Motilal Oswal sector of the week: Oil & gas; check top bets, target here

According to Motilal Oswal Financial Services, the sector has also benefited from a series of regulatory and taxation reforms aimed at improving affordability and project viability

India’s oil and gas sector is undergoing a structural transition, with natural gas increasingly emerging as the anchor fuel in the country’s energy mix. Policy-led reforms, rapid infrastructure expansion, and improving fuel affordability are collectively strengthening the sector’s medium- to long-term growth outlook. While parts of the sector continue to face near-term volatility due to global price movements and currency fluctuations, the domestic ecosystem is benefiting from a clear strategic push toward cleaner fuels, deeper market penetration, and nationwide integration of gas infrastructure. This transition is steadily reshaping consumption patterns across transport, households, and industry, lending greater stability and visibility to sectoral growth.

 

 

A key driver of this transformation has been the accelerated expansion of the city gas distribution (CGD) network across the country. Over the past decade, authorised geographical areas have expanded sharply, creating a near pan-India gas grid that connects trunk pipelines, spur lines, and last-mile distribution. Importantly, the quality and size of newer geographical areas have improved meaningfully, covering denser urban clusters and industrial corridors. This has enhanced capital efficiency by allowing infrastructure costs to be spread over larger and more diversified consumption bases. Alongside this, the participation of private players and oil marketing companies has deepened capital commitment, ensuring faster rollout, stronger execution capabilities, and long-term sustainability of the network.

 

Demand drivers within the gas ecosystem have also broadened significantly. CNG adoption has emerged as a standout theme, supported by a sharp increase in refuelling infrastructure and a steady rise in CNG vehicle offerings by original equipment manufacturers. The number of CNG stations has increased nearly fourfold over the past six years, enabling both urban and intercity mobility. CNG vehicles have gained traction across passenger cars, taxis, buses, and commercial fleets, particularly in cost-sensitive and high-usage segments where operating economics are compelling. With most new CNG launches concentrated in affordable price brackets, adoption is extending beyond metros into tier-two and tier-three cities, reinforcing volume-led growth across the transport fuel segment.

 

The sector has also benefited from a series of regulatory and taxation reforms aimed at improving affordability and project viability. Rationalisation of state-level taxes on natural gas, reductions in goods and services tax on CNG vehicles and related equipment, and the rollout of the unified pipeline tariff regime under the “One Nation, One Grid, One Tariff” framework have materially lowered delivered gas costs for end users. The extension of a single, lower transportation tariff for CNG and domestic PNG nationwide has removed distance-related disadvantages for inland and newly authorised regions, improving economics in emerging markets. Together, these measures are supporting faster adoption, better utilisation of infrastructure, and more predictable returns across the gas value chain.

 

Looking ahead, global and domestic supply dynamics appear increasingly supportive. A significant expansion in global LNG liquefaction capacity over the second half of the decade is expected to ease supply constraints and moderate long-term gas prices. Combined with a softer crude oil environment and improving contract terms for gas sourcing, input cost pressures are likely to gradually recede. While near-term margins may remain sensitive to currency movements and global gas benchmarks, the structural direction remains favourable. With a widening demand base, improving infrastructure density, and sustained policy support, India’s oil and gas sector—particularly the gas-focused segments—is entering a more resilient and scalable growth phase. The convergence of cleaner fuel adoption, regulatory clarity, and expanding consumption points positions the sector well for steady, long-duration growth in the years ahead.

Mahanagar Gas – Target Price: ₹1,700

Mahanagar Gas’ investment case is anchored in sustained volume-led growth and medium-term margin stability rather than short-term earnings volatility. Management has reiterated confidence in delivering 10 per cent+ volume growth, supported by steady expansion across CNG, domestic PNG, and industrial and commercial segments. The amalgamation of UEPL (Unison Enviro Private Limited) expands the addressable geography and structurally lifts consolidated volume growth visibility to 11 per cent CAGR over FY25–28, strengthening the company’s presence in high-growth gas distribution clusters. Margin resilience is underpinned by pricing discipline and a diversified gas sourcing mix, with continued access to lower-cost APM gas supplemented by new well gas and term contracts, limiting exposure to spot LNG volatility. Growth visibility is further reinforced by network expansion, including the addition of ~80 CNG stations in FY26 and ongoing pipeline investments, which support incremental vehicle conversions and long-term throughput. Overall, predictable volume compounding, stable margins, and expanding infrastructure position Mahanagar Gas as a steady compounder in the city gas distribution space rather than a play on quarterly margin movements. It is expected to deliver 11 per cent volume CAGR over FY25–28. 

  Disclaimer: This article is by Motilal Oswal Financial Services Research Desk. Views expressed are their own.