Why UBS Recommends A ‘Buy’ For These Two India City Gas Distributors

Shares of Indraprastha Gas Ltd. and Mahanagar Gas Ltd. surged after UBS upgraded its investment recommendation for the nation's two pipeline gas suppliers, citing increase in demand for a cleaner alternative to kitchen and auto fuel.

The Swiss multinational investment bank upgraded Indraprastha Gas to ‘buy' from ‘sell', and Mahanagar Gas to ‘buy' from ‘neutral' earlier, according to its note. The open access regulation risk, it said, is largely over and volume growth can now start to emerge. The global financial services provider has raised its price target on Indraprastha Gas to Rs 650 apiece from Rs 410, and that of Mahanagar Gas to Rs 1,300 from Rs 1,100 apiece.

“Based on the regulations, infrastructure development and economics and adoption, we believe that CNG and H-CNG are best positioned with city gas distributors leading the multi-fuel advance,” UBS said in its note. India's auto fuel demand is at the cusp of moving from traditional gasoline/diesel fuels to compressed natural gas, hydrogen-CNG, liquefied natural gas and electric vehicles, UBS said, adding that gas utilities, too, are likely to benefit from higher demand.

UBS expects India's hydrogen integration to be natural gas-driven as the country has started generating hydrogen from natural gas and blending up to 18% with CNG. It also said despite the challenge of domestic gas price revisions, city gas distributors should be able to protect margin due to a higher tax on conventional fuels.

Shares of Indraprastha Gas rose as much as 2.6% on Tuesday to Rs 571.9—a record high. The stock is up for the third straight day. Of the 38 analysts tracking the company, 28 have a ‘buy' rating and seven each suggest a ‘hold' and a ‘sell'. The stock trades 11.4% higher than its Bloomberg consensus 12-month price target of Rs 502 apiece.

Shares of Mahanagar Gas, too, gained as much as 1.8% to Rs 1,146 apiece — the highest since February 2020. Of the 32 analysts tracking this company, 25 recommend a ‘buy', three suggest a ‘hold' and the remaining four have a ‘sell' rating. The average of Bloomberg consensus 12-month price targets implies an upside of 1.1%.