Mahanagar Gas has witnessed sharp recovery in high margin CNG volumes to more than 90% of pre-COVID-19 levels, while domestic PNG volumes is witnessing strong growth of 12-15%. Improving volume and sustainable high margin (recently undertaken a price hike of Rs. 1.5/kg for CNG and Rs. 0.95/scm for domestic PNG) bode well for strong growth in earnings in the coming quarters. The management expects high double-digit volume growth for FY2022 (on low base of FY2021) and expects 6% volume CAGR over next couple of years. Mahanagas Gas share price closed at Rs 1208 in last session, up Rs 39 or 3.3%.

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Mahanagar Gas long-term volume growth outlook remains intact, supported by structural gas demand drivers such as regulatory push to curb pollution and government’s target to increase the share of gas in India’s energy mix to 15% by 2030 (from 6% currently). Moreover, any regulatory push to make use of CNG mandatory as a fuel for public transportation (as seen in New Delhi) and development of Raigad CGD GA (0.6 mmscmd volume potential or 20% of MGL’s FY2020 gas sales volume) would further add to the company’s volume growth prospects. Mahanagar Gas PAT is expected to clock an 18% CAGR over FY2021E - FY2023E along with high RoE of 23-25%.

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Mahanagar Gas Valuation is attractive at 12.9x its FY2023E EPS (steep discount of 42% to that of IGL on FY2023E PE basis), given a robust balance sheet, FCF yield of 6%, and dividend yield of 3.1%. Hence, Sharekhan maintains a Buy rating on Mahanagar Gas with a revised price target of Rs 1450.

Mahanagar Gas Key Risks:

Lower-than-expected gas sales volume in case of COVID-19 led demand slowdown. Delay in development of new GAs, sharp rise in LNG prices, and adverse regulatory changes (revision in APM gas pricing formula) could impact outlook and valuations.