ADD on Mahanagar Gas - On the path to normalcy - HDFC Securities

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

Our ADD recommendation on Mahanagar Gas (MGL) with a price target of INR 1,204 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. 3QFY21 EBITDA/APAT was 15/16% below estimates, owing to 11% lower-than-anticipated volumes, and 4% lower per-unit EBITDA margin.

Volumes: Blended volume stood at 2.77mmscmd (HSIE 3.11), led by a strong demand in CNG segment post lockdown (1.88mmscmd or 68% of volume mix). PNG segment's volume in 3Q was at 0.89mmscmd.

Margin: Per-unit gross spread expanded by ~INR 0.5/3.8 QoQ/YoY to INR 17.7/scm. This is attributable to part retention of the benefit of falling RMC. Per-unit EBITDA came to INR 12.4/scm (vs. INR 11.6/9.2 per scm QoQ/YoY). This was primarily due to improvement in 3Q volumes that led to a decrease in per-unit operating expenditure to INR 5.3.

Takeaways from the earnings conference call: (1) Capex target for FY21/22 is INR ~4/7bn. (2) MGL added six new CNG stations in 3Q, taking their count up to 265. It also added 47 new industrial/commercial PNG customers, taking the count up to 4,093. 49,171 new domestic households were connected in 3Q. (3) The Board has declared an interim dividend at 90%, i. e. INR 9/sh for FY21.

Change in estimates: We raise our FY21/22E EPS estimate by 13.2/6.4% each to INR 64.0/74.9, to factor in better-than-expected volumes, the overall performance in 9MFY21 and the management's guidance of sustainability of the current per unit margins owing to pricing power.

DCF-based valuation: our target price is INR 1,204, based on Dec-22E free cash flows (WACC 10%, terminal growth rate 3.0%). The stock is currently trading at 15.0x FY22E EPS.

Shares of Mahanagar Gas Ltd was last trading in BSE at Rs.1139.35 as compared to the previous close of Rs. 1163.75. The total number of shares traded during the day was 45115 in over 2577 trades.

The stock hit an intraday high of Rs. 1178.6 and intraday low of 1132.5. The net turnover during the day was Rs. 51940864.

Source : Equity Bulls

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