Since September 27, when the sell-off in the broader market began, MGL shares have fallen 42%, IGL has declined 41% and Gujarat Gas has dropped 26%. The Nifty 500 index is down 10.6% in this period.New Delhi: Shares of city gas distributors Indraprastha Gas (IGL) and Mahanagar Gas (MGL) were among the top losers in Monday's trading after the government cut their gas allocations under the cheaper APM (administered price mechanism) over the weekend. The move triggered a spate of rating downgrades by analysts, who are mostly advising investors to sell the stocks for now.
IGL plunged 19.8% to ₹325, its lowest closing since March 2020. MGL tumbled 13.8% to ₹1,130.55, the lowest closing since June 2023. Gujarat Gas, which already derives most of its supplies at market rate, fell 6.8% to ₹452.5 on Monday.
Brokerages Jefferies, Nuvama, JM, Emkay and Nomura slashed their ratings and price targets on these stocks as the government's decision would squeeze the sector's profitability.
"Under APM (administered price mechanism), city gas distributors get their gas supply from the government at a rate significantly lower than the market price," said Sumit Pokharna, vice president at Kotak Securities, who has sell ratings on both the stocks.
The move caught investors by surprise as the government had already cut supply through this mechanism once in October.
"Due to both the cuts, the gas allocation to city gas distributors has gone down from 100% to 40-45% now, which will now force them to buy gas at higher rates, squeezing their margins," said Pokharna.
Jefferies said all three companies would have to increase prices of compressed natural gas (CNG) and piped natural gas (PNG) by 10% to maintain margin levels. "This will lower their discount to alternate fuels, and affect conversions and, in turn, volume growth," said the brokerage's analysts.
Pokharna said it would be challenging for companies to raise prices in the midst of elections in Maharashtra.
Since September 27, when the sell-off in the broader market began, MGL shares have fallen 42%, IGL has declined 41% and Gujarat Gas has dropped 26%. The Nifty 500 index is down 10.6% in this period.
Investors are likely to stay away from the sector because of the policy uncertainty, said analysts.
"A further 18-20% reduction in APM gas allocation to CGDs (city gas distributors), over and above the 13-14% de-allocation announced last month, is a big blow to the structural growth of the sector," said Nuvama Institutional Equities. "Not only does this deal a severe blow, but now the market is likely to build in more cuts."
