IGL, Mahanagar Gas, Gujarat Gas Stocks Tumble: Future Outlook Explored

City gas distribution (CGD) stocks, including Indraprastha Gas (IGL), Mahanagar Gas (MAHGL), and Gujarat Gas, have plunged 23-43% in three months. This downturn raises concerns among industry analysts, who speculate whether it’s the right time to invest in stocks in this sector. The decline stems from reduced domestic administered price mechanism (APM) gas availability, rising costs, and regulatory shifts.

Key reasons behind CGD stock decline

The recent downturn in CGD stocks can be attributed to a combination of reduced gas supply, rising costs, and regulatory uncertainties: 

• Drop in APM gas allocation

Industry estimates suggest APM gas allocation could fall from 45% to 25% in 2-3 years. Factors include an 8% decline in ONGC’s older field gas production and increased demand for compressed natural gas (CNG) outside the three major CGD players. This reduction may result in price volatility driven by international crude oil and LNG prices.

• Rising CNG costs

As per the new gas pricing policy, CGDs will pay a 40% premium over APM prices for gas sourced from new ONGC wells. Assuming crude oil prices stay around USD 75 per barrel, this could mean a yearly replacement of 7-8% of APM gas, leading to a ₹1-2 per kilogram rise in CNG raw material costs. Higher costs might make CNG less competitive than petrol, particularly during low crude oil price periods.

• Regulatory impact of third-party access

The PNGRB, or the Petroleum and Natural Gas Regulatory Board, has proposed opening CNG networks to third-party operators, citing expired marketing exclusivity. This step could create significant competition. However, the Delhi High Court has ruled that regulatory decisions will only be implemented with further legal review. If unfavourable rulings occur, CGD companies may lose up to 20% of their network volume, reducing earnings by a similar margin.

Target price downgrades

Analysts have significantly cut target prices for CGD stocks. Indraprastha Gas, Mahanagar Gas, and Gujarat Gas have seen reductions of 30-42%, with recommendations downgraded to “Sell” or “Reduce.” This outlook underlines the challenges in sustaining growth and margins amid rising costs and regulatory uncertainties.

Key takeaways

• APM gas allocation may drop 15-20%, increasing price volatility.
• Rising CNG costs may affect consumer affordability and profitability.
• Regulatory changes could expose CGDs to heightened competition and volume losses.

Investors should weigh these challenges carefully before deciding to invest in stocks in the CGD sector.