India

Overweight (no change)

Highlighted Companies

Gujarat Gas
ADD, TP Rs679, Rs465 close

We recently upgraded our rating on the stock to ADD with a target price of Rs679 (at 23x FY25F EPS). However, the downside risk could arise from a weak ceramic sector outlook, or a sustained discount in propane/LPG prices vs. natural gas prices leading to increased pricing competition from alternative fuels in the industrial and commercial segments.

Summary Valuation Metrics

P/E (x)	Mar22-A	Mar23-A	Mar24-F
Gujarat Gas	24.87	20.95	18.13
Indraprastha Gas	22.06	20.57	15.46
Mahanagar Gas	17.35	13.11	10.47

P/BV (x)	Mar23-F	Mar24-F	Mar22-F
Gujarat Gas	5.69	4.56	3.7
Indraprastha Gas	4.37	4.18	3.37
Mahanagar Gas	2.88	2.51	2.02

Dividend Yield	Mar22-F	Mar23-F	Mar24-F
Gujarat Gas	0.43%	0.43%	0.43%
Indraprastha Gas	0.76%	0.76%	0.76%
Mahanagar Gas	3.15%	0.95%	0.95%

Analyst(s)

Satish KUMAR

T (91) 22 4161 1562
E satish.kumar@incredcapital.com

Abbas PUNJANI

T (91) 22 4161 1598
E abbas.punjani@incredcapital.com

1QFY24 preview - Volume growth likely

The Indian government’s focus on allocating higher APM gas to domestic CGD companies indicates a potential shift in the country’s preference to purchase urea instead of using natural gas for urea production. This strategic emphasis presents an opportunity for CGD companies.

We believe that CGD players are poised to benefit from favourable margins. The decline in LNG prices suggests potential volume growth and a likely upward gross profit/scm trend.

We expect a positive volume trend and improved margins for CGD companies in 1QFY24F. Indraprastha Gas remains our top pick in the CGD space.

APM gas allocation and LNG price fall are signs of tailwinds ahead

The correction in spot prices of liquefied natural gas or LNG in Europe, driven by declining demand, brings some relief in the medium term while the long-term prices are expected to remain stable. As the RasGas contract for Petronet LNG nears its expiry in 2028, a cautious approach is likely for its renewal. The US capacity expansion plans present an opportunity for Petronet LNG to secure a new long-term contract at more favourable rates. Also, the Indian government's emphasis on allocating higher APM gas to CGD companies indicates a potential shift towards purchasing urea instead of using natural gas for urea production. This creates a win-win situation for CGD players, with favourable prospects for increased margins and volume.

Lower European gas demand is a blessing in disguise

The decline in LNG prices can be attributed to multiple factors, including stagnant LNG import demand in China, a notable reduction in Europe's imported gas consumption, shift in consumer behaviour driven by higher gas prices in Europe, decreased LNG imports by Pakistan, and the global expansion of liquefaction capacity. These combined forces have created a complex market landscape characterized by an abundance of supply and weakened demand, leading to a correction in LNG prices and the establishment of a state of equilibrium in the market. Please click our recent report: IN: Gas Transmission & Dist - Volume growth concerns are behind us

Maintain overweight rating on the sector

Indraprastha Gas or IGL is expected to achieve gross profit/scm of approximately Rs14, Gujarat Gas is likely to achieve around Rs12/scm, and Mahanagar Gas is projected to achieve Rs19/scm in 1QFY24F. Additionally, we expect a cumulative volume growth of 10% in 1QFY24F, compared to the previous quarter. We expect moderate volume growth for all CGD companies of only around 6% CAGR over FY24F-26F. It is important to note the potential risks associated with a substantial increase in LNG prices or alterations in government policies impacting the sector. Despite these risks, our top pick in the CGD space continues to be Indraprastha Gas.

Figure 1: Ratings of stocks in our CGD coverage universe

Ticker	Company Name	Rating	Target Price	EPS CAGR 3-YEAR
GUJGA IN	Gujarat Gas	ADD	679	14.7%
IGL IN	Indraprastha Gas	ADD	539	17.2%
MAHGL IN	Mahanagar Gas	ADD	1,252	10.9%

We expect favourable gross marginWe expect favourable gross margin

Higher APM gas allocation to CGD companies boosts the sector’s prospects

Figure 2: Impressive surge in city gas consumption - almost 40% growth compared to 1QFY23; higher APM gas offers a strong advantage for CGD companies

The domestic consumption of city gas witnessed a significant surge of nearly 40% in comparison to 1QFY23. The allocation of higher APM gas to city gas distribution (CGD) companies presents a favourable scenario and brings in potential benefits to the CGD sector. The increased access to APM gas enhances CGD companies' prospects and growth potential in the market.

