Mahanagar Gas: Strong margins offset volume growth concerns, valuation attractive

Highlights 

• Revenue de-growth of 4.5 percent on lower realisation


• Generated Record Unit EBITDA of Rs 16.8 per scm


• Volume growth tepid, but CNG demand is improving


• CNG vehicle conversion picking up due to favourable price differential with auto fuels


• FY24 capex outlook of Rs 600-800 crore


• Near-term catalyst is Unison Enviro acquisition approval


• Valuation at FY25 PE of 9.6x is at a discount to long-term average

Mahanagar Gas (MGL; CMP: Rs 1,031.85; Market Capitalisation: Rs 10,193 Crore) has delivered a record EBITDA (earnings before interest, tax, depreciation, and amortisation) of Rs 16.8 per scm, which was above expectations, on lower gas costs despite a 6.5 percent sequential fall in the blended realisation. Softness in domestic, industrial, and commercial PNG demand led to the weakness in gas volumes. The APM (Administrative price mechanism) gas allocation at 89 percent was lower both sequentially and year on year, leading to MGL meeting the difference with relatively expensive HPHT (High pressure high temperature) gas.

Q1FY24 Financial Performance 

Price cut can support volume growth 

The April-June period this year (Q1) was the first quarter after the implementation of the new domestic gas price of $6.5/MMBtu and MGL passed on the cost savings promptly to consumers. Lower CNG (Compressed natural gas) prices helped in a demand turnaround after three consecutive weak quarters. Vehicle conversion also grew to 14,750 in Q1 against 13,500 in Q4, signalling a demand pick-up. Soft domestic gas prices along with $10-12/MMBtu LNG (Liquified natural gas) gas price, improve the odds for further price cuts. The MGL management sees long-term unit EBITDA of Rs 10-11 per scm, thereby leaving sufficient room for a further cut in retail CNG prices to spur demand.

Gas prices are unlikely to go to the levels of last year 

Post a challenging FY23 on high LNG prices, CGD companies now appear to be well placed on viable gas pricing, thereby retaining their profitability. As the winter season approaches, fear that gas shortage in Europe could push prices high again seems to be overblown. First, European nations are better prepared this time with their gas storage already above 90 percent of the overall capacity. Second, an ongoing slowdown in the Chinese economy will dent its gas demand. Both are supportive of lower gas prices and, by extension, improvement in unit margin and volume.

Outlook 

MGL began FY24 on a good note as gas costs got cheaper and led to record margins. This is expected to continue in the light of persistent weakness in gas prices, domestic policy support, and a rise in gas consumption. MGL’s management is confident of achieving at least 5-6 percent volume growth and Rs 10-11 EBITDA per scm over the long term. This appears credible as gas prices are not expected to rise significantly in the near term. Moreover, the development of existing GAs and the planned acquisition of Unison Enviro are going to provide sustained demand as gas replaces other fossil fuels.

The company plans to spend around Rs 600-800 crore in FY24, of which Rs 150 crore has already been spent on CNG station construction and the laying of pipelines. Around 500-600 CNG buses are to be added to the MSRTC's (Maharashtra State Road Transport Corporation) fleet over the next 2-3 quarters, which, at 80kg /day per bus gas consumption, is expected to improve MGL's volume growth. Also, MGL plans to set up LNG stations over the next 12-18 months with Baidyanath LNG and signed an MoU with BMC (Brihanmumbai Municipal Corporation) to set up a compress biogas plant.

We are of the view that there is a scope for price revision to drive volume in CNG & PNG - Industrial & Commercial. This would help offset lower realisations, while maintaining the EBITDA margin within the long-term guidance range.

Valuation 

MGL’s stock price performance has been flat in the last three months over concerns about volume growth, and LNG prices, which in our view are overstated. At the current market price, the stock is trading at a FY25 PE of 9.6x, which is at a significant discount to its long-term average and therefore has an upside from the current levels. Investors can add the stock with a medium-term view.

Risks 

• Increase in international gas prices, and a significant reduction in APM gas allocation.


• A rapid increase in EV adoption.

Nitin Sharma can be reached on Twitter at @nsharma_01. For more research articles, visit our Moneycontrol Research page.