Q1FY24 Review: Mahanagar Gas: Good quarter; but margins may have peaked

7 Aug 2023 , 01:19 PM

MGL Q1FY24 PAT was up 99% YoY, driven by record-high Ebitda/scm at Rs16.8 (vs Rs9.1 YoY) despite flat volumes. Going ahead, it plans to spend Rs6-8bn p.a., towards network expansion, and rationalises prices to grow volumes. While analysts of IIFL Capital Services upgrade FY24 PAT forecast by 16%, outlook on FY25 is poor as earnings are sensitive to margins (Rs1/scm cut=10% swing), for which multiples (12x FY25 PAT) may remain cheap. 

Strong Q1: 

MGL’s Q1FY24 PAT was up 99% YoY, despite flat volumes as it earned record-high margins. CNG sales were down 2.3% YoY (against industry trends), while PNG volumes grew 5% YoY. Blended realisations were up 7% YoY, while fuel costs down 15% YoY. Gross/Ebitda margin/scm was record-high at Rs22/17 vs Rs14.4/9.1 YoY; clearly, MGL has not passed on the benefit of reduction in APM gas cost to customers, for which margins are at an all-time high. In Q1, the CNG: PNG sales mix was 73:27 vs 74:26 YoY. 

Eyeing 5% volume growth: 

During the post earnings call, MGL CMD said: 1) Decline in CNG volumes in Q1 is partly due to price effect and rich gas leading to low volumes (mmscmd) but higher quantity (mn kg); 2) Efforts are on to improve volume growth through various initiatives, including – network expansion, CNG station addition, etc.; it will spend Rs6-8bn p.a. capex and clock 5% volume growth in the medium term, led by all 3 segments. 3) MGL has recently signed MoU to supply CNG to around 450 MSRTC buses, which would ply by Q3FY24, and add to ~50kscm volumes. 4) The company will look forward to offer competitive CNG pricing to CVs and buses and gain back some volumes. 5) LNG for trucks also an attractive alternative, for which MGL is stepping up infra builds (5-6 stations targeted in next 10- 12 months). 6) The acquisition of UEPL is awaiting PNGRB approval. 

Cheap for a reason: 

MGL has guided for Rs9-11/scm Ebitda in steady state vs Rs16.8/scm clocked in Q1FY24; as such, the FY24 PAT sees 16% upgrade, and has upside risks. Analysts of IIFL Capital Services see FY25 PAT falling as margins normalise; earnings are sensitive to spreads: Rs1/scm change leads to 10% in PAT; valuations may remain cheap for the same, unless the pay-out materially improves (~Rs150/share cash on books).