The recent reduction of 18-20% in the allocation of Administrative Price Mechanism (APM) gas to the city gas distribution entities have clouded their profitability outlook. To compensate for this, CGD firms will need to increase the prices of CNG (compressed natural gas) by Rs 1.5-2 per kg, analysts say.
The earnings of CGD companies have sharply declined in the last few quarters. “With further allocation cuts, the outlook is weaker,” Kotak Institutional Equities said.
The government has cut the allocation of APM gas to CGD companies up to 20% replacing it with equal or more volumes of New Well Gas (NWG) which is more costlier.
“On our estimate, to pass on the entire cost, CGDs will need CNG price hikes of Rs1.5-2.0/kg. With reduced arbitrage versus petrol/diesel, the likely impact on demand and political sensitivity, price increases have been difficult,” Kotak said.
CGD companies including Indraprastha Gas, Mahanagar Gas, and Adani Total Gas get domestic gas allocation for meeting the requirement of PNG and CNG sales volumes at the pricing fixed by the government which is presently at $6.75/MMbtu.
Analysts say that CNG price increases have been difficult politically and due to the likely impact on demand. With this cut, the APM allocation for the CNG segment is reduced back to 37%.
“This is a similar allocation after two cuts in Q3FY25. As cuts were sudden and sharp, and price increases were difficult, there was partial relief in January and allocation for CNG was increased to ~51%. The latest cut nearly reverses the entire relief,” the brokerage said.
The entire reduction in allocation has been made from the CGD sector while other consuming sectors such as fertilizer, power and LPG fractionation have been spared for now. Analysts expect that there could be a further decline in the allocation of APM gas to CGDs due to declining volumes.
“Similar to January, some relief is given by reducing allocation for other consuming sectors. In our view, such respite will not be high. With APM volumes declining, there will be further allocation cuts in the coming quarter, and thus, respite may not be long,” Kotak said.
In an interview with FE earlier, MGL has said that it expects to register decent numbers in FY25 but lower than last year’s on the back of higher procurement costs this fiscal. However, the deallocation of domestic gas to the company is said to have some impact on the company’s margins, the company’s managing director Ashu Shinghal has said.
Shinghal also said that if a further deallocation of domestic gas happens, the company may have to pass on the hike but a part of it can also be absorbed depending on the portfolio and the cost at which MGL is able to source the gas.
As per policy guideline dated August 10, 2022, issued by the Ministry of Petroleum and Natural Gas, domestically produced APM gas is to be allocated to CGD companies for priority segments, specifically domestic PNG and CNG (transport). The policy states that the supply of domestic gas to CGD entities will be made only up to the quantity available and allocated to GAIL (India) Limited for these segments.
“Based on communication received by the Company from GAIL (India) Ltd. (the nodal agency for domestic gas allocation), this is to inform that there has been a reduction in domestic gas allocation to the company effective from April 16, 2025. The revised domestic gas allocation to the company is approximately 20% lesser than previous allocation,” IGL said in an exchange filing, adding that it has been allocated additional ~125% of the reduction in domestic gas volumes as New Well Gas, which is priced at 12% of Indian Crude Basket. The revision in allocations is expected to impact the profitability of the company.
For Adani Total Gas, GAIL has reduced APM gas allocation by 15%, while allocation to Mahanagar Gas has been reduced by 18%, replacing the shortfall with New Well Gas. Both Adani Total Gas and MGL, in separate exchange filing, have said that the higher priced NWG and lower APM gas allocation will have an adverse impact on the profitability of the companies and are exploring all measures to mitigate the impact.
Furthermore, analysts believe that the recent EV policy introduced by the Delhi government weakens growth outlook for the CNG segment with expectations of similar policies in other metros.
“With further APM allocation cuts (and potential price cuts for petrol/diesel), CNG’s arbitrage will be further reduced. The Delhi government’s new EV policy 2.0 targets aggressive EV rollout and weakens the CNG growth outlook. In our view, with the Delhi government taking measures against CNG, even other big metros such as Mumbai may come up with similar policies,” said Kotak.