Gujarat Gas tops Motilal Oswal’s picks in City Gas Distribution space; here’s why
Motilal Oswal Financial Services prefers Gujarat Gas among the three City Gas Distribution companies due to its focus on the industrial segment.
Domestic brokerage, Motilal Oswal Financial Services, quickly skimmed the annual reports of Gujarat Gas Ltd, Mahanagar Gas Ltd, and Indraprastha Gas Ltd, the three City Gas Distribution (CGD)s.Gujarat Gas continues to be Motilal Oswal's top choice among the three CGDS, said the brokerage in its latest report on Oil & Gas sector.
According to the brokerage, Indraprastha Gas and Mahanagar Gas are both CNG-focused operators in the CGD industry, while Gujarat Gas is primarily focused on the Industrial segment. In FY23, Gujarat Gas volumes decreased by 22% year over year (YoY) to 8.4mmscmd, whereas Indraprastha Gas and Mahanagar Gas volumes increased by 16% and 14%, respectively. Mahanagar Gas and Indraprastha Gas had volumes of 3.4mmscmd and 8.1mmscmd, respectively.
As long as the Indian crude basket is above USD65/mmBtu, the new pricing system is adverse to CGDs because it increases the price of petrol to USD6.5/mmBtu. The minimum Administered Price Mechanism (APM) cost is also increased to USD4/mmBtu. According to the brokerage's study, prices for CGDs would have been lower under the previous administration if there had been no geopolitical uncertainties.
The government established the Kirit Parikh Committee to reconsider the pricing structure of domestic APM gas in an effort to promote the switch to CNG (a cleaner fuel). The Kirit Parikh Committee's suggestions for natural gas price were approved by the Union Cabinet on April 6, 2023, and will now be put into effect, explained domestic brokerage, Motilal Oswal Financial Services in its report.
Natural gas generated from legacy fields will be priced under the new pricing structure at 10% of the price of the Indian crude basket, subject to dynamic floor and ceiling prices of USD4/mmBtu and USD6.5/mmBtu, respectively.
Let's check out what the brokerage has to say about each of these companies;
Gujarat Gas
With the acquisition of new industrial units and the development of existing units, the brokerage believes that the company's long-term volume growth prospects remain strong. To encourage the use of industrial gas in rural Thane, rural Ahmedabad, and recently acquired territories in Rajasthan, it is making aggressive infrastructural investments.
"We reiterate our 'Buy' rating on the stock with a target price of ₹550, valuing it at 26x FY25E EPS," the brokerage said.
Mahanagar Gas
In order to develop 5–6 LNG stations over the next 12–18 months, the company and Baidyanath LNG have established an SPV (special purpose). Additionally, the company and BMC have agreed to develop a compressed biogas plant with a 1000 mt/d capacity.
“The stock trades at 12.9x FY25E EPS of ₹80.3. We value it at 16x FY25E EPS to arrive at a target price of ₹1,285. We reiterate our ‘Buy’ rating on Mahanagar Gas, owing to its cheaper valuations,” added the brokerage.
Indraprastha Gas
Nearly half of the additional volume over the next two years is most likely to come from the industrial sector, which would put pressure on Indraprastha Gas's EBITDA/scm and increase its volatility. 20% of the company's CNG usage is attributed to buses, while 30% comes from taxis and three-wheelers. Therefore, the Delhi government's strong electric vehicle (EV) policy could provide a medium- to long-term barrier to volume growth.
“Additionally, the loss of potential volumes from Faridabad and Gurugram GAs due to the PNGRB’s order in Apr’23 is also negative. Hence, we reiterate our Sell rating on the stock valuing it at 14x FY25E adj. EPS and adding the value of investments at a 25% holding company discount to arrive at our target price of ₹335,” the brokerage said.
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