Growth triggers missing
Our ADD recommendation on Mahanagar Gas with a TP of INR 1,137 is premised on its loyal customer base of CNG and commercial establishments (who together comprised 77% of 4Q’s sales mix), that are less price sensitive than industrial customers that enable MGL to maintain its per unit margins higher than peers.
* View on the result: Volumes and EBITDA were in-line with our estimates
* Volumes: MGL’s total volume dipped 6.3% YoY to 2.8mmscmd (estimated 2.8mmscmd), led by a drop in CNG vols (-8.8% YoY to 2.0mmscmd). PNG volumes increased marginally to 0.8mmscmd (+0.4% YoY). Overall volumes were affected by the lockdown in the last week of March.
* Margins: Per unit gross spread expanded by 215bps YoY to INR 15.3/scm. This is attributable to part retention of the benefit of falling RMC (SPOT LNG). Consequently, per unit EBITDA expanded by 171bps YoY to INR 9.6/scm (vs. INR 9.8/8.3 per scm in FY20/FY19).
* Outlook on volumes: We expect volume to dip 15.4% YoY to 2.5mmscmd in FY21 given a poor CNG sales and low offtake by commercial customers in 1HFY21. Thereafter, blended volumes should recover to 3.1mmscmd in FY22 (+23.7% YoY).
* Outlook on margins/EBITDA: Per unit EBITDA should dip by 6.2% YoY from the current levels to INR 9.1/scm in FY21 as decline in volumes will result in increase in per unit opex. Subsequently, per unit EBITDA should expand to INR 10.0/scm in FY22 (+9.1% YoY). In-line with per unit EBITDA and volumes, absolute EBITDA should dip 20.9% YoY in FY21 to INR 8bn but subsequently expand by 34.9% YoY in FY22 to INR 11bn driven by a robust volume outlook and healthy per unit margins.
* View on the balance sheet: MGL’s cash/bank balance and current investments jumped 41% YoY to INR 14bn in the absence of any significant capital outlay. The company does seem to have surplus cash to fund future projects, however, MGL did not win any new Geographical areas in the recently concluded 9th or 10th bidding rounds which remains a big concern.
* Change in estimates: We raise our FY21/22E EPS estimates by 18.9/51.5% to INR 61.3/83.3 driven by (1) Faster than expected ramp-up in volumes in 2HFY21 and FY22 (+3.3/8.6% in FY21/22 to 2.5/3.1mmscmd), and (2) Higher than expected per unit EBITDA margins (+6.9/27.4% to INR 9.1/10.0 per scm).
* DCF based valuation: Our TP is INR 1,137 (WACC 10%, Terminal growth rate 3.0%). The stock is trading at 12.4x FY22 EPS.
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