Mahanagar Gas (MGL) share price: Jefferies says maintain Buy with Rs 1700 price target

Mahanagar Gas EBITDA was up 22% yoy despite a 9% yoy decline in volumes helped by margin expansion and came broadly in-line with Jefferies but 14% ahead of consensus. As flagged recently, Jefferies continues to expect consensus earnings upgrades and note that Mahanagar Gas stock could outperform due to a 25% consensus EPS upgrade even if "valuation" does not re-rate. Jefferies marginally tweaked our FY21-23E EPS estimates by 1-2% and maintained Buy with a Rs 1700 price target at an unchanged 16x FY23E P/E.

Mahanagar Gas Gross and EBITDA margin expansion on track:

Both gross margin and EBITDA margin expanded q/q to Rs 17.7/12.4 per scm coming in line with JEFe helped by partial benefit of lower dom gas costs retained and operating leverage.

See Zee Business Live TV Streaming Below:

Consensus estimates suggest the margin expansion is not factored in for Mahanagar Gas:

As flagged last week, consensus estimates seem to suggest that FY22E PAT is almost flat to FY20 reported PAT (only 7% higher adj for deterred tax gain in FY20). Even if volumes in FY22E are the same as in FY20 (we model 7% higher volumes), then FY22E PAT too could be 22% higher than Adj FY20 due to the better margin.

Price hike in CNG and dom PNG taken today gives confidence on margin trajectory of Mahanagar Gas:

Mahanagar Gas took a price hike of Rs 1.5/kg and Re 0.95/scm in CNG/dom PNG today giving us confidence of maintaining the higher margins we have modeled (even if costs gradually rise) by taking further price hikes if needed.

Even if valuation does not re-rate amid lack of volume catalysts, earnings upgrade could lead to Mahanagar Gas out-performance:

Even though the underlying margin drivers are on track, this is not reflected in the street estimates, prompting us to believe that, even if "valuations" remain at current levels, a 23% upgrade to consensus FY22E EPS could lead to a fair value of Rs 1400 (25% potential upside) even if Jefferies assume a P/ E multiple of 14x (where MAHGL is trading on consensus numbers).

Reiterate Buy on Mahanagar Gas:

With FCF and dividend yield also strong at 7% and 4% respectively and a solid net cash balance sheet, Jefferies reiterate Buy rating on Mahanagar Gas amid attractive valuations (11x FY22E P/E).