Margin woes to continue for city gas distribution companies in Q4

During Q3FY25, the administered price mechanism (APM) gas allocation for the CNG segment was reduced twice, impacting the gas sourcing strategy.

 

The second cut was rolled back but analysts expect another cut in allocation in early FY26.

 

Moderation in crude prices (to which gas prices are linked) provides some relief for city gas distribution (CGD) players who were hit hard by allocation cuts. CGD players are expected to focus on volumes, which implies that margins will be compressed.

 

The first APM reduction was on October 16 last year, with allocation reduced from 63 per cent to 51 per cent.

 

A further reduction to 37 per cent was made on November 16 last year.

 

But on January 16 this year, APM allocation was rolled back to 51 per cent. Nevertheless, this is lower than Q2FY25.

 

The global LNG market stayed tight through CY24 with limited growth in LNG supply. LNG demand in Asia and Europe jumped in the last few months (due to winter, end of Russian gas supply to Europe via Ukraine at end-CY24 and low inventories).

 

Continued geopolitical tensions will keep Europe’s demand high in CY25.

 

Asian spot LNG traded higher at 18 per cent of Brent (versus historical average of 12 per cent pre-Russia-Ukraine crisis).

 

Sustained high spot LNG price is a key concern for all Indian gas companies.

 

On the demand side, in February 2025, CNG vehicle registrations normalised as expected after January’s seasonal high. Despite the sequential drop in 11MFY25 (April 2024-February 2025), CNG registrations grew by double digits in aggregate. 

 

On a year-on-year (Y-o-Y) basis in February 2025, registrations rose for Indraprastha Gas (IGL) and Gujarat Gas but fell for Mahanagar Gas (MGL).

 

IGL’s sales fell 39 per cent month-on-month (M-o-M) for February versus January but rose 3 per cent Y-o-Y (adjusted for leap year), while MGL’s sales dropped 40 per cent M-o-M and 3 per cent Y-o-Y (flat when normalised). Gujarat Gas saw 36 per cent M-o-M decline and posted strong 10 per cent Y-o-Y growth (adjusted). 

 

Gujarat Gas’ Q3FY25 results were in line, volumes were marginally higher on CNG recovery and Morbi demand while operating profit spread was in line.

 

Better gross realisations were supported by increase in prices.

 

The Industrial Morbi price was increased by ₹2.3/scm to ₹46.95/scm (excluding VAT) on December 11, 2024 and CNG price was increased on December 1, 2024 by ₹1.5/kg to ₹77.76/kg.

 

MGL had strong volumes despite weaker operating profit spreads due to the APM squeeze.

 

It took price hikes in CNG, on November 22 by ₹2/kg to ₹77/kg, followed by a hike of ₹1/kg to ₹78/kg a month later. Gas costs were up Y-o-Y and Q-o-Q on falling APM supply and higher spot LNG prices.

 

IGL reported in-line results, with operating profit and net profit declining Y-o-Y with net profit exceeding estimates due to higher other income. Volume marginally beat expectations, but realisations were lower. IGL has implemented hikes of ₹1.5-4/kg outside Delhi but did not hike in Delhi, which accounts for 70 per cent of volumes.

 

However, with the Delhi elections concluded, a price hike in the city is expected soon.

 

While volume growth was strong across all three companies in Q3 and the same is expected in Q4, decline in APM allocation remains an overhang with another cut in allocation expected in April. 

 

CGDs will push volume growth over margins and big price hikes are unlikely. 

 

At the Q-o-Q level, Q4 margins are set to fall by ₹0.3-0.4/scm for MGL and IGL, while Gujarat Gas may see a marginal ₹0.3/scm improvement.

 

Gujarat Gas benefits from a more favourable non-APM gas mix in CNG, and combined with ₹3/kg in price hikes, may see slight margin improvement.

 

While CNG volume and vehicle registrations are healthy, the structural decline in APM allocation is a concern unless the government revises the policy. The weak rupee is also a drag, pushing up LNG costs.