Mahanagar Gas - In-line performance - HDFC Securities

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

Our ADD recommendation on Mahanagar Gas (MGL) and price target of INR 1,255 are premised on its loyal customer base in CNG and commercial establishments (together comprising ~79% of the sales mix in FY21), which is less price-sensitive than the industrial customer base and enables the company to maintain higher per-unit margins than peers. 4QFY21 EBITDA/APAT was 2/3% below estimates, owing to higher-than-expected raw material and operating costs and lower-than-expected other income, which were offset by 4% rise in revenue.

Volume and margin: Blended volume stood at 2.89mmscmd (in line with our estimate), led by a strong demand in CNG segment (2.02mmscmd or 70% of volume mix). PNG segment's volume in 4Q was at 0.87mmscmd. Per-unit gross spread remained flat sequentially and expanded by ~INR 2.4 YoY to INR 17.7/scm in 4Q. Per-unit EBITDA came to INR 12.1/scm (vs. INR 12.4/9.6 per scm QoQ/YoY).

Earnings call takeaways: (1) MGL added 6 new CNG stations in 4Q, taking their count to 271. It also added 99 new industrial/commercial PNG customers, taking the count up to 4,192. 54,688 new domestic households were connected in 4Q, taking the count to ~1.6mn households. (2) The Board has declared a final equity dividend of INR 14/sh for FY21. (3) With the strike of the second wave of COVID-19 and resulting lockdowns, CNG volumes were adversely impacted in 1QFY22, falling by 25-30% sequentially.

Change in estimates: We cut our FY22 EPS estimate by 18.2% to INR 66.1 to account for a lower volume assumption in FY22 as we expect volumes to be affected by the strike of the second wave of COVID-19. We raise our FY23 EPS estimate by 3.6% to INR 91.8, to account for increased volume and better per-unit EBITDA assumptions in FY23.

DCF-based valuation: Our target price is INR 1,255, based on Mar-23E free cash flows (WACC 10%, terminal growth rate 3.0%). The stock is currently trading at 12.5x FY23E EPS.

Shares of Mahanagar Gas Ltd was last trading in BSE at Rs.1190.65 as compared to the previous close of Rs. 1137.3. The total number of shares traded during the day was 69156 in over 4488 trades.

The stock hit an intraday high of Rs. 1198.95 and intraday low of 1144.95. The net turnover during the day was Rs. 81088279.

Source : Equity Bulls

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