Gujarat Gas, Mahanagar Gas shares soar as Street celebrates surprising margin boost

Shares of city gas distribution companies like Mahanagar Gas (MGL) and Gujarat Gas (GGL) soared in early trade on Wednesday as Street celebrated the huge rise in the companies' margins.

Shares of Gujarat Gas rose as high as 8.75 percent to Rs 550.95. The stock outperformed the sector by 3.76 percent and opened with a gain of 5.97 percent. At 10:30 am, it is quoting at Rs 545 apiece on the BSE, up Rs 39.25 or 7.75 percent.

Gujarat Gas intraday stock chart (Source: BSE)

Meanwhile, Mahanagar Gas stock touched an intraday high of 6.8 percent to Rs 799 per share. The company's shares opened with a gain of 2.25 percent and outperformed the sector by 2.19 percent. The stock has gained after 5 days of consecutive fall and is currently trading at Rs 781.55 per piece, up Rs 33.40 or 4.48 percent.

Mahanagar Gas intraday stock chart (Source: BSE)

There was good news in the fourth quarterly numbers for Mahanagar Gas and Gujarat Gas. While investors expected margin expansion, the margin for both firms came in much higher than what the Street was working with.

As per a CNBC-TV18 poll, the Street expected the margin to come in at 10.1 percent for Mahanagar Gas. However, margin came in at around 20 percent. Its profit came in higher than the poll numbers at Rs 131.8 crore.

For Gujarat Gas, margin came in at a whopping 15 percent versus an expectation of 8 percent. They capped volumes at higher levels, and that is something that aided margins for the company. Its profit grew on a sequential basis and came in at Rs 444.3 crore.

As far as valuations are concerned, Mahanagar Gas is the cheapest in the city gas distribution space at 9.8 times, while Gujarat Gas trades at 19.50 times which is more expensive than both Indraprastha Gas (IGL) and Mahanagar Gas.

On the back of these numbers, Jefferies has increased Gujarat Gas’s EPS estimates by 13 percent.

Citi, however, has a different take on Gujarat Gas and has cut its target price, despite the big margin boost and the belief that the worst is behind for the company in terms of margins.

Jefferies has a ‘buy’ call on Mahanagar Gas too, with a target price of Rs 1,400 per share. It reported a 20 percent beat on EBITDA driven by a higher margin, and that is something that is making all the brokerages positive on these two stocks.