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Record margin on weak spot LNG drive Q1
Mahanagar Gas (MGL)’s Q1FY20 recurring EPS was up 21% YoY driven by surge in EBITDA margin to record levels; margin was boosted on industrial and commercial volumes as cost declined on steep fall in spot LNG prices, while realisation was up due to rise in fuel oil and non-subsidised LPG prices. In Q2FY20-TD, margins on industrial volumes have sustained but are down on commercial volumes. Spot LNG price rebound in winter may mean Q1 margin is not sustainable. We have raised our FY20E EBITDA margin but cut volume to factor-in Q1 trend. Net impact is 4% upgrade in FY20E EPS. Target price is cut by 11% to Rs897 (9% upside) as we have cut our terminal value to factor-in any possible hit from competition, if it is allowed by the regulator. We retain our ADD rating on MGL.
Q1FY20 recurring EPS up 21% YoY driven by surge in margins:
Q1FY20 recurring EPS was up 21% YoY driven by 20% YoY (30% QoQ) rise in EBITDA margin to record level of Rs10.25/scm. Margin appears to have been boosted by the fact that the spot LNG price was down 28% QoQ while non-subsidised LPG and fuel oil was up 9%-11% QoQ respectively; MGL buys spot LNG for supply to industrial and commercial consumers and sells it to them at prices linked to fuel oil, LSHS and non-subsidised LPG prices. Volume growth was weak at 3.3% YoY (CNG up 2% YoY, domestic PNG up 10.8% YoY and industrial/commercial up 3.5% YoY).
Raise FY20E EPS, but cut target price; retain ADD:
We have raised our FY20E EBITDA margin estimate to Rs9/scm (earlier: Rs8.37/scm) but cut our volume growth estimate to 5% (8.8% earlier) to factor-in the trends in Q1FY20. The net impact is 4% upgrade in FY20 EPS. We have cut our target price by 11% to Rs897 (9% upside) as there is a risk that regulator PNGRB allows competition; it appears PNGRB Act needs to be modified to enable the regulator to fix tariff for MGL’s pipeline network for use by competition. Whether competition would be allowed or not is crucial.
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