Motilal Oswal upgrades IGL, Gujarat Gas to buy as green corridors, BS-VI, new cities to drive growth

Motilal Oswal turned positive on gas companies as it has upgraded Indraprastha Gas and Gujarat Gas to buy, citing likely volume growth on increased emphasis on usage of gas. It has initiated coverage with neutral rating on Mahanagar Gas.

The research house has set a target price of Rs 404 per share (implying 29 percent potential upside) for IGL and revised target price to Rs 1,011 (from Rs 721 earlier) for Gujarat Gas. Its target price for Mahanagar Gas stood at Rs 1,219, implying an upside of 11 percent.

Indraprastha Gas share price touched a record high of Rs 331.60, up 6.2 percent intraday Tuesday while Gujarat Gas rallied as much as 3.6 percent and Mahanagar Gas was up 4 percent.

Motilal Oswal believes that green corridors, intercity travel, inorganic growth through new areas, and residential usage would drive growth of city gas distribution companies (CGDs, going forward.

With the implementation of BS-VI emission norms, economics would be even more against diesel usage and would aid volume growth for IGL, Mahanagar Gas and Gujarat Gas, the research house feels.

It said Indian CGDs remain in a sweet spot considering increased emphasis on usage of gas, firm supply of cheaper domestic gas, and penetration of gas in newer geographies driving usage of CNG for intercity travel.

The first wave of volume growth came in when the government granted top priority to city gas distribution companies for allocation of cheaper domestic gas in 2014.

The second wave came with increased emphasis on cutting vehicular pollution through restrictions on diesel vehicles and plying of vehicles with odd/even registration plates on alternate days.

Motilal Oswal said though nuances of the policy on green corridors have not yet been clarified, it believes that as and when these are implemented, a new demand area of 3.2mmscmd (or around 30 percent of total CNG consumption in FY17) will be created.

It feels Bharat Stage VI emission standards would make petrol/CNG vehicles much cheaper than diesel variants.

So far, the growth in CNG volumes has been primarily led by passenger vehicles. The research house believes the next phase of growth would be led more by commercial vehicles.

“Over FY17-22, we expect CNG volumes to grow at a CAGR of over 11 percent for IGL and at a CAGR of 8 percent for Mahanagar Gas,” it said.

The government has increased its thrust on penetration of PNG-residential.

Hence, against addition of 2,97,000 connections in FY17, Motilal Oswal expects IGL, Mahanagar and Gujarat Gas to connect 3,75,000 new households in FY18.

The brokerage house feels India’s gas consumption is expected to grow at 10 percent CAGR compared with 8 percent in China and 4 percent in the US over the next three years.

Return on equities of Indian CGDs are 6 percent higher than peers in China and 12 percent higher than peers in the US, it said.

The research house expects expect 13/11/11 percent volume growth for Indraprastha Gas in FY18/19/20, and expects EBITDA CAGR of 14 percent and EPS CAGR of 14 percent over FY17-20.

“We expect 5/6/8 percent volume growth for Mahanagar Gas in FY18/19/20. We expect EBITDA CAGR of 7 percent and EPS CAGR of 7 percent over FY17-20,” Motilal Oswal said.

It expects 14/13/12 percent volume growth for Gujarat Gas in FY18/19/20. EBITDA would grow at a CAGR of 20 percent and EPS at a CAGR of 40 percent over FY17-20.

At 12:18 hours IST, the stock price of Indraprastha Gas was quoting at Rs 326.75, up 4.63 percent and Gujarat Gas was up 2.55 percent at Rs 870 while Mahanagar Gas was quoting at Rs 1,129.80, up 2.17 percent on the BSE.