Spot LNG prices key to outlook
Mahanagar Gas (MGL)’s Q2FY20 EPS was up 99% YoY, despite low volume growth, driven by the rise in EBITDA margin and deferred tax write back on reduction in tax rate. Margin was boosted on industrial and commercial volumes as spot LNG prices were down sharply YoY. H1FY20 recurring EPS is up 59% YoY driven by similar factors as in Q2FY20. We have raised our FY20-21E EBITDA margin estimates, but cut volume estimates to factor the H1 trend. Net impact is an upgrade in FY20-21E EPS by 11-1% and target price by 6% to Rs1,038 (7% upside). Retain our ADD rating on MGL.
* Q2FY20 EPS up 99% YoY driven by rise in margins and tax cut: Q2FY20 recurring EPS was up 99% YoY driven by 22% YoY rise in EBITDA margin to Rs9.9/scm and deferred tax write back of Rs564mn. EBITDA margin was down 3% QoQ. EBITDA margin declined QoQ in spite of 4% QoQ fall in spot LNG prices as alternative fuel prices fell more sharply; fuel oil and unsubsidised LPG declined by 7-17% QoQ. MGL buys spot LNG for supply to industrial and commercial consumers and sells it to them at prices linked to fuel oil, LSHS and non-subsidised LPG prices. Volume growth was weak at 1.3% YoY (CNG up 1% YoY, domestic PNG up 4.5% YoY and industrial/commercial up 0.2% YoY). H1 recurring EPS is up 59% YoY driven by similar factors as in Q2.
* Raise FY20-FY21E EPS and target price; retain ADD: We have raised our FY20- 21E EBITDA margin estimate to Rs9.69-9.33/scm (earlier: Rs9.0-8.77/scm) but cut our volume growth estimates to 2.4-5.5% (earlier: 5.1-8.1%) to factor the trends in H1FY20. The net impact is an upgrade in FY20E EPS by 11%, FY21E EPS by 1% and target price by 6% to Rs1,038 (7% upside). If spot LNG prices in FY21E are lower than in FY20E like some expect, there may be upside to our FY21E EBITDA margin and earnings estimates. Retain our ADD rating on MGL.
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