Here’s what’s in store for the CNG market as Mahanagar Gas hikes prices

Shares of Mahanagar Gas (MGL) rose 4% in intraday trade on the NSE on Friday after the city-based gas distributor announced a ₹2 per kg hike in compressed natural gas (CNG) prices in Mumbai and nearby areas, effective from today day. The price adjustment, aimed at offsetting higher costs, raises the price of LNG supplied to ₹77 per kg, including taxes, the company said in a statement to exchanges.

MGL shares opened higher at Rs 1,152.60 today compared to yesterday’s close of Rs 1,125.35. After rising modestly by 0.6% in the previous session, shares were up 4.35% today to hit an intraday high of ₹1,174.30. The stock is still down 4% year to date.

But what does this mean for the city gas distributor and what awaits the CNG market?

This is the second time in a year that the distributor has raised prices. The first price increase came in July by £1.50 per kg, driven by a reduction in domestic gas supplies to city gas companies. The latest increase represents an increase of 2.6%.

A jarring point to note here is that this announcement came days after the elections in Maharashtra and Jharkhan. Previously, it was assumed that the price increase would occur after the holidays, but this did not happen due to the elections.

However, analysts estimate that city gas distributors may have to raise prices by 8-10% to fully cover rising costs and address declining profitability.

City gas distribution companies, including MGL, are facing increasing pressure as domestic gas supplies dwindle, driving up costs and rising prices. On November 16, the government cut supplies of cheap natural gas from aging fields by nearly 20%, following a similar cut in October. As a result, companies are now increasingly relying on higher-cost alternatives such as liquefied natural gas (LNG) and high pressure high temperature (HPHT) gas, which will have a significant impact on the profitability of these companies.

The ongoing reduction in gas supplies under the Administered Pricing Mechanism (APM) has seen allocations fall from 154% of demand in FY21 to just 30-35% today. The rapid decline in distribution raises concerns about the viability of the sector. The situation highlights the challenges of balancing profitability and competitive prices in the face of declining government support for affordable domestic gas. A gradual reduction in distribution could allow for a smoother price adjustment, but the sharp reduction reduced profitability and disrupted market stability.

This is why other companies are expected to follow the price hike measures taken by Mahanagar Gas due to increased LNG costs due to reduced APM gas distribution being passed on to consumers. While MGL and IGL shares have fallen more than 40% since October, hitting multi-year lows, MGL’s rally today amid rising prices signals good times ahead for these companies in the stock market.