ADD on Mahanagar Gas - Faring well - 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 916 is premised on its loyal customer base of CNG and commercial establishments (together comprising ~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. 2QFY21 EBITDA/APAT was 41/43% above estimates, owing to 9% higher-than-anticipated volumes, and 30% higher per-unit EBITDA margin.

Volumes: Blended volume stood at 2.07mmscmd (HSIE 1.91), led by a strong demand recovery in CNG segment post lockdown (1.28mmscmd or 62% of volume mix). PNG segment's volume in 2Q was at 0.80mmscmd. CNG segment has recovered to 90-95% of pre-COVID levels in Nov-2020. Domestic and industrial PNG segment has reached over 100% recovery. We expect blended volumes to remain subdued in FY21E at 2.5mmscmd owing to weak demand by CNG/commercial customers, post which they should jump by 18% YoY to 2.9mmscmd in FY22E.

Margin: Per-unit gross spread expanded by ~INR 1/3 QoQ/YoY to INR 17.3/scm. This is attributable to part retention of the benefit of falling RMC. Per-unit EBITDA came to INR 11.6/scm (vs. INR 7.9/9.9 per scm QoQ/YoY). This was primarily due to improvement in 2Q volumes that led to a decrease in per-unit operating expenditure to INR 5.7. The per-unit EBITDA margin should dip to INR 9.1 (-4% YoY) in FY21E due to lower volume offtake, and subsequently recover to INR 9.7/scm in FY22E (+6% YoY) as normalcy in demand returns post the pandemic.

Takeaways from the earnings conference call: (1) Capex target for FY21/22 is INR 5/6bn (contingent upon permissions from authorities). (2) MGL added three new CNG stations in 2Q, taking their count up to 259. It also added 28 new industrial/commercial PNG customers, taking the count up to 4,046. 16,223 new domestic households were connected in 2Q. (3) MGL plans to add over 20 new CNG stations and upgrade capacity of over 15 stations in FY22.

DCF-based valuation: our target price is INR 916, based on Sept-22E free cash flows (WACC 11%, terminal growth rate 3.0%). The stock is currently trading at 12.4x FY22E EPS.

Shares of Mahanagar Gas Ltd was last trading in BSE at Rs.869.75 as compared to the previous close of Rs. 863.2. The total number of shares traded during the day was 219257 in over 3446 trades.

The stock hit an intraday high of Rs. 873.25 and intraday low of 856.25. The net turnover during the day was Rs. 190138597.

Source : Equity Bulls

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