City gas distribution shares trade weak: MGL, IGL fall up to 6%

Shares of city gas distribution (CGD) companies - Mahanagar Gas (MGL), and Indraprastha Gas (IGL) fell up to 6 per cent in Monday’s intra-day trade, after the government kept domestic gas prices unchanged at $8.6/mmBtu on a provisional basis from April 2023 to September 2023. The ceiling, however, was reduced marginally to $12.1/mmBtu from $12.5/mmBtu.

Among individual stocks, MGL dropped 6 per cent to Rs 925.75 due to profit booking, while IGL slipped 5 per cent to Rs 407.05. In comparison, the S&P BSE Sensex was up 0.04 per cent at 59,013, as of 10:24 am.

According to reports, domestic gas price was kept on hold as the government mulls recommendations of Kirit Parikh committee on fair pricing of natural gas. It is also expected that once accepted, the recommendations will become applicable retrospectively from 1st April, 2023.

Last year, the panel, headed by Kirit Parikh recommended to fix the price of gas produced from old blocks at 10 per cent of the monthly average of the import price of Indian crude basket, with a floor of $4/MMBtu and cap of $6.5/MMBtu. The Union cabinet has yet to approve recommendations of the panel, the Bloomberg reported.

Meanwhile, shares of MGL soared 10 per cent in March after acquisition of Unison Enviro Private Limited (UEPL) on March 3. Earlier, the stock had hit a 52-week high of Rs 1,007 on March 13, 2023.

The company said that the acquisition would enable MGL to expand to newer geographical areas in Maharashtra (Ratnagiri, Latur & Osmanabad) and Karnataka (Chitradurga & Davanagere), thereby, providing new avenues for long term growth.

MGL took aggressive pricing actions in October-December quarter (Q3) (Rs 9.5/kg for CNG, Rs 5.5/scm for domestic PNG) which have helped EBITDA/scm to Rs 8.2/scm, even in a challenging quarter for costs.

Going forward, with a material reduction in gas costs via the Kirit Parikh Committee recommendations as well as the moderation seen in spot LNG prices, analysts at ICICI Securities expect both volumes and margins to see an improvement over FY24-25E.

"Sharper-than-expected rise in gas prices, inability to pass on gas cost increases, sharper-than-expected fall in alternate fuel prices for CNG (petrol/diesel) are key risks," the brokerage firm said.

Analysts at Nirmal Bang, meanwhile, believe that MGL could over time make UEPL a value accretive acquisition based on the company’s domain expertise in developing/operating CGD infrastructure and expanding the CNG vehicle fleet/PNG customers, in its existing mature GAs – GA1 and GA2; and the progress achieved in developing the Raigadh GA.

"MGL has a track record of several years in pioneering and developing CGD without any court mandate (unlike IGL). MGL also benefits from the gas sector experience and guidance of its promoter GAIL across project execution/operation as well as gas sourcing & regulatory compliance," the brokerage firm said, with a ‘buy’ rating on MGL, and target price of Rs 1,177 per share.