Indraprastha Gas

We expect positive volume growth

IGL reported gross profit per unit of Rs12.6/scm, indicating a YoY decrease of -3.4%. However, there was significant improvement in realization, with a YoY increase of 58.9% to Rs52.9/scm. With the current rise in margins due to reduced global LNG demand, we expect its gross profit to reach around Rs14/scm. Going ahead, IGL plans to strengthen its CNG infrastructure by adding 100 new stations in FY24F, with a focus on expanding into new regions. We have recently upgraded our rating on the stock to ADD (from REDUCE) with a revised target price of Rs539, based on 18x FY25F EPS.

In FY23, IGL expanded its CNG station network by adding 81 new stations, reaching a total of 791 stations, with approximately half of them situated in new geographical areas.

In FY24F, IGL plans to continue this growth by establishing 100 additional CNG stations, with 50% targeting new regions. The company experienced significant progress in piped natural gas or PNG connections, adding 310,000 new connections, and expanding its customer base with over 700 new industrial and 900 commercial customers.

Infrastructure development included the installation of 298km of steel pipelines and 3,400km of MDPE pipelines. Going ahead, IGL aims to achieve a sales volume of 9mmscmd in FY24F and further increase it to 10mmscmd in FY25F, while maintaining a targeted EBITDA/scm range of 7.5-8 in FY24F.

By FY25F, IGL expects 60% of its volume to come from Delhi and neighbouring areas, with the remaining 40% from other regions. In FY23, IGL sourced 89% of its gas requirement from APM/non-APM/CBG, 2% from HPHT, and the remaining from R-LNG. The estimated capital expenditure in FY24F is Rs16 bn, with 50% allocated for new geographical areas.

Figure 3: IGL is expected to achieve gross profit/scm of approximately Rs14, an increase of around 16% on QoQ basis

	1QFY22	2QFY22	3QFY22	4QFY22	1QFY23	2QFY23	3QFY23	4QFY23	1QFY24F	YoY	QoQ
Revenue from operations	13,805	20,160	24,385	26,498	35,303	39,220	40,890	40,616	44,656	26%	10%
Total cost of goods sold	6,851	11,131	16,072	17,617	25,071	29,774	32,418	31,670	33,497	34%	6%
Gross profit	6,954	9,029	8,313	8,881	10,233	9,447	8,472	8,947	11,159	9%	25%
Total expenses	9,996	14,858	19,689	21,493	29,128	33,945	36,606	35,954	37,781	30%	5%
EBITDA	3,809	5,302	4,696	5,005	6,175	5,275	4,285	4,663	6,875	11%	47%
Depreciation & amortization	778	805	835	753	857	914	925	938	938	9%	0%
EBIT	3,031	4,497	3,861	4,252	5,318	4,361	3,360	3,725	5,937	12%	59%
Other income	298	421	304	744	307	510	557	654	654	113%	0%
Finance costs	29	26	28	49	24	31	26	26	24	0%	-8%
PBT	3,299	4,892	4,137	4,947	5,602	4,840	3,891	4,354	6,568	17%	51%
Total tax	857	1,241	1,051	1,361	1,394	1,269	1,109	1,057	1,655	19%	57%
PAT	2,443	3,651	3,085	3,586	4,209	3,572	2,783	3,298	4,913	17%	49%
Volume in mmscm	1QFY22	2QFY22	3QFY22	4QFY22	1QFY23	2QFY23	3QFY23	4QFY23	1QFY24F	YoY	QoQ
CNG	332	488	518	509	540	560	559	550	596	10%	8%
PNG - domestic	44	42	45	51	44	46	51	56	53	22%	-5%
PNG - industrial / commercial	74	91	95	92	89	92	91	92	98	11%	7%
Natural gas	34	46	46	45	46	46	46	45	49	8%	9%
Total sales volume	484	666	704	697	718	744	747	743	797	*11%*	7%
Realization	29	30	35	38	49	53	55	55	56	*14%*	2%
Gross profit/scm	14	14	12	13	14	13	11	12	14	*-2%*	*16%*
EBITDA/scm	8	8	7	7	9	7	6	6	9	0%	*37%*

Figure 4: We expect its overall volume to be around 797mmscm, with a growth of 11% & 7% on YoY & QoQ basis, respectively

