Result Update: Mahanagar Gas Ltd - ACCUMULATE - TP Rs.1084 - Kotak

MGL's Q3FY18 result is marginally lower than our expectations. PAT has increased 25% yoy but flat sequentially to Rs.1.24 bn (vs. our expectation of Rs.1.28 bn). Gross margin has increased 5% qoq (partly base effect) to Rs.3.12 bn (+19% yoy) due to better realization. Another important factor to monitor is EBIDTA per unit of sales. The same has decreased 1% qoq (partly base effect) to Rs.7.97/scm (+12% yoy). The Company has declared an interim dividend of Rs.8/share.

We expect MGL to book CNG gas volume of ~1.99 mmscmd and PNG volume of 0.72 mmscmd in FY18E. Similarly, we model CNG gas volume of ~2.06 mmscmd and PNG volume of 0.73 mmscmd in FY19E and CNG gas volume of ~2.15 mmscmd and PNG volume of 0.78 mmscmd in FY20E We have introduced FY20E earnings. We are bullish on India's gas story supported by government trust on pollution control. We believe there exists a meaningful growth potential for the company due to anticipated growth in the number of CNG operated vehicles considering the current cost effectiveness of CNG as a fuel, potential growth in the number of households in the areas of operation and gas supply to consumers in the Raigad district. MGL has gas distribution rights in Mumbai till 2020 & its adjoining areas till 2030 and in Raigad district till 2040, which acts an entry barrier for competitor. We expect an EPS of Rs.50.1 & cash EPS of Rs.63.3 for FY18E, an EPS of Rs.51.7 & cash EPS of Rs.66.4 for FY19E and an EPS of Rs.55.1 & cash EPS of Rs.71.7 for FY20E. Based on our estimates, the stock at current market price is trading at 9.6x EV/EBIDTA and 18.7x P/E on FY20E earnings. During the last 4 months, MGL's stock price has corrected by 33%. Hence, we now recommend ACCUMULATE (earlier SELL) recommendation on MGL with a DCF based price target of Rs.1084. The company management indicated that Unified Tariff, if implemented, will lower its gas transmission cost as the company can source gas from any part of India at a more reasonable price.

Shares of Mahanagar Gas Ltd was last trading in BSE at Rs.1027.6 as compared to the previous close of Rs. 1037.8. The total number of shares traded during the day was 10289 in over 884 trades.

The stock hit an intraday high of Rs. 1045.65 and intraday low of 1017.05. The net turnover during the day was Rs. 10596541.

Source : Equity Bulls

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