Nomura selected Indraprastha Gas Ltd. as its preferred pick among Indian city gas distributors citing stronger volumes and better earnings growth than peers.
"City gas distributors are effectively a monopoly with high and rising returns," Nomura said in its note. Their pricing power is strong and they can maintain or widen margins while keeping compressed natural gas prices 40-60% cheaper than competing fuels, it said.
Nomura doesn't expect the situation to change anytime soon and expects more favourable measures for city gas distributors including a unified tariff for pipelines and inclusion of the fuel in the goods and service tax regime. "We believe the outlook for CNG is likely to improve post-Covid-19, given a potential increase in preference for personal mobility, along with higher taxes on petrol and diesel."
India plans to more than double the share of gas in its energy mix to 15% by 2030 in its but to cut crude imports and curb pollution in the nation with some of the world's worst polluted cities. And the nation is aggressively expanding gas distribution network.
The Petroleum and Natural Gas Regulatory Board notified access codes for new city gas distributors in November in to simplify gas pipeline tariffs and attract investment for building new gas infrastructure. Nomura, however, expects the legacy gas distributors to remain monopolies even as it underscores the threat from electric vehicles.
Nomura's Take
Indraprastha Gas
- Maintained its 'buy' rating and raised its price target to Rs 650 apiece, implying an upside of 25% from the current levels. Shares of Indraprastha Gas gained as much as 4.5% to a record of Rs 529.7 on Tuesday.
Gujarat Gas
- Initiated coverage on Gujarat Gas with a 'buy' rating and price target of Rs 475 apiece--a potential upside of nearly 22%. Gujarat Gas rose as much as 2.8% to a record of Rs 389.9.
- Nomura said Gujarat Gas' volumes and margins can further grow after strong volume growth over the last two years.
Mahanagar Gas
- Initiated coverage with a 'buy' and a price target of Rs 1,300 apiece, a potential upside of 15%. Shares of Mahanagar Gas gained as much as 4.3% to Rs 1,130.
- Nomura said while volume growth for the company is slow, it finds margins to be the strongest and valuations to be inexpensive.
