Buy Mahanagar Gas Ltd For Target Rs.1,031 - HDFC Securities
Despite the current weakness due to the Covid-19 pandemic, the long-term outlook for the CGD sector remains favourable for existing cities, where incumbents are already operational with domestic gas allocation in place for CNG and PNG (domestic) segments, which should witness healthy growth in volumes. While growth of CNG could be supported further by conversion of auto-rickshaws and taxis to CNG and its cost advantage over alternative fuels, the PNG (domestic) segment will continue to benefit from the cessation of LPG subsidy for high-income consumers.
BEST (Brihanmumbai Electricity Supply and Transport) had a plan to add around 500 buses out of which it has inducted ~300 CNG buses of and consuming CNG at normal about 1 lakh kgs a day and expects another ~150 CNG buses to be added by the end of Oct 2020 and total number of BEST buses could reach at ~2350. BEST is also likely to add another 800–1,000 CNG buses over and above the current ongoing induction of 500 buses. It could add volume growth of MGL going forward.
MGL is expanding its presence through a pipeline network and plans to add 15 new CNG stations in FY21E. Raigad is expected to peak volumes of 0.6 mmscmd in next 3-5 years. CNG is a big opportunity and we expect MGL to capitalize on this next year by adding new stations and upgrading the existing stations in this region. For PNG growth, MGL has laid pipelines and only capex related to last mile connectivity is pending. Total Capex in FY20 was Rs 415 crore and Company has capex target of anywhere between Rs.500 crore to Rs.600 crore in FY21E and FY22E, but it will be dependent upon the speed at which particularly the permissions are received from various statutory authorities. Around Rs.120 odd crore will be in the area of Raigad, rest in other than Raigad area. MGL added three new CNG stations in Q2, taking their count up to 259. MGL plans to add over 20 new CNG stations and upgrade capacity of over 15 stations in FY22E.
Valuations and View:
CGD (City Gas Distribution) business is monopolistic in nature due to allotment of license for specified region and cities (Gujarat Gas for Surat, Bharuch & Ankleshwar, Indraprastha Gas Ltd for Delhi, Ghaziabad, Noida & Greater Noida, MGL for Mumbai, Thane, Mira Bhayandar & Navi Mumbai). MGL’s current area is inhabited by almost 2 crore people and offers a natural gas potential of about 5 MMSCMD (vs 2.95 MMSCMD in FY20). MGL enjoys a strong financial profile – debt-free balance sheet, strong free cash flow and robust return ratios. Despite operating in an asset-heavy industry, MGL has maintained low debt levels and increased its customer base. It has been consistently paying dividends. We feel investors could buy the stock at LTP and add on dips to Rs 821–825 band (~11.5xFY22E EPS). Base case fair value of the stock is Rs 963 (13.5.0xFY22E EPS) and the bull case fair value of the stock is Rs 1031 (14.5xFY22E EPS) over the next 2 quarters. At the CMP of Rs 905 the stock trades at 12.7xFY22E EPS.
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