Margins likely to improve for city gas distribution majors on price cuts

Margins for city gas distribution (CGD) players are expected to improve, with the administered pricing mechanism (APM) prices reduced due to a decline in crude oil prices. The upside is partly offset by lower APM allocation since replacement New Well Gas (NWG) costs 20 per cent more.

 

LNG prices may remain muted over the next 3-4 years due to new LNG capacity and bearish crude oil trends. This implies sustained margin improvement for CGDs, with blended gas costs at $9.7–10 per million British thermal units (MMBtu) over FY26–FY28. Downside risks include further cuts in APM allocations and rapid electric vehicle (EV) rollouts.

 

Demand fell in H2FY25 due to high gas costs. The new pricing policy capped APM prices but was followed by de-allocations of APM to the compressed natural gas (CNG) segment, reducing the allotment from 70 per cent (October 2024) to 38 per cent currently.

 

APM prices were cut from $6.75/MMBtu (April 2025) to $6.41/MMBtu (June 2025) due to lower crude prices. This reduces blended gas costs by 0.6 to 1.5 per cent for Indraprastha Gas (IGL), Mahanagar Gas (MGL), and Gujarat Gas (GGL) for FY26.

 

Overall earnings for CGDs should rise by 4-5 per cent. CGDs get priority allocation for piped natural gas (PNG) at 100 per cent and CNG at 38-40 per cent. In Q1FY26, IGL’s operating profit margin may exceed ₹7 per standard cubic metre (scm), MGL may cross ₹10/scm, and Gujarat Gas may move above ₹6/scm.

 

In May 2025, IGL saw vehicle registrations fall 11.6 per cent month-on-month (M-o-M), while year-on-year (Y-o-Y) they were up 4.6 per cent. MGL saw M-o-M registrations drop 19.8 per cent and Y-o-Y registrations fall 13.1 per cent. Gujarat Gas reported M-o-M registrations down 11.3 per cent and Y-o-Y registrations down 6.7 per cent.

 

Overall, India’s gas demand was 7 per cent lower YoY in April 2025 at 184 million metric standard cubic metres per day (mmscmd), following a 4 per cent YoY decline in Q4FY25. However, CGD demand improved 2.3 per cent M-o-M in April 2025 and may see further boosts from lower APM prices.

 

IGL’s Q4FY25 operating profit was ₹380 crore, down 27 per cent Y-o-Y, up 5.4 per cent quarter-on-quarter [Q-o-Q]), which was weak. Volumes, at 9.2 mmscmd (up 5 per cent Y-o-Y), were below estimates, with an operating profit margin of ₹4.6/scm (down 30 per cent Y-o-Y, up 8 per cent Q-o-Q). Delhi’s draft EV policy 2.0 targets aggressive EV rollout and weakens the CNG outlook. 

 

Reported numbers for Q4FY25 were boosted by the reversal of ₹114 crore in provisions. Reported net profit of ₹350 crore was up 22 per cent Q-o-Q (down 9 per cent Y-o-Y). Adjusted net profit at ₹260 crore was down 8.8 per cent Q-o-Q (down 32 per cent Y-o-Y). Management guided for a 10 per cent increase in volume for FY26 and reiterated its long-term operating profit margin guidance of ₹7-8/scm. However, for the next 1-2 quarters, the operating profit margin is expected to be ₹6-7/scm. Capex for FY25 was ₹1,100 crore, with FY26 guidance at ₹2,000 crore.

 

MGL’s Q4 adjusted operating profit was ₹315 crore (down 20 per cent Y-o-Y, flat Q-o-Q). Volumes were strong (up 11 per cent Y-o-Y) with operating profit margins of ₹8.3/scm (down 27 per cent Y-o-Y, flat Q-o-Q). 

 

Like IGL, MGL’s reported numbers were boosted by the reversal of ₹63 crore in provisions for OMCs’ trade margins. Q4 adjusted net profit, at ₹190 crore (down 29 per cent Y-o-Y, down 16 per cent Q-o-Q), disappointed. The Maharashtra EV policy 2025 accelerates EV adoption and weakens the CNG outlook. Management guided for an operating profit margin of ₹9-11/scm for FY26. MGL has guided capex of ₹1,300 crore for FY26 and 10 per cent sales volume growth.

 

Revenue for GGL stood at ₹4,289 crore, down 1 per cent Q-o-Q (flat Y-o-Y). In Q4FY25, overall volume dropped 2 per cent Q-o-Q to 93 mmscmd (down 4 per cent Y-o-Y). Operating profit increased 18 per cent Q-o-Q (down 24 per cent Y-o-Y) to ₹450 crore in Q4FY25, with a per-unit margin of ₹5.37/scm. Net profit was down 30 per cent Y-o-Y at ₹288 crore in Q4FY25 but up 30 per cent Q-o-Q. 

 

In Q4FY25, GGL added over 38,700 domestic customers and 3 new CNG stations. Long-term growth prospects depend on industrial demand and the fast development of the CNG station network.