City gas distribution stocks in focus: IGL, MGL, Gujarat Gas up 4%

Analysts expects overall gas demand from the CNG and DPNG sectors to grow at 15.7 per cent CAGR over FY22-27 supported by aggressive expansion in infrastructure.

Shares of City Gas Distribution (CGDs) companies were in focus in Tuesday's intra-day trade as they gained up to 4 per cent in an otherwise subdued market.

At 11:04 am, shares of Mahanagar Gas (MGL), Indraprastha Gas (IGL) and Gujarat Gas Company were up 4 per cent. In comparison, the S&P BSE Sensex was down 0.16 per cent at 57,056 points.

In the past three months, these stocks have rallied in the range of 8 per cent to 18 per cent, as compared to 8 per cent gain in the S&P BSE Sensex. However, in the past one year, they underperformed the market by falling in the range of 18 per cent to 24 per cent, as against 5 per cent decline in the benchmark index, as investors expected sustained margin pressure on the back of rising input gas costs.

That said, analysts at HDFC Securities believe that the correction is overdone as the CGDs have passed on the input gas cost increase. The government, too, has tweaked domestic gas supply in favour of the CGDs and CNG/DPNG (domestic piped natural gas) and therefore, volume has seen minimal adverse impact despite the price rise in retail.

Despite the tailwinds, the brokerage firm expects overall gas demand from the CNG and DPNG sectors to grow at 15.7 per cent CAGR over FY22-27, supported by aggressive expansion in infrastructure.

"After initially declining in Q3FY22 due to high input gas cost, CGD companies’ margins have bounced back. Given the strong pricing power and CNG’s continued discount against petrol and diesel inspite of the rising gas cost, we expect the CGD companies’ robust margins to sustain over the long-term," the brokerage firm said in a recent note.

That apart, analysts also expect a shift in gas sourcing mix for CNG and DPNG, on the back of growing gas demand from priority segments and drop in APM gas production.

"We estimate the share of domestic APM gas supply to the priority segment to decline below 50 per cent by FY28 and expect the majority of this demand-supply gap in gas demand to be met through LNG on long term contracts," the brokerage firm added.