Jefferies says that Mahanagar Gas volumes missed Jefferies estimates by 4% leading to a 3% miss on EBITDA even though gross and EBITDA margin were 3%/2% ahead. Final dividend at only Rs 14/sh (2% div yield) is disappointing after a special div last year. Jefferies had already cut FY22E EPS by 12% last week amid COVID 2nd wave and now modestly raised FY22-23E EPS by 1% (higher margin) leading to 1% higher Rs 1680 price target. Maintain Buy also noting attractive valuations at 11x FY23E P/E and an appealing 7% FCF yield.

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Jefferies says that Gross margin came at Rs 17.7/scm which was 35% higher than 4QFY19. Indeed, margins in these segments (85% of overall volumes) must have also raised qoq due to price hikes taken in Feb which helped in offsetting the likely decline in industrial PNG margins due to the spike in Spot LNG prices thereby keeping gross margin flat qoq in 4QFY21.

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Jefferies says that higher opex resulted in a lower beat on EBITDA margin (1.6% above Jefferies estimate) even as EBITDA margin has risen at a CAGR of 16% over the past five years. But EBITDA came 2.6% below Jefferies estimate in 4QFY21 on lower volumes and higher opex partly offset by better gross margin.

Jefferies says that Although the second wave of COVID is yet to largely factored in street EPS, we still think the potential downside to consensus FY22E EPS due to COVID 2nd wave could be limited given our belief that the street was under-estimating Mahanagar Gas margins earlier. The downside impact of soft volumes due to the second wave of COVID could thus be partly offset by upward revision in street margins for Mahanagar Gas.

Jefferies have now modestly raised FY22E/23E EPS of Mahanagar Gas by 1% on higher margins (11% cumulative cut since Apr) resulting in a slightly higher Rs1 680 (Rs 1660 earlier) at an unchanged 16x P/E also noting valuations at <11x FY23E P/E are appealing. Final dividend of Rs 14/sh announced today is unimpressive (no special dividend unlike last year) translating to a full year dividend yield of  2% only and 30% dividend payout ratio despite limited capex obligations.

Net cash balance sheet amid attractive valuations while margins are continuing to expand, Jefferies maintains Buy also noting that market could look past the near-term pressure on volumes amid COVID.