ADD on Mahanagar Gas - Per-unit EBITDA margin surprise positively - HDFC Securities

Mr. Harshad Katkar & Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities.

Our ADD recommendation on Mahanagar Gas (MGL) with a price target of INR 1,065 is premised on its loyal customer base of CNG and commercial establishments (who together comprised ~80% of the sales mix in FY20), which are less price-sensitive than industrial customers that enable the company to maintain its per-unit margins higher than peers. We do not foresee any significant regulatory adversity in its CGD business either through a change in gas allocation or capping returns. 1QFY21 EBITDA/APAT was 17/25% above estimates, primarily owing to 18% higher per-unit EBITDA margin.

Volumes: Blended volume stood at 1.1mmscmd (HSIE 1.1), dragged by weak CNG demand (0.5mmscmd or 43% of volume mix versus 69% in FY20). Volume numbers cannot be compared on a YoY or QoQ basis because of the adverse impact of the nationwide lockdown in 1Q. Gas supply has recovered to 55% of pre-COVID-19 levels in Aug-2020 vs. 25% in Apr 2020, as per the management. No new CNG station was commercialised in 1Q; total station tally still stands at 256. We expect blended volumes to remain subdued in FY21E at 2.5mmscmd owing to weak demand by CNG/industrial/commercial customers, post which they should recover jump by 18% YoY to 2.9mmscmd in FY22E.

Margin: Per-unit gross spread expanded by ~INR 1 QoQ/YoY to INR 16.1/scm. This is attributable to part retention of the benefit of falling RMC. APM (82% of 1Q sourcing mix) declined to USD 2.39/mmbtu in Apr 2020, -26/-35% QoQ/YoY and Asian spot LNG price (18%) declined to USD 2.8/mmbtu in 1QFY21, -43/-48% QoQ/YoY. Per-unit EBITDA came to INR 7.9/scm (vs. INR 9.4 per scm in FY20). This was primarily due to a fall in 1Q volumes that led to an increase in per-unit operating expenditure to INR 8.2 vs. 5.7/4.9 per scm QoQ/YoY. The per-unit EBITDA margin should dip to INR 9.1 (-6% YoY) in FY21E due to lower volume offtake, and subsequently recover to INR 9.7/scm in FY22E (+6.2% YoY) as normalcy in demand returns post the pandemic.

Takeaways from the earnings conference call: Capex target for FY21 is INR 5.5-6bn (contingent upon permissions from authorities), of which INR 1.2bn would be spent in the Raigad district. The demand from restaurants and hotels currently stands at 55/40% of pre-COVID levels.

DCF-based valuation: our target price is INR 1,065, based on Mar-22E free cash flows (WACC 11%, terminal growth rate 3.0%). The stock is currently trading at 13.7x FY22E EPS.

Shares of Mahanagar Gas Ltd was last trading in BSE at Rs.973.45 as compared to the previous close of Rs. 967.7. The total number of shares traded during the day was 26519 in over 2070 trades.

The stock hit an intraday high of Rs. 991.85 and intraday low of 968.5. The net turnover during the day was Rs. 26041387.

Source : Equity Bulls

Keywords