Indraprastha Gas and Mahanagar Gas shares are low on fuel1 min read . Updated: 14 Dec 2018, 02:01 PM IST
Indraprastha Gas and Mahanagar Gas currently trade at about 20.6 times and 16 times their estimated earnings for FY1
Shares of city gas distribution (CGD) companies, Indraprastha Gas Ltd (IGL) and Mahanagar Gas Ltd (MGL), have underperformed the markets so far this fiscal year. The recovery of the rupee from its lows in October and the softening of spot LNG (liquefied natural gas) prices, both of which result in lower input costs, have helped these stocks a bit, but not enough to wipe out the earlier underperformance.
The two companies had hiked prices in October to offset higher input costs, and with input costs having eased since, there should be a positive influence on their profit margins.
Analysts say the reason markets aren’t enthused is that valuations of these stocks were not cheap to begin with. The broader correction in mid-cap stocks also cast its shadow on them. Further, the ninth round of CGD auctions proved to be a damp squib for the companies, with some other firms bidding aggressively.
As things stand, Indraprastha Gas and Mahanagar Gas currently trade at about 20.6 times and 16 times their estimated earnings for FY19, respectively, shows Bloomberg data.
There are reasons why Indraprastha Gas, which operates primarily in Delhi, fetches relatively higher valuations. With high pollution levels in the city, policy support on reducing pollution in the region, such as mandatory conversion of commercial diesel-run cabs to CNG (compressed natural gas), and a ban on petcoke usage have had a favourable impact on the company.
Moreover, volume outlook for Indraprastha Gas is expected to be relatively better. Analysts at Jefferies India Pvt. Ltd expect the company to benefit from the 13.5% compound annual growth rate (CAGR) in volumes over 2018-2023, supported by policy tailwinds due to higher pollution levels.
Jefferies India expects Mumbai-based Mahanagar Gas’s volume CAGR to fall back to 7% over FY18-23, after a solid first half in FY19, constrained by the limited additions of CNG stations and softening policy tailwinds. For the half-year ended September, the company’s volumes had increased by about 11% on a year-on-year basis.
Better valuations at Indraprastha Gas suggest investors are taking cognizance of these factors.
Going ahead, if these companies perform better on the back of price hikes taken in October without major leaks, valuations could improve a notch for both.