Last updated on December 23rd, 2024 at 02:53 pm
CGD stocks crash as gas allocation cuts hit profits. Learn why IGL, MGL, Gujarat Gas shares plunged. Market analysis inside!
The CGD stocks suffered a huge beating on Monday the 18th of November; Indraprastha has gas (IGL) and Mahanagar Gas (MGL) stocks plummeted. The primary reason? The government cut the APM gas supply to these companies for the second month in a row, this reflected in the table below.
Why is the Gujarat and Indraprastha gas share falling?
The change in the APM gas allocation means city gas retailers are now receiving relatively cheaper natural gas from the old fields. To meet this demand therefore spot LNG or New Well Gas expensive to companies like IGL and MGL will have to be used. This is stretch their profit margins to the extreme limits.
IGL agreed with this challenge, saying that its new domestic gas allocation is $US3mln or approximately 20 percent less than before. The same has been noted with MGL reports an 18% additional cut over the prior 20% cut made in October earlier this year. Even the Gujarat Gas company did not escape the ax: as a result of the financial changes it received a 13% cut in allocation.
Immediate Impact on Stock Prices
As a result, stock prices plummeted in the morning session:
- IGL shares fell 20% to ₹324.7.
- MGL stock dropped by 12%, trading at ₹1,150.75.
- Gujarat Gas also saw a 5.8% dip, trading at ₹458.
These sharp declines highlight the market’s concerns over the profitability of CGDs amidst these supply cuts.
Brokerages Sound Alarm
The effect for this development has seen brokerages lowering their CGD stocks. While the group’s forecast retained its prior year’s level, Jefferies downgraded MGL to ‘underperform’ and IGL to ‘underperform’. The target prices for these stocks alone were changed to ₹1,130 and ₹295 respectively. In response to Gujarat Gas, they got a ‘hold’ recommendation.
Jefferies also reduced its EPS (earnings per share) estimates:
- MGL: 31%
- IGL: 27%
- Gujarat Gas: 19%
Profit Margins Under Stress
Other spot gase like LNG is much costly. The blended margins could be affected by ₹2.7–3/scm, due to the fact that replacement gas costs are reported to be in the region of $13–14/mmbtu. In return, gas companies may be forced to increase the price by ₹4.5 to ₹4.8 per kg.
IGL had earlier indicated that it would beREAD: symptomatic at the right time to raise prices after the auspicious period in an effort to deal with these challenges. Nevertheless, they do not comprise a rise in the price of their products and service yet. This new trim in allocation means that the forecast for margins has worsened implying very few windows through which companies can regain their operating profit.
Gujarat Gas Feels the Heat
It is the same with Gujarat Gas as it struggles with these challenges. Its shares dropped down 4.15% and reached 466. Experts opine that a cut by 35% within the span of a month accompanied by no policy changes is negative news as far as the APM is concerned.
Brokerage firm Nuvama Institutional Equities estimates a 43–63% hit to EBITDA for CGD companies by FY26 if the current trends continue.
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