City Gas Companies To Be Under Pressure On Increased Risk To Margins

City gas companies like Indraprastha Gas Ltd., Mahanagar Gas Ltd. and Adani Total Gas Ltd. could be under pressure in trade on Monday, after all the three companies announced that their domestic gas allocation from GAIL (India) Ltd. has been reduced in the range of 13-20%.

City gas companies mainly get domestic gas allocation at a fixed price of $6.5 per million metric British thermal unit for the their CNG sales volume requirements. Reduced allocation of this domestic gas has a negative impact on the companies' profitability.

This cut also marks the second reduction of domestic or APM gas allocation. The first was done by Oil and Natural Gas Corp. in October 2024.

How Much Has Allocation Been Reduced?

As per the exchange fillings posted on Friday, Indraprastha Gas, Mahanagar Gas and Adani Total Gas have seen a 20%, 18% and 13% cut in allocation, respectively. The allocation cuts back in October were in the range of 16-20%.

After the recent cut, APM allocation to the city gas distribution companies, now stands at around 30-35%, as per Systematix. Jefferies expects city gas companies to have nil domestic gas allocation by mid 2025.

Impact On Margins

When ONGC Ltd. announced its first cut, Emkay Research projected a potential Rs 1.4-1.5 per standard cubic meter margin impact for Indraprastha Gas and Mahanagar Gas. This now worsens to a Rs 2.7-3 per standard cubic meter impact.

Jefferies expects Indraprastha Gas, Mahanagar Gas and Gujarat Gas' per unit Ebitda margins to see a sharp fall of Rs 2.5, Rs 1.5 and Re 1 per standard cubic meters in fiscal 2026-27. The brokerage also lowered its fiscal 2026 EPS estimates for the three companies in the range of 19-31%.

Systematix noted that, following the deallocation, IGL and MGL would need to replace 1.5 and 0.6 million standard cubic meter of gas per day, respectively—above the volumes they had to replace after the first deallocation. These volumes would likely be sourced from higher-cost high-pressure, high-temperature gas or spot LNG, trading around $13/MMBtu, much higher than the fixed APM gas price.

Higher gas sourcing from the spot LNG market would thus impact the city gas companies' operating costs.

CNG Price Hike Imminent 

As per IIFL Securities, Emkay Research and Jefferies, a CNG price hike is needed for the gas companies to maintain their margins. Jefferies expects a 10% increase in CNG retail selling prices. Systematix estimates a Rs 6-8 per kg price hike. Emkay Research expects a Rs 6.3 and Rs 6.4 per kg CNG price hike for Mahanagar Gas and Indraprastha Gas, respectively.

However, brokerages do not expect an announcement of any price hikes soon due to the ongoing state elections in Maharashtra and Delhi. This could imply near term margin pressure for the companies.

Volume Growth At Risk

The expected price hike also puts the companies' volume growth at risk. Higher prices would reduce CNG's price benefit over petrol and diesel and may dent their volume growth.

Emkay Research notes that with oil prices trading in a range of $70-75 per barrel, petrol and diesel prices warrant cuts in retail prices. This can further impact CNG economics.

Thus, a potential hike in CNG prices coupled with a potential cut in petrol and diesel retail prices could harm conversion and volume stories for gas companies.

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