Axis Capital has initiated coverage on city gas distribution (CGD) companies, highlighting the sector’s strong growth potential due to aggressive expansion, favorable fuel economics, and policy support. The brokerage has issued a ‘Buy’ rating on Mahanagar Gas (MGL) with a target price of ₹1,580, a ‘Reduce’ rating on Gujarat Gas with a target price of ₹390, and an upgrade on Indraprastha Gas (IGL) to ‘Buy’ with a revised target price of ₹224.
Axis Capital expects CGD companies with a higher exposure to compressed natural gas (CNG) to see the fastest growth, driven by several structural tailwinds:
1. Network Expansion: The aggressive expansion of gas pipeline infrastructure will significantly increase the reach of natural gas, improving availability in new regions.
2. Competitive Pricing vs Petrol/Diesel: With CNG maintaining a substantial cost advantage over petrol and diesel, demand for CNG vehicles is expected to remain robust.
3. New Vehicle Model Launches: The introduction of new CNG models is set to expand the addressable market to nearly 55% of the passenger vehicle industry volume, boosting demand further.
4. Government Support: Policy incentives continue to favor natural gas adoption, positioning CGD companies for sustained growth.
Axis Capital’s preference lies with MGL and IGL, which have a higher proportion of revenues from CNG sales, as this segment is expected to outperform the overall CGD industry in the coming years.
City gas distribution companies supply natural gas for domestic, commercial, industrial, and vehicular use. The sector has been a key beneficiary of India’s clean energy transition, with government policies supporting increased adoption of natural gas as an alternative to conventional fuels. Companies like MGL, IGL, and Gujarat Gas play a crucial role in expanding access to CNG and piped natural gas (PNG) across urban and semi-urban areas.
