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Second wave affects demand recovery...

Mahanagar Gas’ (MGL) results for Q4FY21 were broadly in line with estimates on the operational front. Topline increased 4.2% YoY to | 784 crore vs. our estimate of | 772.6 crore. Sales volume came in at 2.9 mmscmd, up 3.8% YoY (up 4.4% QoQ) in line with estimate. Gross margins were marginally better than estimate of | 17.5/scm at | 17.7/scm, up | 2.4/scm YoY (flat QoQ). EBITDA at | 316.2 crore (up 29.7% YoY) was slightly below our estimates of | 321 crore. Other income of | 17.2 crore was lower than expectations of | 27 crore. Reported PAT was at | 212.8 crore, up 26.7 % YoY (our estimate: | 225.8 crore).

CNG, commercial PNG demand impacted in Q1FY22E

MGL reported volume growth of 3.8% YoY on a lower base. CNG volume grew 2.2% YoY to 2 mmscmd in line with estimate. On the PNG front, volumes grew 7.9% YoY to 0.9 mmscmd. While industrial and domestic PNG segments reported growth of 21.7% YoY, 8.9% YoY, commercial PNG volumes were still down 11.6% YoY. Given the cost economics of natural gas over other alternative fuels in conjunction with rising pollution concerns, achieving higher growth over the long term should not be a concern. The management said that CNG sales volume dipped up to 25-30% in the current quarter (Q1FY22-TD) due to the second wave of Covid-19. Accordingly, we revise our estimates and expect sales volumes at 2.9 mmscmd and 3.4 mmscmd in FY22E and FY23E, respectively. Among new initiatives, the company is also planning to sell CNG via a mobile unit to increase penetration owing to lack of space to build infrastructure in certain areas.

Healthy margin outlook, going ahead

MGL’s gross margins increased | 2.4/scm YoY to | 17.7/scm on account of lower gas prices. Gross margins were flat QoQ. Subsequently, EBITDA/scm also increased by | 2.5/scm YoY to | 12.1/scm (down | 0.3/scm QoQ). The company’s discussion with oil marketing companies regarding a hike in trade margins will also be a key monitorable. With increase in petrol, diesel prices, the competitive advantage of CNG has increased substantially over the past few months. Hence, we believe MGL will be able to pass on higher costs to customers in future also. Going ahead, gross margins are expected to stay strong at | 17.5/scm, | 17.2/scm in FY22E, FY23E respectively.

Valuation & Outlook

The government’s priority allocation of domestic gas to the CGD sector has enabled MGL to access cheaper gas for CNG and domestic business segments (~85% of sales mix). MGL’s strong gas pipeline infrastructure and expanding operations in Mumbai, its adjoining areas and Raigad district will enable the company to capture the benefits of the large and growing market given the low penetration. We maintain BUY recommendation with an unchanged target price of | 1340/share (13x FY23E EPS).

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