Mahanagar Gas Share Price: CLSA sees 55% return from here on - big news for investors

CLSA reiterates BUY rating on Mahanagar Gas (MGL) with target price of Rs 1350 (+55% potential upside). The volume recovery surprised positively with Nov sales rising above the pre-Covid-19 level.  Lower other income was offset by a marginally higher tax rate as net profit also stood 45% ahead.

Quicker than expected rebound:

Faster recovery drives QQ beat; BUY for its attractive risk-reward:

Mahanagar Gas’ Q2 FY21 EBITDA stood 44% ahead led by higher volume and margins with the unit EBITDA margin spiking to a record high. The volume recovery surprised positively with Nov sales rising above the pre-Covid-19 level. OMCs have raised demands for higher commissions but management is confident it can pass this on to consumers. This Q2 beat & faster rebound makes CLSA raise their FY21 EPS 40% & lift their target to Rs 1350. An improved volume and margin outlook should shrink its 50% discount to IGL’s PE. At a 3% FY22CL yield and just an 11x FY22PE, MGL offers attractive risk-reward.

Big beat driven by a record margin and higher volume:

MGL’s Q2 FY21 net profit of Rs 1.44 bn (-47% YoY/+3.2x QoQ) was 45% ahead of estimates driven by higher volume and a better gross margin. Volume rebounded 86% QoQ and was a clear beat at 2.07mmscmd. Its gross margin was higher than forecast and along with lower than expected OPEX it drove a big 44% beat on Ebitda (Rs 2.21 bn; -19% YoY/+2.8x QoQ). Its unit EBITDA margin rose by a big Rs3.7/scm YoY/Rs1.7/scm QoQ to a record high of Rs11.6/scm. Lower other income was offset by a marginally higher tax rate as net profit also stood 45% ahead.

Positive surprise on volumes across the board in Q2:

The rebound in volume surprised positively across all segments with CNG the biggest contributor making up 82% of incremental QoQ volume. CNG volume spiked 2.7x QoQ to 1.28mmscmd but was lower by 42% YoY. Residential PNG volume remained robust and rose 22% YoY to 0.46mmscmd. Industrial and commercial volume spiked 63% QoQ to 0.33mmsmcd (-20% YoY) led by the industrial segment.

Volume normalisation continues and OMCs demand higher commissions:

Overall volume surpassed 3mmscmd in Nov vs 2.95 mmscmd in FY20. CNG volume has risen to 90%-95% of the pre Covid-19 level with domestic piped gas volume growth staying strong. Industrial volume has also normalised even as the recovery in commercial PNG remains slow. Oil marketing companies (OMCs) are demanding a hike in margins. Noting that sales through OMCs make up 60%-65% of CNG volume, management remains confident of positive discussions with OMCs and highlighted any such increase in the margin would likely be recovered via a price hike.

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Maintain BUY:

Building in the Q2 beat and faster than expected normalisation in volume lifts our FY21 EPS estimate by 40%. CLSA raised their FY22 EPS 2%, an improving volume and margin outlook should shrink MGL’s massive 50% PE discount to IGL. At just a 11x FY22CL PE and a 3% yield, MGL offers attractive risk-reward; BUY.