GST on Natural Gas: Impact on CGD Firms and Market Outlook

According to Nuvama Institutional Equities, the market may be overlooking the anticipated profit decline while factoring in the potential implementation of Goods and Services Tax (GST) on natural gas. In November, the government reduced APM gas allocation to CGD firms by 20% for the second consecutive month. This reduction limits access to low-cost natural gas sourced from older fields, compelling CGD firms to procure costlier alternatives, such as New Well Gas or spot LNG.

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Following a ~45% decline in share prices from September to November, stocks like Indraprastha Gas Limited (IGL), Mahanagar Gas Limited (MGL), and Gujarat Gas have rebounded by 22%, 10%, and 12%, respectively, from their November lows. However, Nuvama notes that the recovery is not supported by strong fundamentals, as near-term profit pressures loom.

GST and Its Impact on the Gas Sector

Currently, natural gas falls outside the GST regime and is subject to multiple indirect taxes, including state VAT, central excise duty, and central sales tax. The introduction of GST could eliminate cascading taxes by enabling input tax credit (ITC) and reduce overall costs. However, any cost savings under GST rules would need to be passed on to consumers in line with anti-profiteering laws.

If GST on natural gas is implemented at a 12% rate, it could lead to a 9–11% boost in EBITDA projections for FY26E. However, the timeline for GST inclusion remains uncertain, with discussions unlikely to be addressed in the 55th GST Council meeting scheduled for December 21, 2024.

Outlook for CGD Firms

Nuvama maintains a bearish stance on CGD companies, citing weak fundamentals in the near term. Both IGL and MGL have received a "reduce" rating, while Gujarat Gas retains a "hold" recommendation, as it is relatively less affected by APM allocation cuts due to a lower dependency on priority sector sales. The rising share of expensive gas in the supply mix is expected to exert further pressure on margins across the sector.