MGL, IGL: HDFC Securities positive on stocks, says pessimism overdone

In its report on city gas distribution (CGD) companies, brokerage firm HDFC Securities notes that companies with higher exposure to compressed natural gas (CNG) fuel will gain from now on. This is after the companies have seen underperformance in contrast to the headline indices.

IGL, or Indraprastha Gas, has seen a correction of over 18 per cent, while Mahanagar Gas has fallen by 1 per cent over a six-month period. The positive performance in the counters is expected, as the brokerage sees these companies benefiting from the boost in volume growth on the back of the increased price differential between CNG and other fuel forms.

Besides, there has been an improvement in margins as there is a decline in the price of gas produced from high-pressure, high-temperature (HPHT) fields. As per the Kirit Parekh (KP) Committee, the gas produced from the HPHT fields will be cheaper by 18 per cent, amounting to as much as US$9.96/mmbtu in H2FY24.

Furthermore, volumes are expected to grow due to three factors. They are: a decline in administered pricing mechanism (APM) gas prices due to the implementation of the Kirit Parikh Committee recommendations; higher priority in the supply of HPHT gas for CNG and DPNG segments; and expansion of the CGD network. "We estimate IGL volumes at 8.3/9.4/10.5mmscmd and MGL volumes at 3.6/3.9/4.1mmscmd for FY24/25/26E," noted the brokerage.

Moreover, Vahan data shows that over the last seven months, there has been an uptick in CNG vehicle registration month-on-month (MoM) in top metros, including Delhi and Maharashtra.

HDFC Securities, given the uptick in CNG volume growth, is positive on MGL and IGL due to their high exposure and pricing power in the core CNG segment. “We estimate the stock price factors only 7/3.6 per cent CAGR volume growth for IGL/MGL over FY24-32E, assuming 0 per cent terminal growth,” added the brokerage.

Revised targets for CGDs

HDFC Securities, while maintaining an optimistic view on IGL, has retained the target price of Rs 500, implying 28 per cent gains, while for MGL, the target is pegged at Rs 1,255, suggesting a 23 per cent potential upside.

Transition to electric vehicles- An overhang for the city gas distribution companies

The Delhi EV policy, which intends to deploy 25 per cent of all new vehicles through the battery mode, was initially seen as a threat to CGDs. Keynote Capitals earlier maintained a buy rating on IGL with a target of Rs 485 (16x FY25 earnings), incorporating a 20 per cent discount relative to historical valuations. This adjustment accounts for the increasing risk associated with the transition to electric vehicles (EVs) in Delhi, noted the brokerage.

Nevertheless, hailing a different view in reference to the EV policy, BOB Capitals maintained that the situation is not that aggressive in Mumbai and that it sees CNG co-existing with EVs in the medium term. The brokerage upgraded MGL to a buy and suggested a target of Rs 1,255 given its strong Q2 show.