Domestic brokerage, Motilal Oswal Financial Services has taken a close look at the annual reports of three prominent City Gas Distribution (CGD) companies: Gujarat Gas Ltd, Mahanagar Gas Ltd, and Indraprastha Gas Ltd. Among these, Gujarat Gas stands out as Motilal Oswal’s top choice in the CGD sector, as revealed in its latest Oil & Gas sector report.
Motilal Oswal’s assessment highlights that Indraprastha Gas and Mahanagar Gas predominantly focus on CNG operations within the CGD industry, whereas Gujarat Gas has a primary focus on the Industrial segment. In FY23, Gujarat Gas saw a 22% year-over-year (YoY) decline in volumes to 8.4 million metric standard cubic meters per day (mmscmd), while Indraprastha Gas and Mahanagar Gas witnessed volume increases of 16% and 14%, respectively, with volumes reaching 8.1 mmscmd and 3.4 mmscmd, respectively.
The brokerage’s analysis indicates that the new pricing system is unfavorable for CGDs when the Indian crude basket exceeds USD 65 per million metric British thermal units (mmBtu), leading to a rise in petrol prices to USD 6.5/mmBtu. Additionally, the minimum Administered Price Mechanism (APM) cost increases to USD 4/mmBtu. According to the report, under the previous administration and in the absence of geopolitical uncertainties, CGD prices would have been lower.
In a move to encourage the adoption of cleaner CNG as a fuel, the government established the Kirit Parikh Committee to reevaluate the pricing structure of domestic APM gas. The Union Cabinet approved the committee’s recommendations for natural gas pricing on April 6, 2023, and these changes are set to be implemented, as detailed in Motilal Oswal Financial Services’ report.
Under the new pricing structure, natural gas from legacy fields will be priced at 10% of the Indian crude basket price, subject to dynamic floor and ceiling prices of USD 4/mmBtu and USD 6.5/mmBtu, respectively.
Let’s delve into Motilal Oswal’s insights on each of these CGD companies:
Gujarat Gas The brokerage believes that Gujarat Gas’s long-term volume growth prospects remain robust, thanks to the acquisition of new industrial units and the development of existing ones. The company is actively making infrastructural investments to promote the use of industrial gas in rural Thane, rural Ahmedabad, and recently acquired territories in Rajasthan. Motilal Oswal maintains its ‘Buy’ rating on the stock with a target price of ₹550, valuing it at 26 times FY25E EPS.
Mahanagar Gas Mahanagar Gas has partnered with Baidyanath LNG to establish an SPV (special purpose vehicle) aimed at developing 5–6 LNG stations over the next 12–18 months. Additionally, a collaboration with BMC involves the creation of a compressed biogas plant with a capacity of 1000 mt/d. The stock is trading at 12.9 times FY25E EPS of ₹80.3, and Motilal Oswal values it at 16 times FY25E EPS, arriving at a target price of ₹1,285. The brokerage maintains its ‘Buy’ rating on Mahanagar Gas, citing attractive valuations.
Indraprastha Gas Motilal Oswal highlights that approximately half of the anticipated volume growth in the next two years is likely to come from the industrial sector, potentially impacting Indraprastha Gas’s EBITDA/scm and increasing volatility. The company’s CNG usage comprises 20% from buses and 30% from taxis and three-wheelers. The Delhi government’s strong electric vehicle (EV) policy could pose a medium- to long-term challenge to volume growth. Furthermore, the loss of potential volumes from Faridabad and Gurugram GAs, due to the PNGRB’s order in April 2023, has also added a negative aspect. Motilal Oswal maintains its ‘Sell’ rating on the stock, valuing it at 14 times FY25E adj. EPS and applying a 25% holding company discount to assess a target price of ₹335.
In conclusion, Motilal Oswal’s comprehensive analysis positions Gujarat Gas as the top pick among these CGD companies, while providing valuable insights into the factors shaping their future prospects in the ever-evolving energy landscape.