Gas stocks plunge as government cuts domestic gas allocation

Shares of five gas companies fell by 1.4% to 18.66% following the government's decision to reduce domestic gas allocation to city gas distributors by ~20% for the second straight month.

Indraprastha Gas (down 18.66%), Mahanagar Gas (down 13.45%), Gujarat Gas (down 6.36%), Adani Total Gas (down 2.54%) and Gail (India) (down 1.40%) declined.

The government's policy prioritizes the allocation of Administrative Price Mechanism (APM) gas to City Gas Distribution (CGD) companies for crucial segments like domestic PNG and CNG for transportation. However, due to limited availability, the allocation has been curtailed, impacting the operations of these companies.

Mahanagar Gas, a leading CGD company, has highlighted that the 18% reduction in allocation, effective November 16, 2024, will negatively impact its profitability. Similarly, Indraprastha Gas has reported a 20% reduction, while Adani Total Gas has seen a 13% reduction in their APM gas allocations, which will adversely affect their financial performance.

As a result of these developments, multiple analysts have downgraded their ratings on CGD stocks, expressing concerns about their future profitability.

To mitigate the impact of reduced gas allocation, Mahanagar Gas is exploring alternative sources of natural gas, such as High-Pressure High-Temperature (HPHT) Gas, New Well/Well Intervention (NWG) Gas sourced from ONGC, and Benchmark-Linked Long-Term Contracts with gas suppliers. The CGD industry is actively engaging with key stakeholders to address the issue and seek a resolution. However, the immediate impact of the reduced gas allocation is likely to weigh on the financial performance of these companies.

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