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Lockdown delays recovery; near-term headwinds prevail

* Mahanagar Gas (MAHGL) reported numbers in line with estimates. Total sales volumes were up 4% YoY/QoQ to 2.9mmscmd (v/s pre-COVID levels of 3mmscmd in 4QFY19); EBITDA/scm stood at INR12.1.

* The lockdowns due to the second wave, which commenced on 15th April in Maharashtra, have adversely impacted CNG volumes (1.43mmscmd; -28.5% v/s 4QFY21) and PNG volumes (0.89mmscmd; flat v/s 4QFY21) – as per data on 22nd May’21.

* Based on these factors, we cut our FY22E EPS by ~10% and expect volumes to reach pre-COVID levels in 2HFY22, provided the lockdowns are lifted.

* Negotiations with OMCs on trade margins are still on, with OMCs asking higher single-digit commissions on CNG sales. Notably, ~65% of CNG volumes for MAHGL come from OMC outlets. In light of this, we keep our EBITDA/scm assumption unchanged at INR10/scm over FY22–23E (also considering the rise in APM prices in 2HFY22). The ability to pass on the steep hike demanded by OMCs would be limited hereafter as liquid fuel prices peak, along with Brent price around current levels (USD70/bbl).

* The company stated that the resolution to the above-stated negotiations and the Uran–Trombay Pipeline (UTPL) case (total demand up to Mar’21 stands at INR3.1b) would happen over the next two quarters, resulting in near-term headwinds.

* Considering the above factors, along with no new potential GAs with the company (awaiting bids for the 11th bidding round), we value the company at 16x FY23E EPS of INR81 to arrive at TP of INR1,300/share. Maintain Buy.

4QFY21 – in line with our estimates

* Volumes were in line with our estimate at 2.9mmscmd (up 4% YoY/QoQ). EBITDA/scm stood at INR12.1 (v/s INR12.4 in 3QFY21; +26% YoY). The gross margin remained flat QoQ at INR17.7/scm (+16% YoY), while opex moderately increased QoQ to INR4.9/scm (v/s INR4.5 in 3QFY21; flat YoY).

* CNG volumes stood at 2mmscmd (+2% YoY; +7% QoQ).

* PNG volumes came in at 0.9mmscmd (+8% YoY; -2% QoQ). PNG domestic volumes fell 10% QoQ to 0.46mmscmd – as demand for household cooking declined with the opening up of offices.

* EBITDA was in line at INR3.2b (+30% YoY). PAT came in at INR2.1b (+28% YoY), with the tax rate at 25.8%.

FY21 – margins expand; volumes drive impact

* EBITDA stood at INR9.3b (-11% YoY) despite EBITDA/scm expanding to INR11.6 (v/s INR9.7 in FY20). Volumes, down 25% YoY to 2.2mmscmd, led the impact. CNG volumes fell 34% YoY to 1.4mmscmd. PNG volumes were flat YoY at 0.8mmscmd (PNG domestic volumes aided 15% growth, while decline was seen in PNG Industry/Commercial).

* PBT/PAT stood at INR8.3b/INR6.2b (-15% YoY/-22% YoY).

* The company announced final dividend of INR14/share (in addition to interim dividend of INR9/share), totaling INR23/share in FY21.

Valuation and view – maintain Buy

* The company has been guiding for long-term volume growth of 5–6% per year. Growth would primarily be driven by the development of the Raigad GA, which has total volume potential of ~0.5mmscmd over the next 3–4 years. PNGcommercial penetration in MAHGL’s GAs is just ~20%; as it already has the pipeline infrastructure in place and only last-mile connectivity is required, this presents upside potential in volumes.

* That said, MAHGL highlighted that the additions of CNG stations in Mumbai (GA1) and Thane Urban (GA2) are proving to be a challenge due to the scarcity of available land. The company is looking at the feasibility of mobile CNG dispensing units – although this is yet to be approved by the regulator. It also plans to set up an LNG station (at Savroli) by end-FY22 and another station by end-FY23.

* The company expects CNG volumes to recover with the easing of the lockdowns. Although, this would largely depend on the current WFH scenario. We build in volumes at 3.2mmscmd in FY23E (v/s 2.95mmscmd in FY19 and FY20).

* The stock trades at 14x FY23E EPS of INR81, with dividend yield of ~3% for FY22/FY23E. We maintain Buy considering the company’s attractive valuations

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