IGL To Mahanagar: Why Latest Rebound In City Gas Distribution Stocks Isn't Justified
Nuvama Research maintained a 'reduce' rating on Indraprastha Gas and Mahanagar Gas, and a ‘hold’ on Gujarat Gas due to weak near-term fundamentals.
City gas distribution stocks like Mahanagar Gas Ltd., Indraprastha Gas Ltd. and Gujarat Gas Ltd. have recovered 12–20% after hitting multi month lows in November 2024, due to the drastic cut of domestic gas allocation.
However, Nuvama argues that the current fundamentals of the companies are unsupportive. The stocks have rallied due to a potential GST inclusion, without taking into consideration the impact that sectoral headwinds would have on profits, according to the brokerage.
Why Have Gas Stocks Rebounded?
Indraprastha Gas, Mahanagar Gas and Gujarat Gas shares have run up 22%, 10% and 12%, respectively, from their November lows. This rally has been fuelled by news flow around the inclusion of natural gas under the GST regime.
While a GST roll out could imply a 9–11% upside for gas companies' FY26 Ebitda, the timing and benefits of this is still uncertain, Nuvama said.
GST anti-profiteering regulations would require majority of the GST benefits to be passed on to customers, it noted. Furthermore the timing of such a rollout is still uncertain due to complicated state negotiations.
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Gas Stocks Rally Sans Fundamentals Support
The steep cut of APM or domestic gas allocation for the city gas distribution sector are set to impact margins of companies. Lower domestic gas allocation means that gas stocks of companies would be higher by Rs 1 to Rs 3.5 per standard cubic meter for companies.
Nuvama expects third quarter margins of city gas companies to be negatively impacted by Rs 1 to Rs 3 per standard cubic meter. This implies a 17–44% quarter-on-quarter contraction in Ebitda margins of the companies in the October-December period.
Efforts of companies to get into better long term gas supply contracts to cushion themselves for the APM de-allocation are expected to impact the performance of companies further in the last quarter of fiscal 2025.
A Two-Fold Disadvantage
While additional CNG price hikes would help partially offset the potential margin impact, it would harm the growth story of companies.
Higher CNG prices would put pressure on the volume growth of gas companies, since prices would have reduced competitiveness to petrol and diesel.
