Nuvama has issued a cautious outlook on city gas distribution (CGD) stocks, stating that fundamentals remain unsupportive despite a notable rebound in stock prices. Indraprastha Gas Ltd (IGL), Mahanagar Gas Ltd (MGL), and Gujarat Gas Ltd (GGL) have rallied 22%, 10%, and 12%, respectively, from November lows following the twin APM de-allocation. However, Nuvama believes this optimism is premature, largely driven by market expectations of a Goods and Services Tax (GST) rollout on natural gas, which the brokerage deems elusive.
Nuvama argues that while a 12% GST rollout on CNG could provide a 9–11% upside to FY26 EBITDA for CGD companies, administrative hurdles and anti-profiteering rules make this scenario unlikely. Even if GST were implemented, the rules would require companies to pass on the benefits to consumers, limiting profitability.
More critically, Nuvama expects a significant 3QFY25 EBITDA margin decline, forecasting a 17–44% QoQ plunge. The report attributes this to an insignificant 1% uptick in realisation, which fails to offset a sharp 4–11% increase in weighted average gas costs. IGL, which has seen the sharpest rally among peers, is likely to face the most severe input cost impact, leading Nuvama to maintain its ‘REDUCE’ rating on the stock.
The brokerage reiterates that while CGD stocks have seen sharp recoveries, the current valuation optimism is unsupported by fundamentals, and an imminent margin squeeze could weigh heavily on profitability in the coming quarters.
