Nomura has maintained a positive outlook on the city gas distribution (CGD) sector, noting that a potential shift from the current 15% Value Added Tax (VAT) rate to a 2% Central Sales Tax (CST) could meaningfully boost margins for key players such as Indraprastha Gas Limited (IGL) and Mahanagar Gas Limited (MGL).
Assuming that CGD companies retain the full benefit of lower taxes, Nomura estimates an EBITDA impact of ₹1.36 per standard cubic metre (scm) for IGL and ₹0.36 per scm for MGL, translating into a 22% and 4% absolute EBITDA benefit, respectively. The brokerage maintained a neutral rating on IGL with a target price of ₹225, while reiterating a buy on MGL with a target price of ₹1,580.
Nomura said it prefers MGL due to its attractive valuation, leading volume growth, and superior margin profile compared to peers. The firm added that tax rationalisation, if implemented, could serve as a major profitability driver for the sector, enhancing investor sentiment and re-rating potential for city gas distributors.
Disclaimer: The views and recommendations above are those of Nomura. Business Upturn does not endorse them. Please consult a financial advisor before making investment decisions.
