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On the path to normalcy

Our ADD recommendation on Mahanagar Gas (MGL) with a price target of INR 1,204 is premised on its loyal customer base of CNG and commercial establishments (together comprising ~80% of the sales mix in FY20), which are less price-sensitive than industrial customers that enable the company to maintain its per-unit margins higher than peers. 3QFY21 EBITDA/APAT was 15/16% below estimates, owing to 11% lower-than-anticipated volumes, and 4% lower per-unit EBITDA margin.

* Volumes: Blended volume stood at 2.77mmscmd (HSIE 3.11), led by a strong demand in CNG segment post lockdown (1.88mmscmd or 68% of volume mix). PNG segment’s volume in 3Q was at 0.89mmscmd.

* Margin: Per-unit gross spread expanded by ~INR 0.5/3.8 QoQ/YoY to INR 17.7/scm. This is attributable to part retention of the benefit of falling RMC. Per-unit EBITDA came to INR 12.4/scm (vs. INR 11.6/9.2 per scm QoQ/YoY). This was primarily due to improvement in 3Q volumes that led to a decrease in per-unit operating expenditure to INR 5.3.

* Takeaways from the earnings conference call: (1) Capex target for FY21/22 is INR ~4/7bn. (2) MGL added six new CNG stations in 3Q, taking their count up to 265. It also added 47 new industrial/commercial PNG customers, taking the count up to 4,093. 49,171 new domestic households were connected in 3Q. (3) The Board has declared an interim dividend at 90%, i. e. INR 9/sh for FY21.

* Change in estimates: We raise our FY21/22E EPS estimate by 13.2/6.4% each to INR 64.0/74.9, to factor in better-than-expected volumes, the overall performance in 9MFY21 and the management’s guidance of sustainability of the current per unit margins owing to pricing power.

* DCF-based valuation: our target price is INR 1,204, based on Dec-22E free cash flows (WACC 10%, terminal growth rate 3.0%). The stock is currently trading at 15.0x FY22E EPS.

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