Figure 5: We expect average realization of Rs56, a growth of 16% QoQ, but remains in line YoY

Figure 6: We have valued IGL at 18x FY25F EPS to arrive at our target price of Rs539 (18x one-year forward P/E is only at a 5% premium to the historical average)

Gujarat Gas

Stable volume may lead to positive outcome

Gujarat Gas successfully managed its pricing amid intense competition from alternative fuels, resulting in a decline in margins. However, we expect improved margins in the future due to the global correction in LNG prices. The annualized gross profit per unit touched Rs11.4/scm, reflecting a YoY growth of 47.4%. For FY24F/25F, we expect the gross profit per unit for Gujarat Gas to be in the range of Rs12-12.5/scm. As a result, we have upgraded our rating on the stock to ADD (from REDUCE) with a higher target price of Rs679, based on 23x FY25F EPS.

Gujarat Gas witnessed a significant increase in overall volume, reaching approximately 8.9mmscmd QoQ. This growth was primarily attributed to a favourable propane-to-gas price gap and proactive pricing measures in the industrial segment resulting in a recovery in its volume to 5.4/mmscmd in 4QFY23.

Despite the decline in propane price to Rs43.99/kg in Apr 2023, which led to Gujarat Gas’ equivalent price of around ~Rs44.7/kg, the company has taken proactive steps to reduce the industrial segment prices in Morbi by Rs9.5/scm over the past six months.

Going ahead, we expect moderate spot LNG prices, reduced APM gas cost due to price ceiling, and the momentum from new areas to drive the volume to ~9.4mmscmd in FY24F and further increase to ~10mmscmd in FY25F.

Figure 7: Gujarat Gas is expected to achieve gross profit/scm of approximately Rs12, an increase of 15% on QoQ basis

	1QFY22	2QFY22	3QFY22	4QFY22	1QFY23	2QFY23	3QFY23	4QFY23	1QFY24F	YoY	QoQ
Revenue from operations	30,659	36,859	52,412	47,734	53,032	41,078	38,213	40,738	45,764	-14%	12%
Total cost of goods sold	21,154	30,498	47,631	38,239	44,304	31,998	29,650	32,250	35,958	-19%	11%
Gross profit	9,506	6,361	4,780	9,495	8,728	9,081	8,563	8,489	9,807	12%	16%
Total expenses	23,431	32,649	50,037	40,759	46,966	34,651	32,390	35,135	38,843	-17%	11%
EBITDA	7,229	4,210	2,375	6,974	6,066	6,427	5,823	5,603	6,921	14%	24%
Depreciation & amortization	905	937	969	1,021	1,032	1,064	1,093	1,094	1,094	6%	0%
EBIT	6,324	3,273	1,406	5,954	5,035	5,363	4,731	4,509	5,827	16%	29%
Other income	213	192	353	177	190	186	320	318	318	67%	0%
Finance costs	159	123	140	145	136	131	76	61	61	-55%	0%
PBT	6,378	3,343	1,619	5,867	5,089	5,418	4,974	4,766	6,084	20%	28%
Total tax	1,616	852	400	1,424	1,278	1,379	1,261	1,074	1,371	7%	28%
PAT	4,762	2,491	1,220	4,443	3,811	4,039	3,713	3,692	4,713	24%	28%
Sales volume in mmscm	1QFY22	2QFY22	3QFY22	4QFY22	1QFY23	2QFY23	3QFY23	4QFY23	1QFY24F	YoY	QoQ
PNG	708	799	774	616	610	411	373	493	500	-18%	1%
CNG	141	180	200	205	224	213	224	233	237	6%	2%
PNG - domestic	54	59	62	75	51	63	62	76	67	32%	-13%
PNG - commercial	8	11	13	13	12	13	13	13	13	12%	4%
Total sales volume	911	1,050	1,048	910	897	701	671	815	817	*-9%*	0%
Realization	34	35	50	52	59	59	57	50	56	*-5%*	*12%*
Gross profit/scm	10	6	5	10	10	13	13	10	12	*23%*	*15%*
EBITDA/scm	8	4	2	8	7	9	9	7	8	*25%*	*23%*

Figure 8: We expect its overall volume to be around 817mmscm, with growth remaining in line

Figure 9: We expect average realization of Rs56, a growth of 12% QoQ

Figure 10: We have valued Gujarat Gas at 23x FY25F EPS to arrive at our target price of Rs679 (+0.5SD of long-term mean)

Mahanagar Gas

Margins set to improve further

Mahanagar Gas (MGL) reported an annualized gross profit per unit of Rs14.9/scm, representing a YoY increase of 7.9%. The realization per unit stood at Rs55.4/scm, showing a substantial YoY increase of 56.1%. Going ahead, we estimate the gross profit per unit for FY24F/25F to be around Rs15/scm. The improvement in margins can be attributed to higher APM gas allocation, accounting for 93% of the gas supply, as well as increased CNG volume. In the light of these positive developments, we have upgraded our rating on the stock to ADD (from REDUCE earlier) and set a higher target price of Rs1,252, based on 18x FY25F EPS.

