MGL, IGL shares jump 6% each after UBS lifts target price, expects over 30% upside

Despite front-line indices trading within a narrow range during Tuesday’s session, shares of city gas distribution companies Mahanagar Gas and Indraprastha Gas experienced notable gains. Mahanagar Gas (MGL) surged by 6.7 per cent, reaching a new record high of ₹1,943 per share, while Indraprastha Gas (IGL) rose by 6.2 per cent, reaching ₹562.75 per share.

The rally was sparked by a revised outlook from global brokerage UBS, which upgraded its rating and target price for IGL and set a new record high target price for MGL

Double upgrade for IGL

The brokerage has upgraded the rating on IGL to ‘buy’ from the previous rating of sell’ and also lifted its target price from ₹400 to ₹700, which reflects an upside potential of 32.32% for the stock from its previous closing price. 

UBS emphasized that the company’s strong near-term fundamentals are now supported by promising inorganic growth opportunities. The brokerage had previously been cautious about IGL due to slower volume growth in recent quarters and concerns about the risks associated with electrification.

However, the brokerage now expects IGL’s volume growth trajectory to improve, projecting an increase from 4 per cent year-on-year in FY24 to an 8.2 per cent CAGR between FY24 and FY27. UBS pointed to IGL’s expansion into new geographies and infrastructure development as key growth drivers, with potential mergers and acquisitions (M&A) opportunities yet to be reflected in the stock price.

MGL TP raised to ₹2,400

Similarly, UBS has increased the target price for Mahanagar Gas (MGL) from ₹1,600 to ₹2,400 per share, which implies a potential upside of 32 per cent from the stock’s most recent closing price. It continued with its ‘buy’ recommendation on the stock. 

It raised its volume growth expectations for FY25 to FY27, forecasting an increase of 7 per cent to 11 per cent, anticipating that both organic and inorganic growth in volumes could exceed expectations. Infrastructure development and the expansion of CNG fleets are expected to drive this growth.

It also lifted its EBITDA per standard cubic meter (scm) forecast for FY25-27 by 6-11 per cent to ₹12.1-12.3/scm, factoring in MGL’s pricing strategies. Similar to IGL, potential M&A opportunities have not yet been factored by the brokerage into MGL’s current stock price.

CNG 2Ws; a growth avenue in the long term

In their Q1FY25 earnings report, both companies highlighted the launch of the world’s first CNG motorcycle by Bajaj Auto in early July. TVS Motors is also exploring the CNG scooter market, with a model expected to launch in the first half of CY25.

While these innovations may open new growth avenues for city gas distribution companies (CGDs), the impact is likely to be more significant in the long term rather than the near term. Volume growth will depend on the adoption rate of CNG two-wheelers, which is expected to increase as more units become available on the roads.

Bajaj Auto has started with an initial production of 20,000 units per month, beginning in Maharashtra and Gujarat, with plans to expand to other states in the coming quarter.

In Q1 FY25, Mahanagar Gas reported a capital expenditure of ₹2.5 billion. The company plans to add over 50 new CNG stations at a standalone level and approximately 25 stations in UEPL’s geographical area during FY25.

Indraprastha Gas has projected a capital expenditure of ₹17-18 billion for FY25. In Q1FY25, IGL’s capex was about ₹3 billion, compared to ₹2 billion in the same quarter of the previous year.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.