Marginal EBITDA beat led by better volumes
* Mahanagar Gas (MAHGL)’s 1QFY21 EBITDA was marginally above est., led by better volumes; however, EBITDA/scm came in below estimates.
* Total sales improved to ~65% of normal levels in Aug’20 v/s 55% in Jul’20 and 25% in Apr’20. These are estimated to rise further with an increase in vehicle movement and the opening up of malls and other commercial and industrial units.
* Cab aggregators are currently operating at ~40% of normal levels, and ~50% of auto rickshaws are back on the road, plying passengers.
* BEST has inducted ~300 CNG buses to date of its total plan of adding ~500 buses and expects another ~150 CNG buses to be added by the end of Oct’20. BEST is also likely to add another 800–1,000 CNG buses over and above the current ongoing induction of 500 buses.
* While lockdown has affected demand, CGDs are likely to compensate for the volume loss from lower APM and spot prices. We maintain Buy on MAHGL considering its attractive valuations, and value it in line with global peers at 16x FY22E EPS to arrive at TP of INR1,200.
1QFY21 snapshot – volume-led beat
Total volumes stood at 1.11mmscmd (-62% YoY; -60% QoQ), ~21% higher than our estimates, primarily due to CNG and PNG Industrial/Commercial (I/C).
* CNG volumes were down 78% YoY to 0.48mmscmd.
* PNG domestic was higher by 7% YoY to 0.43mmscmd.
* PNG I/C was down 49% YoY to 0.20mmscmd.
* At the end of 1QFY21, the company had ~256 CNG stations (~184 belong to OMCs). Raigad had ~14 CNG stations, and the minimum work program (MWP) is fulfilled at Raigad.
EBITDA/scm came in lower at INR7.9 v/s our est. of INR9.0 (INR10.3 in 1QFY20 and INR9.6 in 4QFY20). Opex increased ~44% YoY to INR5.8/scm (+15% QoQ).
* Thus, EBITDA was 5% higher than est. at INR0.8b (-71% YoY; -67% QoQ).
* Reported PAT stood at INR0.45b (-73% YoY, but +9% vs. est.), with the tax rate for the quarter at 25.5%.
Capex of INR5.5–6b is targeted for FY21, of which INR1.2b is for Raigad GA. However, the migration of contract laborers is resulting in major constraints on new developments.
Volumes growth avenues and assumptions
* Public transport contributes 60–70% to MAHGL’s total CNG consumption. Moreover, if current restrictions on pillion riders remain, the no. of trips is expected to increase, leading to a quick ramp-up in CNG volumes.
* MAHGL has gas pipeline connectivity in three of the four GAs classified by NGT under polluted areas (and is prepared to supply gas in the fourth GA via a virtual pipeline). A bench of the NGT recently sought an Action Taken Report (ATR) within four months to ensure a ban on the usage of pet coke and furnace oil by all states and UTs (article).
* PNG-commercial penetration is just ~20% in MAHGL’s GAs and is already equipped with pipeline infrastructure; only last-mile connectivity is needed.
* The company is also looking forward to the 11th CGD round (~44 GAs are up for offer) and may bid for the same once the round is open for bidding.
* MAHGL had earlier guided for volume growth of 6–7% over the near-tomedium term. We model an in-line volume growth CAGR of ~6% over FY20–22E in light of developments at Raigad (peak demand of 0.6mmscmd expected in three years) and a potential boost in CNG volumes from BEST bus additions.
* We have built-in volumes of 2.3mmscmd/3.3mmscmd for FY21/FY22 (unchanged), with EBITDA/scm of INR9/scm (unchanged).
* MAHGL has reiterated that higher operating cost would come off as volumes return to normal. Also, the subdued feedstock environment is likely to keep margins healthy, if not boost them.
A value play: Maintain Buy
* Even after various initial attempts by the regulator, we are yet to see a notification on the introduction of competition. The recent lockdown may result in further delay in the same. Nevertheless, the regulator is also trying to be a facilitator to the incumbent companies, along with maintaining the interests of consumers.
* MAHGL’s saturated GA in Mumbai reduces the risk from common carriers as it becomes less attractive for third-party entrants. However, the company enjoys the highest EBITDA/scm among peers, which we believe should normalize going forward.
* The company trades at >45% discount to IGL’s P/E, P/B, and EV/EBITDA (despite enjoying the highest EBITDA/scm), offering the highest dividend yield among CGDs at 2.2–3.2% (FY20 dividend stands at INR35/share).
* Even with a 3% terminal growth rate for MAHGL (considering lower volume growth and no new GA wins), DCF-derived TP stands at INR1,203.
* A combination of these factors makes MAHGL a great prospect for a value company. The stock trades at 12.9x FY22 EPS of INR75, and valuing it at 16x FY22 EPS, we arrive at TP of INR1,200. Maintain Buy.
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