3 Energy Stocks To Buy For 21% to 38% Upside Says HDFC Securities

HDFC Securities, a brokerage, is bullish on the Indian gas sector in the current market scenario. According to the brokerage, Indraprastha Gas (IGL), Gujarat Gas (GGL), Mahanagar Gas (MGL), and City Gas Distribution (CGD) stock prices may skyrocket from their current levels. MGL has a target price of Rs 1,025 and an 'add' recommendation from the brokerage and anticipates the stock to climb 21% from its current market price of Rs 847. The brokerage has set a target price of Rs. 790 for GGL, which it expects to jump 28 percent from its current market price of Rs. 613, and a target price of Rs. 665 for IGL, which it expects to rise 38 percent from its current market price of Rs. 480. And hence, the brokerage has given a buy rating for IGL and GGL.

The brokerage’s take on Indian Gas Sector

HDFC Securities in its latest research report has said that "City Gas Distribution (CGD) companies - Indraprastha Gas (IGL), Gujarat Gas (GGL) and Mahanagar Gas (MGL) - have seen an exaggerated ~14-28% correction from their highs in the past six months due to (1) a sharp rise in APM gas and spot LNG prices; (2) reduction in petrol and diesel taxes, which has reduced the tax arbitrage for CNG; and (3) potential increase in dealer margins. Although CGD companies' margins are likely to be muted in the near term as a result of higher spot LNG prices and 10-15% lower allocation of cheaper domestic gas to CNG and domestic PNG segments, margins should recover after this temporary blip due to price advantage of CNG over petrol and diesel and domestic PNG over LPG. We expect strong CNG volume growth to sustain, as the highest-ever pricing differential between CNG and petrol/diesel incentivizes faster CNG adoption/conversion."

The brokerage has also claimed that "After a 62% revision to USD 2.9/mmbtu in October 2021, we expect the domestic gas price to further increase by 37+% to about USD 4/mmbtu in April 2022, based on the current trend in international gas prices. However, as evident from historical trends and supported by the highest-ever gap between the price of CNG and alternate fuels, city gas companies should be able to pass through any rise in domestic gas cost on to consumers. The CNG-Petrol price spread has risen by 38% to INR 54 over the past 12 months despite the government's recent cut in petrol taxes, providing a degree of support for any potential CNG price hike. Any increase in OMCs dealer margins will almost certainly be passed on to consumers, without an adverse impact on margins. At current petrol, diesel, and CNG prices, we estimate per km running cost of INR 5 for petrol, INR 3.4 for diesel, and INR 1.6 for CNG. Resultant, the current price advantage for CNG over petrol at INR 3.4 per km (121%) and over diesel at INR 1.9 per km (22%) is the highest ever."

According to the research analysis of HDFC Securities "Our channel check indicates a higher conversion of vehicles to CNG, owing to the highest-ever CNG discount over petrol and diesel and the government's regulatory push to curb pollution. Additionally, with travel restrictions relaxed across the country, aggressive penetration in the existing areas, and the development of new geographical areas (GA's), we expect volume growth to remain strong, driving earnings growth for CGD companies. We expect volume growth of 22/16/18% over FY21-23E for IGL/GGL/MGL."

Buy IGL Says HDFC Securities

The brokerage has stated in its research report that "We remain bullish on the CGD space but prefer IGL over GGL, given its high exposure to CNG segment at 73% and MGL's at 72% vis-à-vis GGL's 17% of overall volumes. Currently, IGL/GGL/MGL trades at 20.5/23.7/9.9x FY23E EPS. While on FY23E PER, IGL and MGL trade at a 12% discount to its 3-year average, GGL trades at a 49% premium. We revise our EPS estimates by ~3-7% for FY22-24E and target price (TP) by 7-9% (Exhibit 13), given near-term pressure on margins."

As per HDFC Securities "We reiterate BUY on IGL with a TP of INR 665 based on (a) robust volume growth at 22% CAGR over FY21-23E, (b) steady margins, and (c) regulatory support from the government to curb pollution in the Delhi/NCR region. We reiterate our BUY rating on GGL with a TP of INR 790, owing to a ramp-up in volumes from existing and new GAs. We maintain ADD on MGL with a TP of INR 1,025, given subdued volume growth over the long term."

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.