Shares of city gas distribution (CGD) companies were tanking at the bourses on Monday after the government slashed its Administered Price Mechanism (APM) allocation to these companies by another 20%.

What Happened: Companies including Indraprastha Gas (IGL) and Mahanagar Gas (MGL) said they received intimations from GAIL regarding the further reduction in domestic gas allocation which took effect from November 16. This is the second straight month in a row that the gas allocation has been cut.

The revised domestic gas allocation is approximately 20% less than the previous allocation for IGL and about 18% less for MGL. The significant reduction in allocation will impact their profitability, the companies said.

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APM gas, supplied by ONGC and Oil India, is priced lower by the government compared to market-priced natural gas, such as spot liquefied natural gas. With reduced allocations, CGDs are forced to purchase more expensive gas, increasing their costs and compressing margins. This could eventually result in higher prices for customers.

To bridge this shortfall, MGL is exploring options of sourcing gas through domestically produced High-Pressure High Temperature (HPHT) gas, New Well/ Well Intervention gas (NWG) from ONGC and benchmark-linked long-term gas contracts to continue providing gas to its customers with price stability.

In September, global brokerage firm Jefferies hiked its target price for Mahanagar Gas to ₹2,120 from ₹1,990, while sticking to its "buy" rating pointing to the company’s improving volume growth driven by the rapid expansion of new outlets and robust demand from the industrial sector. However, it had then flagged a potential concern around the declining APM gas allocations. In the same month, UBS also raised the target price for both MGL and IGL.

Price Action: MGL lost 14.19% to ₹1,126.45 whereas IGL tanked 18.83% to ₹329.40 on Monday morning.

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