Mahanagar Gas: A pricey bet on growth

10 Mar 2023 , 10:38 AM

Recommendation: Add

Target Price: Rs 1,050

Transaction value (FY22 6x P/s) seems expensive versus other listed players and will be earnings-dilutive for MGL in the near term but will have limited impact on the balance sheet.

Unlocking volume expansion with synergies

UEPL is an authorized entity in the geographical areas of Ratnagiri, Latur and Osmanabad in Maharashtra and Chitradurga and Devangere in Karnataka. With MGL’s presence in Maharashtra, the newly acquired GAs around MGL’s existing areas can create potential synergies. The gradual expansion of CNG stations and addition of new PNG customers will drive long-term volume growth for MGL. Analysts at IIFL Capital Services believe this acquisition will have minimal impact on MGL’s balance sheet (~38% of net worth in cash) and can easily be financed by the existing cash balance and FCFs.

CNG driven growth

During the concall, management shared: 

• Transaction value would be entirely funded from internal accruals and existing cash on the books. 
• UEPL’s volumes reached 0.1mmscmd in September 2022; management expects volume potential of 1.1mmscmd in the next seven to eight years, for which, CNG will be the main driver of growth. 
• Capex target for the next seven to eight years is of Rs10 billion, with an annual target of Rs1-1.5 billion p.a. 
• The acquisition will get completed after September 2023, as PNGRB approvals require a minimum of five years since the license award for ownership transfer. 
• While there are no restrictions on merging, UEPL will likely remain a subsidiary of MGL.

Cheap valuations

Analysts at IIFL Capital Services have marginally cut their FY24/25 earnings estimated by 2-3% on lower other income. On FY24, MGL trades at 13x FY24 estimated EPS. Valuations are at significant discount to other CGD entities like IGL (19x FY24) and GGAS (21x FY24) — and are compellingly cheap. Valuation discount could narrow down materially, provided MGL improves capital allocation and assures greater confidence in long-term volume growth.