Indraprastha Gas Ltd., Mahanagar Gas Ltd., and Adani Total Gas have noted that the companies will be receiving an increase in domestic gas allocation from Jan 16, 2025.
This comes as a big relief for the city gas distributors who saw an almost 35% cut in domestic gas allocation in the last few months of 2024, which implied a big margin risk and need for CNG price hikes.
For context, domestic gas or APM gas is gas received by the companies for a fixed price of $6.5 per million metric British thermal unit, and helps them maintain gas sourcing costs.
Margins To Be Restored By FY26
As per Emkay Research, the two consecutive cuts in domestic gas allocation that the industry saw in 2024 would have hit Indraprastha Gas and Mahanagar Gas' margins by Rs 3.8 and Rs 4 per standard cubic meter respectively.
But the partial restoring of allocation, with a help of minor price hikes now eliminates margin risks for the companies, as per Citi Research. While margins in Q3FY25 are expected to be weak for both, IGL and MGL, Q4FY25 would see much better quarter-on-quarter improvement, as per Emkay.
Emkay Research also noted that the city gas distribution companies could revert to normative margin levels in FY26.
Smaller CNG Price Hike Required
The earlier APM allocation cut required an Rs 7-8 per kg hike in CNG retail prices for Indraprastha Gas and Mahanagar Gas. It is to be noted that MGL already took a Rs 3 hike in November, while IGL saw a similar hike in other geographical areas apart from Delhi. Emkay now notes that the Indraprastha Gas and Mahanagar Gas would require a lower CNG retail price hike of Rs 4-5 and 2-3 per kg, respectively, to revert to margins before the Oct-Nov 2024 domestic gas allocation cut.
Brokerage Upgrades
On the back of the latest developments, it is also key to note that Emkay has upgraded its stance on MGL and IGL. The brokerage has upgraded IGL to an 'Add' rating from 'Reduce' earlier. It has also hiked the target price for the company by 17% to Rs 450.
Furthermore, the brokerage has also upgraded MGL to a 'Buy' rating versus 'Add' earlier. The target price of the stock has been increase by 21% to Rs 1,700. Emkay has also raised its FY26 and FY27 Ebitda per unit estimates for both the companies.
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