A value play – lower volume growth but better margins
* Mahanagar Gas’ (MAHGL) 4QFY20 EBITDA was marginally below est. led by a miss on volumes. The COVID-19 led lockdown in the latter part of Mar’20 impacted entire sales volumes, except for PNG-household.
* However, EBIDTA/scm was higher YoY and QoQ, supported by lower spot LNG prices and revision in PMT gas prices to APM prices (in Jan’20).
* For FY20, total volumes were flat YoY at 3mmscmd, while EBITDA/scm was higher at INR9.7/scm (v/s INR8.2/scm in FY19). This led to EBITDA jumping 19% YoY to INR10.5b in FY20, while PBT stood at INR9.8b (+18% YoY) in FY20.
* Also, while lockdowns have affected demand, the city gas distributors (CGDs) are likely to compensate for the volume loss from lower APM and spot prices. CGDs have retained a portion of the APM gas price cut in Apr’20, and thus, are likely to earn higher margins.
* We maintain Buy on MAHGL considering its attractive valuations and value it in line with global peers at 16x FY22E EPS to arrive at a TP of INR1,200.
Lower than est. volumes lead to EBITDA miss
Total volumes at 2.78mmscmd (-7% YoY, primarily due to CNG)
* CNG volumes were down 10% YoY to 1.98mmscmd.
* PNG-domestic was 7% higher YoY to 0.42mmscmd, while PNG-industrial was down 8% YoY to 0.39mmscmd. This resulted in total PNG volumes declining 1% YoY to 0.8mmscmd. EBITDA/scm was marginally lower than est. at INR9.6/scm; however, it was up YoY (INR7.9/scm) and QoQ (INR9.2/scm).
* Thus, EBITDA was ~9% lower than est. at INR2.4b (+14% YoY). Reported PAT stood at INR1.7b (-11% est., +25% YoY), with the tax rate at 25.9%. During FY20, the company adopted the new lower tax rate and recorded INR565.9m of DTL benefits. Hence, full-year FY20 PAT was up 45% YoY to INR7.9b with average tax rate of 19.3%.
Sales volumes – at ~42% of pre-COVID levels (up from 25% in Apr’20)
* Public transport contributes 60-70% of total CNG consumption for MAHGL; if current norms (constraining pillion passenger) stay, then trips numbers should increase, bolstering a quicker ramp-up in CNG volumes.
* Industrial volumes have revived well; most commercials have not opened yet and many operational consumers are facing challenges.
* The company has given some relief to consumers where minimum offtake contract is in place. MAHGL has also asked GAIL to consider force majeure, and thus, might not incur any liability on the take or pay contracts.
* The company believes CNG revival to be gradual in the coming months, followed by commercial volumes (in line with our thesis highlighted in our earlier report).
* Factoring in the same, we have built in two months of complete shutdown in our volumes, resulting in 2.65mmscmd/3.3mmscmd for FY21/FY22E.
Margins/cost snapshot – majority of CNG expenditure variable
* For CNG (which constitutes ~71% of the total volumes), most expenditures are variable; just maintenance related expenses and employee expenses are fixed.
* Power related cost (INR1.25-1.50b is 100% variable), gas carrying cost to daughter booster station, and even commissions are all variable costs.
* Thus, the concerns over fixed costs are pretty well answered by the management in current times of lower demand. Also, the subdued feedstock environment is likely to keep margins healthy, if not boost it.
* However, on a conservative basis, we model in EBITDA/scm of INR9.0 for FY21/FY22E, revised up from INR9.0/INR8.2 earlier (v/s INR9.7 in FY20). This translates into EPS revision of +9% in FY22E (FY21 unchanged).
Valuation and view
* The company had earlier guided for volume growth of ~6-7% over the near-tomedium term (barring the one-off lower volume growth in FY20).
* We model in-line volume CAGR of ~6% over FY20-22E, in light of the developments at Raigad (peak demand of 0.6mmscmd expected in 3 years) and probable CNG volume boost expected from the BEST bus additions (order of ~500 new buses).
* Even after various initial attempts by the regulator, we are yet to see a notification on introduction of competition. The recent lockdowns might also result in further delay of the same. Nevertheless, the regulator is also trying to be a facilitator to the incumbent companies along with maintaining the interest of consumers.
* MAHGL’s saturated geographical area (GA) of Mumbai reduces the risk from common carrier as it becomes less attractive for third-party entrants. However, the company enjoys highest EBITDA/scm amongst peers, which we believe would normalize.
* The stock trades at 17.2x FY21 and 13.8x FY22E EPS, with RoEs of ~20% and dividend yield of 3.4% in FY20.
* With an upward EPS revision of 9% in FY22E, at 16x FY22E EPS our TP now stands at INR1,200 (v/s INR1,100 earlier). Maintain Buy.
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