MGL implemented a new pricing formula, resulting in a reduction of CNG prices by Rs8/kg, from Rs87/kg to Rs79/kg, effective from 8 Apr 2023. Domestic PNG prices were also lowered by Rs5/scm, from Rs54/scm to Rs49/scm, with the same effective date.

MGL has actively expanded its CGD infrastructure, connecting 92,274 domestic households during the quarter and reaching a total of 2.17m households. The company laid 128km of steel and PE pipelines, bringing the aggregate length to 6,535km. Also, MGL added 12 new CNG stations, increasing the total count to 313 as of 31 Mar 2023.

The acquisition of 115 new industrial and commercial customers raised the total count to 4,558 by the end of the last financial year. In the Raigad area, MGL connected 68,033 domestic households and currently operates 28 CNG stations.

The pipeline network in Raigad was expanded by 10km, reaching a total length of 382km. MGL achieved an overall sales volume increase of 14.11% compared to the previous year, with an average sales volume of 3.423mmscmd for the year ended 31 Mar 2023, compared to 2.999mmscmd in the corresponding period last year.

Figure 11: MGL is expected to achieve gross profit per SCM of approximately Rs19, an increase of 2% QoQ and 32% YoY

	1QFY22	2QFY22	3QFY22	4QFY22	1QFY23	2QFY23	3QFY23	4QFY23	1QFY24F	YoY	QoQ
Revenue from operations	6,669	9,076	11,229	11,876	15,932	17,175	18,384	17,718	19,864	25%	12%
Total cost of goods sold	2,424	4,593	8,603	8,081	11,423	13,024	14,077	12,041	13,574	19%	13%
Gross profit	4,245	4,482	2,626	3,795	4,508	4,151	4,307	5,677	6,290	40%	11%
Total expenses	3,629	6,058	10,198	9,721	13,076	14,647	15,823	13,821	15,197	16%	10%
EBITDA	3,040	3,018	1,031	2,155	2,856	2,528	2,561	3,897	4,667	63%	20%
Depreciation & amortization	453	473	482	555	537	551	585	638	638	19%	0%
EBIT	2,587	2,545	549	1,600	2,319	1,977	1,976	3,259	4,029	74%	24%
Other income	186	226	218	227	200	260	323	336	336	68%	0%
Finance costs	17	20	15	23	23	25	24	22	22	-3%	0%
PBT	2,756	2,751	752	1,804	2,496	2,213	2,274	3,573	4,343	74%	22%
Total tax	716	708	184	486	644	573	553	885	1,095	70%	24%
PAT	2,041	2,043	568	1,318	1,852	1,640	1,721	2,688	3,249	75%	21%

Volume in mmscm	1QFY22	2QFY22	3QFY22	4QFY22	1QFY23	2QFY23	3QFY23	4QFY23	1QFY24F	YoY	QoQ
CNG (scm m)	141	206	220	205	231	234	228	217	241	4%	11%
PNG - domestic (scm m)	43	42	44	43	43	43	46	46	47	10%	3%
PNG - commercial (scm m)	35	40	40	38	40	41	40	41	43	8%	6%
Total PNG (scm m)	77	82	84	80	83	84	86	87	90	9%	4%
Total Sales Volume (scm m)	218	287	304	285	314	318	314	303	331	6%	9%
Realization	31	32	37	42	51	54	59	58	60	*18%*	3%
Gross profit/scm	19	16	9	13	14	13	14	19	19	*32%*	2%
EBITDA/scm	14	10	3	8	9	8	8	13	14	*55%*	*10%*

Figure 12: We expect its overall volume to be around 331mmscm, a growth of 6% & 9% on YoY & QoQ basis, respectively

Figure 13: We expect average realization of Rs60, a growth of 18% YoY, but remains in line QoQ

Figure 14: We have valued MGL at 18x one-year forward EPS to arrive at our target price of Rs1,252

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