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Higher margins drive profitability
We maintain BUY on MGL despite muted volume growth owing to its remarkable pricing power (hence, better spreads) and inexpensive valuations (14.5/13.7x FY21/22E PER) versus its peers (IGL 25.3/22.6x and GGL 16.2/14.2x). Our TP is Rs 1,355/sh (19x Sep-21E EPS).
HIGHLIGHTS OF THE QUARTER
* MGL’s total volume was up merely 1.3/1.1% YoY/QoQ to 3.0mmscmd. CNG volumes were up 1.0% YoY to 2.2mmscmd while PNG volumes were up 2.2% YoY to 0.8mmscmd. CNG volume was low owing to
(1) Fire at ONGC’s Uran facility in Sep-19 adversely affecting the domestic gas supply
(2) Scrapping of some CNG buses by Brihanmumbai Electric Supply and Transport (BEST). PNG volumes were affected consequential to lower offtake by a few industrial customers.
* BEST will add 500 new CNG buses over the next six months starting Nov-19. It has initiated the tendering process to add another 500 buses. Addition of buses and auto rickshaws will drive CNG volume growth (CNG CAGR of 5.4% expected over FY19-22E).
* MGL clocked per unit EBITDA spread of Rs 9.9/scm (Rs 8.1/10.3 in 2QFY19/1QFY20). This is attributable to better spreads earned from industrial/commercial customers (~14% of total volume), for whom 100% LNG is sourced on spot basis. Seasonal increase in LNG prices will lead to narrower spreads between NG and alternate fuels in 2HFY20. MGL will have to take price cuts to maintain volume growth. Hence, we expect margins to correct to Rs. 8.9/scm in FY20.
* The company has opted for the lower tax rate of 25.2% for FY20 versus 34.7% in FY19. Resultantly, there is a net tax receivable in Q2 of Rs 148mn. We adjusted the RPAT for the deferred tax availed in the quarter, i.e. Rs 563mn to arrive at an APAT of Rs 2.14bn.
* Key monitorable: Sustainability of per unit EBITDA margin in 2H when LNG prices are seasonally high.
MGL did not win any new GAs in ninth or tenth rounds of CGD biddings. This factor may weigh on its long-term growth. Its loyal customer base of CNG and commercial establishments (who together comprise 81% of total sales mix), that are less price sensitive than industrial customers enable it to maintain per unit margins higher than peers. 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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HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475
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