Mahanagar Gas (MGL) share price: BUY with price target of Rs 1450, says Sharekhan; Know key positive and negative indicators

Brokerage firm Sharekhan maintains Buy rating on MGL with an unchanged price target of Rs 1450. Nevertheless, valuation is attractive at 12.2x its FY2023E EPS [steep discount of 45% to that Indraprastha Gas Limited (IGL) on FY2023E PE basis], given industry-leading margins high RoE/RoCE of 24%/30% and FCF yield of 4-5%.

MGL Key positives:

Better-than-expected domestic PNG volume growth of 9% y-o-y to 0.5 mmscmd
Decent FCF generation of Rs 466 cr (4% yield) in FY2021 despite the pandemic’s effect in Q1FY2021.

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MGL Key negatives:

Lower-than-expected EBITDA margin of Rs12.1/scm (down 2.2% qoq) due to decline in gross margin and high opex.

MGL Key Risks:

Lower-than-expected gas sales volume in case of delayed recovery due to COVID-19 led slowdown

Delay in development of new GAs, a sharp rise in LNG prices, and adverse regulatory changes (revision in APM gas pricing formula) could impact outlook and valuations

Sharekhan says that Mahanagar Gas Q4FY2021 operating profit at Rs 316 cr (up 29.7% yoy; flat qoq) was 4.8% below estimates of Rs 332 cr but in line with street estimates. Lower-than-expected EBITDA versus our estimates was on the account of 3.7%/1.2% miss in the EBITDA margin at Rs. 12.1 per scm/2.9 mmscmd; down 2.2% qoq/up 3.8% yoy. The miss in EBITDA margin/ volume was on the account of marginally lower-than-expected gross margin at Rs. 17.7/scm (flat qoq) and higher-than-expected operating cost (opex/scm increased by 4.6% qoq to Rs. 5.6/scm). High-margin CNG volume growth of 2% yoy to 2 mmscmd was below expectation of a 4% yoy growth, while PNG volume growth of 7.9% yoy to 0.9 mmscmd beat expectations.

Adjusted PAT at Rs 213 crore (up 27% yoy; down 2% qoq) missed our/consensus estimate by 8.5%/3.3% due to lower other income (down 36.3% yoy). The management has indicated that CNG volume has witnessed 25-30% decline versus normal level due to lockdown during April 21-May'21 but domestic and industrial PNG volumes remained at normal levels. Margins are expected to remain strong given weak domestic gas prices, correction in spot LNG price and higher alternative fuels (linked to oil prices), explains Sharekhan.

MGL expects CNG volumes to speedily recover as easing of lockdown restrictions and progress in the vaccination drive would normalise vehicular tariff. However, ongoing negotiation with OMCs with regards to revision in dealer commissions would remain an overhang on MGL in the near term. OMC demand of high dealer commission would remain an overhang on MGL until resolved