We maintain BUY on MGL post an impressive performance on spreads albeit disappointing volume growth. Our TP is Rs 1,133/sh (19x Jun-21E standalone EPS).
HIGHLIGHTS OF THE QUARTER
* MGL’s total volume was up merely 3.3% YoY and flat QoQ to 2.97mmscmd. CNG volumes were up 2% YoY to 2.2mmscmd while PNG volumes were up 7% YoY to 0.8mmscmd. The State Department Corporation had scrapped a few buses in Q1 that led to subdued volume growth for CNG. Tendering process to add 500 new buses has been already begun.
* The company clocked the highest ever per unit EBITDA spread of Rs 10.3/scm vs Rs 8.6/scm in 1QFY19 and Rs7.9/scm in 4QFY19. This is attributable to better spreads earned from industrial/commercial customers (~14% of total volume), for whom 100% gas is sourced on spot. Fall in oil prices is leading to narrower spreads between NG and alternate fuels. Hence, MGL will have to take price cuts. Thus, we do not foresee the current quarter margins sustaining in ensuing quarters. Rather, we expect them to correct to Rs. 8.4/scm for FY20.
* Space constraints and regulatory approvals prior to building CNG stations are common challenges faced by all CGD companies alike. However, the problem is more severe for MGL. The company has been able to add only ~46 CNG stations since Jun-16. We expect CAGR for CNG to be 6.8% over FY20-21E, beyond which growth is possible only by increasing the pace of addition of CNG stations/dispensers.
* Near-term outlook: The expected stake sale by BG Asia (Shell) could have a technical overhang on the stock similar to the one witnessed at the time of sale earlier in Apr and Aug-18.
MGL did not win any new GAs in either of the recently concluded ninth or tenth rounds of CGD biddings. This factor may weigh on its long-term growth. We believe that the company will continue to enjoy pricing power and be able to maintain its per unit spread. This is because of a loyal customer base of CNG and commercial customers (who together comprise ~80% of total sales mix), that are less price sensitive than industrial customers. Moreover, we do not foresee any significant regulatory adversity in its CGD business either through a change in gas allocation or capping returns.
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