MGL, IGL shares: Why UBS raised target prices on 2 CGD stocks

Shares of Mahanagar Gas Ltd (MGL) and Indraprastha Gas Ltd (IGL) climbed up to 7 per cent in Tuesday's trade after foreign brokerage UBS upgraded the target prices for the two city gas distributors (CGDs). The brokerage upped its rating for IGL to 'Buy' from 'Sell' earlier and suggested a target price of Rs 700 from Rs 400 earlier. For MGL, it suggested a fresh target of Rs 2,400 from Rs 1,600, as it maintained its 'Buy' rating on the stock.

UBS reportedly said that India's fragmented city gas distribution space has just started to consolidated and given the structural challenges in the industry, the trend may continue. UBS said large city gas entities such as IGL and MGL, with net cash balance sheets, have stated their intention of participating, and said the pressure to meet infrastructure targets, challenges of gas sourcing and opportunities from regional overlap could all be drivers.

"Inorganic growth prospects and strong near-term fundamentals should support further rerating," the brokerage said.

MGL shares jumped 6.76 per cent to hit a high of Rs 1,942 on BSE. IGL shares, on the other hand, climbed 6.11 per cent to hit a high of Rs 562.80.

In the case of MGL, UBS reportedly said volume trajectory could continue to surprise positively, thanks to the infrastructure development and CNG fleet expansion. It raised its FY25-27 volume expectations for MGL to 7-11 per cent. The brokerage said it is not pricing in M&A opportunities.

In the case of IGL, UBS reportedly its inorganic growth prospects complement strong near-term fundamentals. It noted that its earlier bearish stance on the counter was driven by tapered volume growth in the previous few quarters and possible electrification risk. It expects volume growth trajectory for IGL to improve from about 4 per cent YoY in FY24 to an 8.2 per cent CAGR in FY24- 27E. Infrastructure expansion and new geographies may drive volumes, it said.