IGL vs MGL: Which gas stock should you choose for long-term? Here’s a 5-point analysis
- IGL vs MGL: Both gas stocks received a ‘buy’ rating from BOB Capital Markets. The stock prices are discounting growth below seven per cent over the next decade, said the brokerage.
Leading city gas distributors (CGDs) Indraprastha Gas Ltd (IGL) and Mahanagar Gas Ltd (MGL) declared their January-March quarter results for fiscal 2023-24 (Q4FY24) this month and have received bullish-to-neutral rating from domestic brokerage firms. Earlier this year, the CGDs announced a reduction in their respective compressed natural gas (CNG) prices across all locations.
MGL, the city gas operator in Mumbai and its adjoining areas, announced a ₹2.5 per kg reduction in the CNG price on March 6. Accordingly, the revised CNG price will be ₹73.50 per kg. The reductions followed a softening in input gas prices.
"MGL's CNG price now offers attractive savings of 53 per cent compared to petrol and 22 per cent compared to diesel at current price levels in Mumbai while delivering unmatched convenience, safety, reliability and environmental friendliness to consumers," the CGD said in a statement on March 5.
Also Read: IGL Q4 Results: Net profit rises 9% to ₹433 crore, revenue down 2% YoY; dividend declared
IGL announced a similar price reduction in Delhi and the adjoining cities a day later. "The retail consumer price of CNG is being reduced by ₹2.50 per kg across all geographical areas of IGL from 6 am on Thursday, 7th March 2024. The revised selling price of CNG in Delhi shall be ₹74.09 per kg, while it shall be ₹78.70 per kg in Noida, Greater Noida and Ghaziabad,'' said IGL.
Stock Price Trend
IGL has underperformed the domestic benchmarks Nifty 50 and Sensex this year. In the last six months, IGL has provided 16.65 per cent returns on investments, however, in the last one year, the returns are negative to the tune of 5.07 per cent, compared to Nifty 50's 25.41 per cent and Sensex's 21.71 per cent returns.
On Thursday, shares of IGL settled 2.92 per cent higher at ₹454.20, against a 52-week high of ₹501.35 apiece on the BSE. Shares of MGL settled 0,54 per cent higher at ₹37.39, against a 52-week high mark of ₹52.35 apiece on the BSE.
On the other hand, MGL has performed better than the benchmarks in the last one-to-three year time period. In the last one-to-three months, the gas stock has provided negative returns to the tune of 6.58 per cent and 15.7 per cent. However, in the last one year, MGL has given 25.68 per cent returns, compared to Nifty 50 and Sensex.
Q4 Results
IGL reported a rise of nine per cent in consolidated net profit at ₹433.79 crore in the March quarter of FY24, compared to ₹397.51 crore in the corresponding period last year. The revenue from operations in the quarter-under-review dropped two per cent to ₹3,964.42 crore, compared to ₹4,056.44 crore in the year-ago period. IGL's board also recommended a final dividend of 250 per cent at Rs.5 per equity share for a face value of ₹2 each for FY24.
MGL reported a decline of 16.5 per cent year-on-year (YoY) in net profit to ₹265 crore in the March quarter, while revenue stood marginally lower by 0.1 per cent at ₹1,567 crore. On the operating level, MGL's earnings before interest, taxes, depreciation, and amortization (EBITDA) stood at ₹394 crore, down 12.2 per cent YoY. Margin for the quarter was 25.1 per cent compared to 26.9 per cent in the year-ago period. MGL's board also declared a final dividend of ₹18.
Volumes
Both MGL and IGL have seen good traction in volumes post Covid, with volume growth CAGR of 17.7 per cent and 16.5 per cent, respectively. On medium-term volume growth, MGL has been significantly better than the 4.7 per cent CAGR it clocked over FY17-20, prior to Covid.
Post Covid growth has been primarily driven by improved traction in the CNG vehicles and industrial segments. The CNG segment has found support in favourable policies to improve thecompetitiveness of CNG vs liquid fuels. Traction in the industrial segment is attributable to achange in approach by both CGD players to prioritise volume over margin and offer a discount on alternate fuels to attract new volumes.
For long-term volume, IGL has the advantage of a significantly larger footprint. Besides Delhi, IGL operates in Gautam Budh Nagar, Ghaziabad, Hapur, Muzaffarnagar, Shamli, and uncovered parts of Meerut and Kanpur, Fatehpur and Hamirpur in Uttar Pradesh; and districts Rewari, Gurugram, Karnal and Kaithal in Haryana, and Ajmer, Pali and Rajsamand in Rajasthan.
‘’We give credit to IGL for this larger footprint (at different stages of development) by using four per cent terminal growth (including inflation) in our DCF valuation against the 2.5 per cent that we use for MGL,'' said BOB Capital Markets.
Valuation
MGL: MGL is breaking out of its historically modest growth trend and clocking 10 per cent YoY volume growth in H2FY25, which supports the FY24-26 volume CAGR of 7.4 per cent, as against its past trajectory of four per cent reported over FY19-FY24.
''We lower the MGL’s target price (TP) to ₹1,545 from ₹1,590 as we incorporate our revised estimates into our DCF-based fair value for the core business and roll forward our TP to May’25 (from Jan’25),'' said BOB Capital Markets.
‘’We believe MGL deserves a higher multiple than in the past as it looks set to deliver a higher volume CAGR of 7.4 per cent for its existing operations over FY24-FY26 and potentially at 6.8 pwe cent including UEPL over FY24-33. This is significantly higher than the four per cent CAGR seen over FY19-FY24. Our TP implies 19 per cent upside and, hence, we reiterate our BUY rating,'' it added.
IGL: IGL’s EBITDA is expected to grow by 8.5 per cent CAGR, driven by volume growth of 7.7 per cent and normalisation of margin to ~ ₹8/scm by FY26 as the global LNG market turns into surplus. Growth will continue outside Delhi.
‘’We have a DCF-based TP of ₹525. Key assumptions for our DCF-based fair value are cost of equity of 11 per cent, terminal growth of four per cent, volume CAGR of ~6.8 per cent and average EBITDA margin of ₹7.8/scm over our explicit and semi-explicit forecast period of FY25-FY33. As our TP implies ~19 per cent upside, we reiterate our BUY rating on IGL,'' said the brokerage.
Key Risks:
The key downside risks to estimates by BOB Capital Markets for MGL and IGL are:
-Lower-than-expected margins arising from an inability to pass on higher gas purchase cost to consumers
-Material reduction in taxation structure on petrol and diesel, which could lower competitiveness of CNG and result in lower margins for MGL
-Slower volume growth than our assumptions, with faster-than-expected penetration of electric vehicles
-Adverse Petroleum and Natural Gas Regulatory Board (PNGRB) or government regulations that could impact our margin or volume outlook.
Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.
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