City gas distribution (CGDs) companies' share prices were in focus as they surged up to 5 per cent in the otherwise volatile market on the BSE intraday during Tuesday's trading session.  

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Individually, shares of Mahanagar Gas (MGL), Indraprastha Gas (IGL), and Gujarat Gas Company were up between 4-5 per cent to Rs 834.75, Rs 415.6 and Rs 509.6 per share, respectively, as compared to 0.2 per cent rise in the S&P BSE Sensex at around 12:00 PM.  

These counters have reported a growth between 8-18 per cent in the last three months, as against an 8 per cent gain in the S&P BSE Sensex during the same period. On the contrary, they underperformed the market by falling around 17-23 in one year versus a 4.5 per cent decline in the benchmark index, as investors expected sustained margin pressure with rising input gas costs, HDFC Securities said. 

HDFC Securities believe the correction is overdone especially as the CGDs have passed on the input gas cost increase underscoring their pricing power, the government has tweaked domestic gas supply to favour the CGDs and CNG/DPNG (domestic piped natural gas) volume has seen the minimal adverse impact of the retail price increases.  

Notwithstanding the challenges, the brokerage expects overall gas demand from the CNG and DPNG sectors to grow at 15.7% CAGR over FY22-27 supported by aggressive expansion in infrastructure.  

“We remain constructive on CGD space and prefer IGL over GGL and MGL owing to robust volume growth at 13% CAGR over FY22-25E and the strong pricing power enjoyed by the CNG segment, which accounts for ~73% of IGL’s FY22 volumes as against ~19/70% for GGL and MGL respectively.” 

HDFC Securities reiterate a BUY rating on IGL with a target of Rs 520 apiece, downgrade Gujarat Gas to ADD, with a target of Rs 565 apiece, and maintain an ADD rating on MGL, with a target of Rs 950 apiece.