Natural gas distribution companies in India are facing a variety of concerns that are limiting stock prices in the short term. Gujarat Gas has seen little change in its shares, while Mahanagar Gas has seen a rise of 3.63%, although this is still less than the Sensex’s rise of 3.76%. The main concerns include the expected cuts to auto fuel prices by oil marketing companies, which could cause short-term volume challenges for natural gas distribution companies. This is due to the potential reduction in the price differential between compressed natural gas (CNG) and other fuels.
The focus on electric vehicle (EV) conversion and the draft cab aggregator policy in Delhi are another major concern for Indraprastha Gas Ltd (IGL), as it could impact its volume growth outlook. Additionally, the decline in propane gas prices has affected Gujarat Gas’ volume growth prospects, as many industrial users have switched to propane usage over natural gas. The Q4 performance of CGDs showed minimal growth, with only MGL’s earnings beating analyst estimates.
Despite these concerns, analysts remain positive about the natural gas distribution companies. Since natural gas prices have been declining over recent months, the margin outlook for the companies has improved. Furthermore, the favorable administered price mechanism (APM) gas price cuts have also strengthened volume assumptions for the CGDs. Analysts believe that vehicle conversion is yet to pick up, but green shoots are visible and the current price arbitrage versus liquid fuels remains attractive enough to drive conversion.
Analysts expect CNG vehicle conversion to grow, driving further growth for CGDs. However, if auto fuel prices are cut, it may affect the margins of CGDs such as IGL and MGL. Yet, analysts suggest that MGL already has a sufficient cushion given its current high margins and volumes for both companies are improving. Nevertheless, Gujarat Gas, with a high exposure to industrial supplies, is expected to face some challenges due to the decline in propane prices.
The draft cab aggregator policy in Delhi remains a concern, but analysts note that the policy is yet to be finalized and implementation may take time. Nevertheless, the target seems steep and may pose a threat to IGL’s current volume by 2030. Analysts suggest that the impact will be back-ended, with not more than 4-5% of current volume impacted over the next four years.
