Strong show led by margin expansion
* Strong Q1 results led by margin expansion, but high base effect and 12% decline in CNG volumes to state buses due to scrappage of old buses impacted volume.
* Complete reliance on spot LNG prices, which has corrected sharply, for industrial and commercial units helped improve gross margins.
* Discretionary conversion and geographical expansion to drive volume growth.
We maintain our earnings estimate for FY20/21E. MGL remains a play on increased gas penetration from rising vehicle and PNG penetration. We continue to like MGL’s business given their dominating share in the growing markets of Mumbai and suburbs. Reiterate BUY.
Gross margin expansion lift earnings: Mahanagar Gas' (MGL's) reported strong results with Q1FY20 EBITDA and PAT at Rs2.8bn (PLe: Rs2.3bn; +31%YoY) and Rs1.7bn (PLe: Rs1.5bn; +33%YoY), respectively. Higher than expected operating profits were due to strong gross margin expansion from soft spot LNG prices and appreciating exchange rate. MGL relies on only spot LNG prices for commercial and industrial volumes and has benefited from sharp drop in gas prices.
IND AS116 implementation also led to higher EBIDTA by Rs47m, which was partly nullified by higher finance and depreciation charges. For Q1, MGL’s gross margins were at Rs17.9/scm vs Rs15.8 in Q4 and spreads were at Rs10.3/scm (Q4:Rs7.9/scm; PLe Rs8.3/scm).
Volumes disappoint: For Q1, CNG and PNG volumes were at 270mscm (+2% YoY) and 73mscm (+7% YoY), respectively. High base effect (CNG and PNG growth of 12.6% and 10.1%) also dimmed Q1 volume traction. CNG volumes were also hit by 12% decline in CNG volumes supplied to state buses as they were scrapped. Going forward, state government plans to introduce 500 new CNG buses which is likely to lift CNG volumes. For Q1, vehicle conversion momentum continued and were at ~6,000 vehicles per month.
Going forward, CNG volumes is likely to remain healthy on the back addition of new three wheelers along with geographical expansion to Raigad and Karjat. Also, government’s push for PNG’s domestic connections will support volumes. Tailwinds of benign domestic gas, opportunities in two-wheeler space, along with favourable demand traction from new geography, will drive earnings.
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