Sustaining Guided Sales Volume Growth Unlikely; Maintain HOLD
Mahanagar Gas (MAHGL) has delivered a marginally higher-than-estimated performance in 2QFY20. While its total sales volume growth remained muted, EBITDA/scm declined sequentially. Its net sales grew by 13% YoY & 3% QoQ to Rs7.8bn (2% above our estimate and 2% below consensus estimate), mainly due to improvement in CNG price realisation and CNG & PNG industrial volume growth. Overall price realisation increased by 11% YoY to Rs28.4/scm aided by series of CNG price hike during the last 1 year. Surprisingly, though the CNG prices were same sequentially, price realisation improved. Total gas sales volume of 3mmscmd in 2QFY20 (1% YoY and 1% QoQ). EBITDA increased by 23% YoY (-1% QoQ) to Rs 2.7bn (3% above our estimate). EBITDA/scm declined to Rs9.9/scm from Rs10.3 in 1QFY20. Despite fall in average spot LNG prices to US$4.4/mmbtu in 2QFY20 from US$4.6/mmbtu in 1QFY20, MAHGL’s total cost of gas increased by US$0.3/mmbtu (Rs0.82/scm), which implies US$1.5/mmbtu QoQ rise in LNG procurement cost and partially due to INR depreciation. Its net profit grew by 99% YoY and 59% QoQ to Rs2.7bn (33% above our estimate) on lower ETR. We maintain our HOLD recommendation on the stock with an upwardly revised DCF-based Target Price of Rs956 (from Rs761 earlier).
Challenge Ahead to Maintain Volume Growth >6% in FY20
CNG/PNG sales volumes rose 1%/2% YoY, while total sales volume saw a mere rise of 1% YoY. Surprisingly, PNG domestic volume fell by 4% YoY. After seeing peak-out in total sales volume in 3QFY19, MAHGL is witnessing a fall in growth momentum to 1% YoY. Total sales volume growth in 1HFY20 came in at mere 2.3% vs. the Management’s guidance of 6% for FY20E. In order to report >6% growth in total sales volume in FY20E, MAHGL now needs to maintain ~10% growth run rate in the 2HFY20. Addition of PNG commercial and industrial consumers is likely to slow down owing to fall in LPG prices. In 2QFY20, non-subsidised LPG cylinder prices fell by 17-20% compared to 1QFY20, which led to 2% QoQ fall in PNG price realisation. We believe falling LPG prices to drag MAHGL’s PNG industrial and commercial price realisation. Subsidised gas cylinder prices continue to remain in line with PNG household prices.
EBITDA/scm to dilute more on rise in spot LNG prices
MAHGL’s EBITDA/scm declined to Rs9.9 from Rs10.3 in 1QFY20 mainly due to rise in gas/LNG procurement cost. In 3QFY20 YTD, spot LNG prices averaged to ~US$6/mmbtu. As US$1/mmbtu rise in LNG cost for PNG industrial can drag overall EBITDA/scm by Rs0.40, we believe EBITDA/scm likely to dilute due to cyclical rise in spot LNG prices. Notably, MAHGL has very little pricing power to pass on higher gas cost to PNG industrial consumer (mainly due to lower LPG and fuel oil prices).
Outlook & Valuation
As we expect MAHGL to face challenges to sustain volume growth >6%, while we maintained volume growth assumption at 3.5% for FY20/FY21E. As guided, the Company mostly procure spot LNG for PNG industrial and commercial products. In line with the guidance, we have changed our assumption from contracted LNG to spot LNG that led to fall in LNG procurement cost of the company and improvement in EBITDA/scm to Rs9.2/9.4 for FY20/21E, which is still below than Rs10.1 in 1HFY20. We raise our earnings estimate by 36%/33% in FY20/21E to factor in switching to spot LNG and lower ETR. At CMP, the stock trades at 13x of FY21E EPS discount to peer (IGL IN) mainly due to lower single digit volume growth. We maintain HOLD recommendation on the stock with an upwardly revised DCF-based Target Price of Rs956 (from Rs761 earlier).
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