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Top picks: Sharekhan’s top 3 energy stocks to BUY next week for a strong gain

The brokerage firm Sharekhan has proposed to buy the shares of Indraprastha Gas Limited (IGL), Mahanagar Gas Ltd (MGL) and Gujarat Gas Ltd. Sharekhan has a price target of 480 for the stock despite IGL shares closing on Friday at 418.65 per share. Sharekhan predicts a gain of 14% from the current market price of the stock. The brokerage expects a gain of 14.75% for the stocks recommended to buy with a price target of 980 after MGL’s shares closed on Friday 854.00 each. The shares of Gujarat Gas Ltd. ended trading on Friday at Rs. 457.00 per share, but the stock represents an upward trend of 19.25% for Sharekhan, and the brokerage has set a target price of Rs. 545 for the stock.

Sharekhan brokerage research analysts said: “With the recent revision of the domestic gas allocation policy, the gas supply to city gas distribution companies (CGDs) will increase by 2.4mmscmd to 20.7mmscmd and the same would reduce the domestic gas shortage to just 6% from 15% in Q1FY23 This is positive for IGL/MGL (given high exposure to CNG/D-PNG at 81%/87% of total gas sales volume in Q1FY23) as it would reduce gas costs by 25% to ~$8.4/mmBtu versus a uniform mixed price (UBP) of $10.5/mmBtu in August 2022. In addition, a likely cap on the domestic gas price (expected to increase to $10/mmBtu as of October 2022) would help maintain current EBITDA margins/ Policy support for CGD players would help support high volume growth for IGL/MGL (CNG volume growth of 21%/14% in Q1FY23 versus pre-pandemic volume in Q3FY2020) We maintain our Buy rating on CGDs (IGL/MGL/Gujarat Gas) and prefer IGL/MGL in space as policy support would boost earnings growth and improve valuation.”

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“Accommodating policies and likely capping of the domestic gas price would improve the visibility of volume growth (supported by a wider price gap between CNG and gasoline) and a continued recovery in margins for CGDs and with high exposure to CNG/D-PNG. We have increased our PT for IGL/MGL to Rs. 480/Rs. 980 as we increase our PE multiple, as better policy support could remove the margin overhang (from high gas costs and lower availability of APM gas). We prefer IGL/MGL in CGD space as earnings visibility is expected to improve and valuation is also attractive (IGL trades at 18.6x FY24E EPS and MGL at 11x FY24E EPS),” she added ready.

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Energy stocks to buy (Source: Company; Sharekhan Research)

Indraprastha Gas Ltd

The research analysts said: “The government’s recent decision to increase gas allocation for CNG and domestic PNG points to a favorable policy framework for CGDs, as space would be critical to meet the government’s target of 15% natural gas in India’s energy mix. compared to currently only 6% by 2030. A higher domestic gas allocation of 94% to CGDs is a short-term relief for CGDs and raises hopes for more policy measures, such as capping the domestic gas price at current levels. for CGDs would help support the high volume growth and maintain/improve the current margin for IGL.”

They further added that “IGL’s valuation of 20.5x/18.6x FY23E/FY24E EPS is attractive given the visibility of volume growth, supported by robust demand in the existing NCR region and the emergence of new geographic areas (GAs ) from Rewari, Karnal and Gurugram A potential cap in domestic gas prices at current levels would be a major trigger for CGD revaluation as it would boost confidence in both double-digit volume growth and continued strong margins. buy on IGL with an increased PT of Rs.480, as we allocate a higher PE multiple, given an accommodative policy framework, would improve visibility of volume/earnings growth.”

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“The government’s goal to increase the share of gas in India’s energy mix to ~15% by 2030 (up from 6% currently) and the drive to reduce air pollution in the NCR region are providing regulatory impetus for strong growth in CNG and domestic PNG volumes for IGL. In addition, the development of new GAs from Rewari, Karnal and Gurugram and the recent award of three new GAs in the 10th round of CGD bids would drive volume growth outside of existing business areas. The company’s margins are expected to remain strong given the favorable economic conditions of CNG versus gasoline. In addition, the recent sharp volume recovery above pre-COVID levels bolsters confidence regarding the double-digit earnings growth outlook,” Sharekhan said in a report.

Mahanagar Gas Ltd

Sharekhan said in a note that “the recent government decision to increase gas allocation for CNG and domestic PNG indicates a favorable policy framework for CGDs, as space would be critical to meet the government’s target of 15% natural gas in the energy mix.” of India by 2030 versus only 6% currently.A higher domestic gas allocation of 94% to CGDs is a short-term relief and raises hopes for more measures, such as capping the domestic gas price at current levels.Continued policy support for CGDs would increase the help support high volume growth and support/improve the current margin for MGL.”

“Accommodating government policies and likely capping of the domestic gas price would improve the visibility of volume growth (supported by a widening price gap between CNG and gasoline) and a continued recovery in margins for MGL. So we increase our PT for MGL to Rs. 980, as we increase our PE multiple given the improving policy while maintaining our buy rating. MGL is the cheapest CGD stock with an attractive valuation of 11x FY24E EPS, discounting 27% from the 3-year average PE multiple,” the brokerage’s analysts said.

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“The long-term prospects for volume growth of MGL are strongly supported by the government’s goal to increase the share of gas in India’s energy mix to ~15% by 2030 (from 6% currently) and the impetus to reduce air pollution provides a regulatory boost for strong growth in CNG and domestic PNG volumes for MGL. The development of Raigad GA (volume potential of 0.5mmscmd) would further enhance the company’s growth prospects. However, a lower allotment of APM gas, a higher spot price for LNG and a demand for higher dealer commissions by OMCs would remain close to the margins. MGL is the cheapest CGD stock,” the brokerage added.

Disclaimer: The views and recommendations made above are those of individual analysts or brokerage firms, not Mint.

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