Q2FY24 Review: Mahanagar Gas: Growth on back of margins; stable outlook

31 Oct 2023 , 12:22 PM

Mahanagar Gas (MGL) Q2FY24 PAT was up 106% YoY, driven by strong Ebitda/scm at Rs14.6 (vs Rs7.9 YoY) as overall volumes grew only 3% YoY. Analysts of IIFL Capital Services upgrade FY24/25 forecast by 22%/7% respectively to reflect management’s guidance on firm margins; the initiatives to boost CNG sales through aggressive promotions are noteworthy, and delays in adding e-buses in the state should support 5% pa volume growth over next few years. Valuations are inexpensive after recent correction (on the back of fears of rollout EV policy by Maharashtra in line with Delhi). ADD.

In-line performance:

As expected, MGL’s Q2FY24 PAT was up 106% YoY (low base effect). Its volumes were up 3% YoY with CNG/PNG volumes rising 2/8% respectively. MGL during the quarter also benefited from lower APM prices (KP committee recommendations on APM gas prices) for which the input prices were down 24% YoY; meanwhile, the blended realisations were down only 3% YoY; as a result, the gross spread/Ebitda per scm expanded by 57%/83% YoY respectively to Rs20.4/14.6. The 68% YoY growth in treasury income also supported the earnings growth. The share of CNG: PNG volumes was broadly maintained at 72:28 vs 73:27 YoY. MGL added 43k consumers in PNG segment and 7 new CNG stations in Q2. 

Maintains medium term growth outlook: 

During the Q2FY24 call, MGL stated that -1) it plans to invest Rs7-8bn pa to grow its CNG/PNG network in all operating areas; this should help connect/serve new consumers; 2) it has initiated aggressive marketing campaign to promote CNG, which combined with economics (50% cheap vs petrol) should drive 5% pa growth in volumes; moderation in LNG prices bodes well for PNG volumes; 3) EVs is a risk in long run, but has its own scalability issues (eg: Maharashtra state has seen consistent delays in new e-buses and resorted to CNG); 4) UEPL acquisition is awaiting approvals but should be complete in 3QFY24; 5) exposure spot LNG is insignificant + gas availability is abundant for which Ebitda/scm should average at Rs10-12 through FY25/26. 

Upgrade forecasts:

Analysts of IIFL Capital Services raise MGL’s FY24/FY25 EPS by 22%/7%, to reflect the firm outlook margins (which are highest vs IGL and GGAS) while volume growth remains largely unchanged. A change of Rs1/scm in margin swings EPS by ~8%; there is a scope for payout to improve (40% in FY25, leading to a yield of 4%) which may re-rate the inexpensive valuations.