The bullish commentary by CLSA drove shares of City Gas Distribution (CGD) companies higher on March 21. CLSA said CGD players will see a good time again as pricing power returns.
Indraprastha Gas Ltd (IGL), Mahanagar Gas Ltd (MGL) and Gujarat Gas gained after CLSA says the regulatory regime will become more favourable from April 1 and pricing power will bring back earnings stability for the companies in the sector.
At 1:23 pm, shares of IGL were up at Rs 441.50, up 3.6 percent while those of MGL rose 1.4 percent to Rs 984.55 on the BSE. Even Gujarat Gas stock was up 2.3 percent at Rs 506.45.
The brokerage firm expects the expert committee suggested formula for pricing legacy domestic gas to be implemented on April 1, 2023. The formula has proposed a gas price ceiling of $6.5 per MMBtu which will lead to a 24 percent fall in domestic gas price.
This, along with comfort around the new allocation policy for deep-water gas and cooling off LNG prices, which will reduce the dependence of city gas players on the vagaries of the volatile global spot LNG market, should ensure strong margins for IGL and MGL, even as they keep pricing at attractive discounts to competing fuels, CLSA explained.
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“The return of pricing power will bring back earnings stability and growth similar to FY16-20 and once again make IGL and MGL attractive,” CLSA pointed out.
CGD players have witnessed margin pressure and muted volumes, with IGL and MGL even missing out on the estimates in the quarter gone by, some analysts have said. Nevertheless, the government accepting KPC recommendations on the cap on domestic gas prices will remove a big overhang for CGDs.
Read more | Hopes of margin recovery in FY24 may keep City Gas Distributors in focus
Even with a 20 percent discount to long-term average Price to Earnings (PEs), to acknowledge the threat of Electric Vehicles (EVs), CLSA has raised its target price for IGL to Rs 585 from Rs 420 and has upgraded its rating on the stock to ‘buy’ from ‘outperform’. It has also hiked EPS estimates for the company by 6-15 percent. Meanwhile, after the recent acquisition with Unison Enviro, the brokerage firm has raised the target price for MGL to Rs 1,260 from Rs 1,020 and retained its ‘buy’ recommendation.
The optimism for the sector is visible in foreign institutional institutions (FIIs) buying shares of CGD companies like IGL and MGL.
Sumit Pokharna, Research Analyst and Vice President at Kotak Securities, highlighted that even as FIIs are cautiously selling Indian equities, they have started buying shares of CGD companies. “We have noticed that FIIs have already started increasing stakes in CGD companies like IGL and MGL. Just to highlight, FII holdings in IGL has increased from 19.88 percent in March 2022 to 21.76 percent in December 2022. Similarly, FII holdings in MGL has increased from 24.98 percent in March 2022 to 29.73 percent in December 2022.”
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