Why IGL, MGL Shares Dropped 10%, and Gujarat Gas Fell 4%: An Analysis

On November 18, 2024, shares of key city gas distributors (CGDs) took a sharp downturn. Indraprastha Gas Ltd (IGL) and Mahanagar Gas Ltd (MGL) each dropped by 10%, while Gujarat Gas fell by 4.15%. The decline followed a significant reduction in APM (Administered Pricing Mechanism) gas allocation, marking the second such cut in a month. This development raises concerns about the impact on the sector’s growth and profitability.

Why IGL, MGL Shares Dropped 10%, and Gujarat Gas Fell 4%: An Analysis

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What Triggered the Decline?

Reduction in APM Gas Allocation

• A fresh 18–20% cut in APM gas supply to CGD companies was announced, on top of a 13–14% reduction just a month ago.
• APM gas, a regulated and affordable supply source, is crucial for CGDs to serve priority sectors like residential customers and public transportation.

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Stock Performance Overview

Indraprastha Gas Ltd (IGL)

• IGL shares hit the 10% lower circuit, closing at ₹365.40 on the BSE.
• With over 80% of its portfolio dedicated to priority sectors, the company is highly reliant on APM gas.
• IGL’s lower base margins add to its challenges in absorbing the shortfall in allocation.

Mahanagar Gas Ltd (MGL)

• MGL shares also dropped by 10%, ending at ₹1,180.30.
• Like IGL, a large portion of MGL’s business comes from priority sectors, leaving it exposed to the reduction in affordable gas supply.

Gujarat Gas

• Gujarat Gas saw a smaller decline of 4.15%, closing at ₹466.
• The company’s focus on the industrial segment, which comprises less than 40% reliance on priority sectors, helped limit the impact.
• Its significant use of spot and contracted LNG for gas sourcing provides greater flexibility compared to its peers.

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Challenges for the CGD Sector

1. Increased Costs: Reduced APM gas forces companies to rely more on expensive LNG options, leading to higher costs and shrinking margins.
2. Priority Sector Dependency: Companies like IGL and MGL, with substantial business from priority sectors, face the greatest challenges due to their reliance on affordable APM gas.
3. Volatile Pricing: Increased dependence on LNG introduces price fluctuations, adding further uncertainty to earnings.

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Investor Sentiment and Market Response

The sharp sell-off reflects investor worries about the sector’s future:

• Profitability Pressure: The added cost burden from reduced APM gas availability is expected to weigh heavily on earnings.
• Growth Uncertainty: Repeated reductions in allocation signal potential changes in government priorities, adding to long-term concerns.

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Outlook for the Sector

IGL and MGL

• Both companies are expected to see a significant impact on earnings, with limited short-term solutions to counteract the effects of reduced gas supply.

Gujarat Gas

• Thanks to its diversified portfolio and reliance on industrial customers, Gujarat Gas is relatively well-positioned to manage the shortfall.
• Its ability to pivot to LNG-based solutions offers a buffer against the worst effects of the allocation cuts.

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Conclusion

The reduction in APM gas allocation has put the CGD sector under pressure, with companies like IGL and MGL facing the brunt of the impact. While Gujarat Gas appears more resilient, the overall market sentiment remains cautious. Companies will need to explore alternative sourcing strategies and operational efficiencies to navigate this challenging phase. For now, the sector faces uncertainty as it adjusts to evolving policy and market conditions.

Keywords: IGL shares, MGL stock drop, Gujarat Gas impact, APM gas cuts, CGD sector challenges, gas sourcing, market analysis.

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