Shares of Mahanagar Gas Ltd (MGL) have increased by almost 8% since the city gas distributor announced its September quarter results last week. This is when volume performance was below expectations at just 1.3% increase over the same period last year. This is the second quarter in a row that the company’s volume growth has remained muted. During the September quarter, MGL’s compressed natural gas (CNG) volumes, accounting for a lion’s share of total volumes, grew slowly by 1%. The remaining volumes, coming from the piped natural gas (PNG) segment increased by 2.2%.
Despite the subdued volumes, the MGL stock is burning brighter since results. What gives? Investors seem to be pleased with the company’s better than expected profits, especially the margin beat. Net profit of Rs270 crore was far ahead of Rs188 crore, estimates of a Bloomberg poll of analysts. MGL was able to almost double its net profit during the September quarter, thanks to robust margins and a deferred tax write back.
“Indeed, margin expansion led to 4% beat in Ebitda in the September quarter (up 21.1% year-on-year, down 1.5% quarter-on-quarter) but the quality of earnings growth was a tad disappointing," said Pratik Chaudhuri and Somshankar Sinha, analysts from Jefferies India Pvt. Ltd.
Ebitda is earnings before interest, tax, depreciation and amortisation; and is a key measure of profitability.
“The margin trajectory of MGL however continues to remain robust with Ebitda margin (adjusted for AS-116 accounting norms) at Rs9.7 per standard cubic meter (scm) in 2QFY20," pointed out Jefferies’ analysts in a report on 11 November. “The recent price cut in CNG and domestic PNG in response to lower domestic APM gas price could result in a small margin compression of about Rs0.2 to 0.3 per scm," they added.
Meanwhile, despite the recent appreciation in MGL shares, the stock is pretty much flat since the beginning of this financial year. Valuations at about 14 times estimated earnings for financial year 2021 appear reasonable.