Mahanagar Gas, Gujarat Gas poised for gains as CNG adoption surges; Siddhartha Khemka sees 10-20% upside
India's City Gas Distribution (CGD) sector has emerged as a resilient and strategically vital component of the energy landscape, supported by rising CNG adoption, expanding infrastructure, and favorable cost economics.
While electric vehicles (EVs) continue to capture headlines, their penetration—particularly in the mass segment—is facing headwinds globally, inadvertently strengthening the outlook for CNG adoption and, by extension, the CGD ecosystem.
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Structurally, the CGD sector is witnessing renewed investor interest due to consistent volume growth, margin expansion potential, and supportive regulatory frameworks. In FY25, the CNG powertrain grew by ~35% YoY, establishing itself as one of the fastest-growing fuel categories in India's passenger vehicle market.
Moreover, CNG vehicle penetration across leading OEMs has expanded significantly, with models now forming up to 25% of certain manufacturers' portfolio, compared to low double-digits just a year ago.
This trend is further reinforced by the launch of affordable CNG models in the sub-INR1 million category—a segment where EV penetration remains limited.
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Globally, slowing EV momentum is playing to the CGD sector's advantage. Policy tapering in the US and Europe has dampened EV sales growth, with revised projections cutting the expected oil displacement by EVs to just 5mb/d by 2030, half of which is dependent on China alone.
Concurrently, increased import tariffs in key markets against Chinese EVs are creating bottlenecks in global EV supply chains, delaying broader adoption.
In contrast, CNG is gaining share steadily, driven by better unit economics, infrastructure rollout, and OEM alignment with mass-market demand.
Government support continues to be a key enabler for CGD. Expansion of the CGD network across new geographies and industrial zones—especially in tier-2/3 cities—is catalyzing gas consumption.
Policy continuity around cleaner mobility alternatives and price-linked incentives further de-risk the segment's medium-term prospects.
In summary, while EV adoption remains aspirational, the CGD sector is anchored in affordability, scalability, and infrastructure readiness.
With limited competitive disruption, robust policy backing, and rising penetration in key auto segments, the CGD sector is structurally well-positioned for sustained growth over the next 3–5 years.
Mahanagar Gas: Buy| Target Rs 1760| LTP Rs 1370| Upside 28%
Mahanagar Gas remains a BUY, underpinned by robust fundamentals and strong growth visibility. Despite FY25 EBITDA/PAT declines, management guides for 10% volume CAGR over FY25-27, led by CNG demand, collaborations with OEMs, and guaranteed price discounts for new PNG customers.
The company targets significant expansion—adding 250 CNG stations and upgrading existing ones by FY30, with depot access for commercial vehicles and strong uptake in the Mahotsav 2.0 scheme.
UEPL volumes are guided to grow 40% YoY in FY26, while forays into battery manufacturing, LNG, and CBG offer long-term earnings upside. We expect a 10% CAGR in volume over FY25-27.
Gujarat Gas: Buy| Target Rs 535| LTP Rs 476| Upside 12%
Gujarat Gas is well-positioned for growth with an expected EBITDA margin of INR 5.6–5.8/scm for FY26/27, supported by lower gas costs from falling LNG and crude prices and rupee appreciation.
The company targets 12% YoY CNG volume growth and is expanding aggressively in Thane rural, Ahmedabad rural, and Rajasthan to capture industrial demand. Strategic infrastructure investments and efforts to boost industrial gas adoption support robust volume growth.
These factors underpin a positive margin and volume outlook, reinforcing Gujarat Gas's strong position in the growing gas distribution market.
(The author is Head – Research, Wealth Management,
Motilal Oswal Financial Services Ltd
.)
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