Shares of city gas distribution companies have plummeted more than 30 percent from recent highs as surging global natural gas prices compress margins. Yet, Credit Suisse believes there is room for some more pain.
“The stocks have fallen 30 percent from peak but are still factoring stable margins or expanding margins,” said Credit Suisse in a note on April 29.
The brokerage has downgraded its rating on Indraprastha Gas, Mahanagar Gas and Gujarat Gas as it expects no growth in earnings per share over the next two years and sees more than 20 percent downside to Street’s earnings estimate for the three companies.
Globally, natural gas prices have surged to record highs in Europe and the the US due to supply shortages and sanctions imposed on Russia following the country’s invasion of Ukraine in February.
Lack of investments in new oil fields has severely constrained natural gas capacity amid record demand from industry and consumers as the pandemic fades.
Credit Suisse believes that the structural changes in the Indian gas industry will result in perpetually lower margins for city gas distributors.
“Higher blending now is a structural risk to the sector. The increase is driven by significant increase in new CNG stations. Gas availability has not changed but demand has increased sharply,” the brokerage firm said.
With demand outstripping supply, domestic sources of natural gas are no longer enough. Credit Suisse expects the share of imported gas in overall supply to rise to more than 50 percent by 2025-26 from 15 percent currently.
“As blending increases, input cost is closely linked to crude oil prices. Therefore, ability to expand margins reduces,” Credit Suisse argued.
Given rising concerns around margins, the brokerage has downgraded Indraprastha Gas to underperform from outperform and slashed its price target by 55 percent to Rs 290.
Similarly, it has downgraded Mahanagar Gas to neutral from outperform earlier and cut the price target to Rs 785 from Rs 1,500. The brokerage has also downgraded Gujarat Gas to underperform from neutral and slashed its price target by 40 percent to Rs 380.
At 10:18 am, shares of Indraprastha Gas were down 4.3 percent at Rs 360.30, while those of Mahanagar Gas were down 4.7 percent at Rs 786.95. Shares of Gujarat Gas were down 5.7 percent at Rs 482.7 on the National Stock Exchange.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
