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Indraprastha Gas and Mahanagar Gas have reported a 21% reduction in APM gas allocation, impacting shares of city gas distributors. Potential price hikes could follow as companies explore alternative gas sources to maintain profitability and supply.
On October 17, city gas distributors Indraprastha Gas (IGL), Mahanagar Gas (MGL), and Gujarat Gas faced a significant hit to their share prices. The drop came after reports confirmed a 21% reduction in the domestic gas allocation through the Administered Price Mechanism (APM). The APM gas is a key resource for supplying domestic Piped Natural Gas (PNG) and Compressed Natural Gas (CNG) for transport, sectors which are given priority by the government.
The reduction in APM gas allocation by 21% is expected to severely impact the profitability of city gas distributors. IGL and MGL, two of the largest players in the sector, have announced that the cut became effective from October 16, 2024. This reduction comes as part of a communication from GAIL India, the nodal agency overseeing gas allocation in the country. GAIL has confirmed that IGL and MGL will receive less domestic gas, forcing these companies to rely on more expensive alternatives.
Shares of IGL and MGL both saw selling pressure following the announcement, with investors concerned about the potential impact on profit margins. The reliance on costlier Liquified Natural Gas (LNG) could push prices higher in the near future, adding strain to both companies and their customers.
IGL and MGL have started exploring options to ensure continuity of gas supply. MGL is looking at sourcing domestically produced High Pressure High Temperature (HPHT) gas, as well as long-term benchmark-linked gas contracts, to make up for the shortfall in domestic gas. Similarly, IGL is considering various options but has not confirmed any price adjustments yet.
However, reports indicate that city gas distributors might need to increase prices by as much as ₹6 per kg to counterbalance the financial impact. The spot price for LNG in the open market currently exceeds $11 per million British thermal units (mmbtu), significantly higher than the $6.5 per mmbtu that city gas distributors were previously paying under APM.
The 21% reduction in APM gas allocation is set to hurt the profitability of city gas distributors like IGL and MGL. With rising costs and potential price hikes on the horizon, both companies are looking to secure alternative gas sources to maintain supply and minimise the impact on customers. The next steps by these companies will be closely monitored as they navigate this new challenge.
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