Q4FY23 Review: Mahanagar Gas: Beat on record margins

10 May 2023 , 10:17 AM

MGL’s Q4FY23 PAT beat estimates and rose 104% YoY, driven by record-high Ebitda/scm at Rs12.8 (vs Rs7.6/scm YoY); due to softening of spot LNG prices and higher availability of HPHT gas from 4Q onwards. However, MGL’s overall volumes were up by only 6% YoY (CNG 5.8% YoY). Analysts of IIFL Capital Services upgrade FY24/25 EPS by 13%/10%, driven by an increase in the Ebitda spread. Valuations are cheap at 13x FY24ii EPS, but lower volume growth compared to other CGDs remains an issue.

Strong margins, but volumes below estimates: 

MGL’s Q4FY23 PAT was driven by expansion in margins; Ebitda/scm was up 70% YoY at Rs12.8 while volumes rose by only 6% YoY and were below estimates. CNG volumes were up 6% YoY but down 3% QoQ; while PNG volumes grew by 8% YoY driven by 8% YoY growth both in domestic and industrial volumes. CNG: PNG sales mix was 71:29 (72:28 YoY). Spot LNG prices declined sharply in the Q4, leading to a sequential rise in Ebitda spread to Rs12.8/scm (vs Rs8.2/scm QoQ).

Healthy margins to continue: 

During the Q4 call, management shared: 1) In Q4, CNG volumes were impacted due to high prices, and also because 300 CNG BEST buses were off roads. 2) Margins saw significant improvement sequentially, owing to the fall in LNG prices and priority availability of HPHT gas to the CGD sector. 3) Benefit of reduction in APM gas prices has been passed on fully to the consumers. 4) It is confident of maintaining healthy margins for the next 1-2 quarters, on low prices and higher availability of gas. 5) Approval from PNGRB regarding the UEPL acquisition is expected by October-November 2023. 6) Capex for FY23 was Rs5.8bn and target for FY24/FY25 is Rs6bn p.a. 7) APM gas allocation in the priority sector was 93% for FY23; it expects 88-90% allocation in FY24.

Analysts of IIFL Capital Services raise estimates: 

IIFL Capital Services’ analysts raise MGL’s FY24/FY25 EPS by 13%/10%, to reflect the strong margin seen in Q4. They now see Ebitda margin of Rs9.7/scm in FY24 (Rs9.5/scm in FY23 and Rs12.8/scm in Q4). CNG/PNG sales likely to grow by 6-7% in FY24. Earnings are sensitive to margin estimates; change of Rs0.5/scm in margin swings EPS by 6%. Relative to IGL (similar revenue model), valuations (13x FY24ii EPS) are cheap, due to lower volume growth. Revival in volume growth may cause rerating.

Analysts of IIFL Capital Services maintain Add with target price of Rs 1180.