Despite cut in gas allocation, city gas distributors register decent volume growth in Q3
Back-to-back cuts in gas allocation under the Administered Price Mechanism (APM) notwithstanding, city gas distributors have managed to report creditable numbers in the December quarter with decent volumes, though the net profits declined as expected.
Mahanagar Gas saw 12 per cent volume growth in the quarter, Indraprastha Gas volumes rose 7 per cent, while that of Adani Total Gas was 15 per cent higher.
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The APM gas allocation for the CNG segment was cut to 50.75 per cent from 67.74 per cent with effect from October 16, 2024, and then to 37 per cent November 16, which created an anxiety in the market from the point of view of gas availability and profitability of CGD companies. This led to rise in gas costs and fall in net realisation due to CNG price cuts.
Rupee impact
The situation was further aggravated by the weakening rupee and higher international LNG prices which resulted in higher overall gas sourcing costs, sparking concerns in the minds of investors on the lucrativeness of the entire CGD sector, leading to a sharp drop in value of CGD stocks in the month following the first gas supply cut.
Some of those concerns seem to have been allayed with CGD companies showing surprising resilience.
Mahanagar Gas is aiming to replace APM gas with new well gas and a price hike of ₹1 per standard cubic metre would be required every year to maintain its margins.
“Since MGL already has a high margin cushion, we believe impact due to APM de-allocation would not be detrimental. Another positive development is that the Mumbai High Court has directed the State government to study phasing out petrol and diesel vehicles from Mumbai to curb pollution. Although at preliminary stages, if passed, this order would boost MGL’s CNG volumes significantly,” said Prabhudas Lilladher in a post earnings note.
The company has also raised its volume growth guidance to 10 per cent helped by growth from compressed natural gas and industrial, commercial segments.
Indraprastha Gas has taken counter measures to make up for the reduction in APM gas allocation by signing two sourcing agreements. During the quarter, its sales volume mix comprised 47 per cent APM, non-APM and new wells gas and 50 per cent regasified LNG. During the analyst call to discuss the results, the company said it would have to hike prices by ₹2 per scm to increase the EBITDA to ₹7-8/scm from ₹4.3 now.
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Adani Total Gas’ net profit fell 17 per cent in the quarter compared to Indraprastha that declined 32 per cent and Mahanagar Gas by 29 per cent.
While announcing the results, Adani Total Gas CEO said, “Despite APM cuts the company ensured uninterrupted supply of CNG by sourcing gas via alternative options, all the while keeping in mind affordability of CNG for the end consumer, which ultimately resulted in volume growth.”
Note of caution
Industry players are optimistic that the situation will improve in Q4 as the APM allocation to CNG segment is increased to 51.48 per cent with effect from January 16, 2025, until further revision next month.
Nuvama Research, however, sounded a note of caution saying that sourcing mix for CGDs is likely to deteriorate as allocation of cheap APM gas is likely to gradually reduce, in line with muted domestic gas production growth.
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