Why HDFC Securities believe city gas distributor stocks weathering perfect storm; lists reasons – check target price here

The correction in city gas distributor (CGD) stocks such as Indraprastha Gas (IGL), Gujarat Gas (GGL), and Mahanagar Gas (MGL) have been overdone as they have passed on the input gas cost increase underscoring their pricing power, a domestic brokerage firm HDFC Securities believe.

The CGDs have corrected by 26-29 per cent over the last 12 months, underperforming Sensex by 28-31 per cent, as investors expected sustained margin pressure with rising input gas costs.

Besides, the government has tweaked domestic gas supply to favour the CGDs and CNG/DPNG (compressed natural gas/domestic piped natural gas) volume has seen minimal adverse impact of the retail price increases, the brokerage added.

HDFC Securities, notwithstanding the challenges, expect overall gas demand from the CNG and DPNG sectors to grow at 15.7 per cent CAGR (Compound Annual Growth Rate) over FY22-27 supported by aggressive expansion in infrastructure.

The brokerage remains constructive on CGD space and prefer IGL over GGL and MGL owing to robust volume growth at 13 per cent CAGR over FY22-25E and the strong pricing power enjoyed by the CNG segment, accounts for 73% of IGL’s FY22 volumes versus 19/70% for GGL and MGL respectively.

IGL/MGL trade at 17.6/11.4x FY24E EPS, a 18-20 per cent discount to their 3-year average, while GGL trades at 24.9x FY24E EPS, a 17 per cent premium to its 3-year average.

HDFC Securities reiterate Buy rating on IGL with a target of Rs 520 a share, while downgrades GGL to ADD, with a target of Rs 565 apiece; maintain an ADD rating on MGL, with a target of Rs 950 a share.

IGL is our preferred pick within the CGD space due to its strong volume growth and pricing power in its core CNG segment, the brokerage said, adding that it downgraded GGL to ADD, owing to near-term pressure on margin and volume because of high spot LNG price.

Key Highlights

Rising input gas cost unlikely to impact margins

CNG and DPNG gas demand to double

Share of domestic APM gas to decline