Mahanagar Gas Limited (MGL) has hiked the price of compressed natural gas (CNG) by Rs 2 per kilogram, effective November 22, bringing the delivered price in and around Mumbai to Rs 77 per kg, inclusive of taxes. This increase comes amidst a challenging environment for city gas distributors, following the government’s reduction in domestic Administered Price Mechanism (APM) gas allocation.

The price hike follows two recent cuts in APM gas supply to city gas distribution (CGD) companies like MGL and Indraprastha Gas Limited (IGL). The first cut of 21% was announced on October 16, followed by an additional 20% reduction on November 16. As a result, the overall allocation of low-cost APM gas to CGD players has dropped to 40%-45% of their requirements, a sharp fall from 65%-70% a month earlier. This allocation was as high as 154% in FY21.

The cuts force companies like MGL to rely heavily on costlier alternatives such as spot or imported liquefied natural gas (LNG). This increased dependence on expensive raw materials has significantly raised operational costs, prompting a price hike to protect profitability. Analysts have noted that to fully pass on the impact of rising costs, CGD companies may need to increase prices by 8%-10%.

MGL last raised CNG prices in July this year by Rs 1.5 per kg, also due to a reduction in domestic gas allocation. The latest hike represents a 2.6% increase, reflecting the ongoing pressure on the company’s margins. The reduction in APM gas allocation has had a cascading effect on the profitability of CGD players. Both MGL and IGL have issued statements highlighting the adverse financial implications of these supply cuts.

The allocation cuts come just days after the conclusion of state elections in Maharashtra and Jharkhand. The move by the government has attracted attention as it places CGD players in a difficult position, forcing them to adjust to higher sourcing costs.

Following the price hike, MGL shares saw a 4% surge on November 22 as the market reacted positively to the company’s proactive approach to managing cost pressures. However, on a year-to-date (YTD) basis, MGL shares remain 4% lower.

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City gas distributors are now sourcing nearly half of their gas requirements through market-linked prices, exacerbating the financial strain. For consumers, the frequent price hikes have raised concerns about the affordability of CNG, particularly as it is considered a more economical and eco-friendly fuel option compared to conventional fuels like petrol and diesel.

The broader implications of these developments extend beyond the CGD sector. Rising input costs for distributors could impact efforts to promote CNG as a sustainable fuel choice, particularly in urban areas. As the government continues to adjust gas allocations, balancing consumer interests and the profitability of CGD companies will remain a critical challenge.

Story first published: Friday, November 22, 2024, 9:51 [IST]