City Gas Distributors: Macquarie Expects Margins To Expand In FY22; Lists Mahanagar Gas As Preferred Pick
Vehicles wait in line to be refueled with compressed natural gas (CNG) at an Indraprastha Gas Ltd. gas station in New Delhi. (Photographer: Prashanth Vishwanathan/Bloomberg)

City Gas Distributors: Macquarie Expects Margins To Expand In FY22; Lists Mahanagar Gas As Preferred Pick

Macquarie expects margin expansion to continue for city gas distribution companies in the upcoming financial year, mainly driven by a favourable gas price environment and all-time high prices for competing fuels.

FY21 turned out to be a year of substantial margin expansion for the piped gas suppliers, the global financial services provider said in a report. “The differential between CNG and diesel prices in Mumbai has widened from 32% in March 2018 to 44% today, offering plenty of room for Indian city gas distributors to raise prices and expand margins further.”

Besides, domestic gas prices hit a record low of $2.1 per mmbtu in FY21, down 40% year-on-year, Macquarie said. According to the present gas price formula, it expects domestic gas prices to increase only 4% year-on-year to $2.2 per mmbtu in FY22. A sub $6-per-mmbtu price level should support demand for Indian LNG consumers, Macquarie said.

The investment bank has increased its FY22-23 earnings estimates for its city gas coverage by 10-14% and margin estimates by 8-12%. It listed Mahanagar Gas Ltd. as a preferred pick among peers, and upgraded Indraprastha Gas Ltd.’s rating. Macquarie, however, downgraded Gujarat Gas Ltd. considering the recent run-up in its share prices.

Here is Macquarie's view on the city gas operators...

Mahanagar Gas

  • Maintains ‘outperform’ rating with a price target of Rs 1,400 apiece.

  • Sees earnings CAGR of 8% over FY20-23E, with an average RoE of 25% and close to 5% dividend yield.

  • Valuations are attractive.

  • “Stock is part of our bottom-up India opportunities portfolio.”

Indraprastha Gas

  • Upgrades to ‘outperform’ from ‘neutral’; hikes price target to Rs 550 apiece from Rs 485.

  • Expects 16% earnings CAGR over FY20-23E, with an average RoE of 22%.

  • Trades at an 18 times price-to-earnings on FY23E.

Gujarat Gas

  • Downgrades to ‘neutral’ from ‘outperform’, but hikes price target to Rs 500 apiece from Rs 450.

  • Expects earnings CAGR of 13% over FY20-23E, with an average RoE of 26%.

  • Has rallied nearly 40% year-to-date.

  • Current valuations fairly capture growth potential.

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