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Result Highlights: In‐line 1Q; earnings growth levered to strong margins

* 1QFY22 Profitability:  Reported EBITDA and PAT stood at Rs 3.0bn (+280% YoY; ‐4% QoQ) and Rs 2.04bn (+351% YoY; ‐4% QoQ). The YoY growth stemmed from weaker base quarter as strict lockdown during Covid‐1st wave severely impacted sales; however the impact of Covid ‐2nd wave was comparatively less severe, and was apparent by ~4% sequential decline in earnings.  

* Gross Margin: The gross margin for the 1Q stood sequentially higher at Rs 19.4/scm, as availability of cheaper gas from RIL‐KG Basin along with moderation in spot LNG, helped reduce the gas cost by ~10‐11% YoY & QoQ to Rs 8.75/scm.

* EBITDA per unit: The EBITDA per unit at Rs 13.9/scm stood sequentially higher by 15% and in‐line with our estimates. Aided by lower gas cost, higher EBITDA per unit helped offset sequential decline in gas sales to a large extent.

* Gas Sales: The total gas sales during the quarter stood at 2.4mmscmd (CNG: 1.55mmscmd; PNG 0.85), which is about 115% higher YoY but 17% lower QoQ. The sequential decline in gas sales stemmed primarily from 23% QoQ drop in CNG sales, even as PNG was largely flat QoQ.  

* Infrastructure development: During the 1QFY22, MAHGL added a) 5 CNG stations in GA‐I&II, taking the total to 274, b) 43.1km of pipeline in GA‐1&II taking total to 5950km & 7.94km in GA‐III taking total to 268.8km.

* Customer addition: During the quarter, MAHGL added 29162 domestic and 40 Industrial & Commercial (I&C) consumers; at the end of 1QFY22, total domestic consumers stood at 1.63mn along with 4196 I&C consumers.

View & Valuation

The 1QFY22 earnings stood largely in‐line with estimates as 17% sequential decline in sales was partially offset by a 14.7% expansion in EBITDA/unit to Rs 13.9/scm. The per unit EBITDA in 1Q, was highest so far as MAHGL continued to surprise, indicating its pricing power. As an incremental indicator of pricing power, MAHGL undertook an increase of Rs 2.6/kg in CNG prices (Jul’21), to pass on a likely, prospective, increase in transport cost (due to Uran ‐Trombay pipeline tariff of ~ Rs 35/mmbtu).

We, therefore upgrade our rating to BUY (from ADD) and TP to Rs 1445/sh (from Rs 1280), premised upon earnings revision and also, as we roll estimates forward to FY24e. While there are challenges in coming quarters, viz. a) likely increase in trade margins charged by OMCs and  b) an increase in domestic gas prices Oct’21 onwards, we repose our faith in MAHGL pricing power, and raise our per unit EBITDA estimates to Rs 12/scm (from Rs 10.5‐11/scm earlier), in sync with 1Q margins. As a result, our earnings estimates for FY22e/23e/24e stand revised upwards by 10%.  

AT CMP the stock is trading at 11.6x FY23e, below is its mean trading multiple of 15x. A large part of earnings growth over FY11‐20, was primarily driven by expansion in per unit margins. Going ahead as well, sustainability of earnings momentum and hence valuations appears contingent upon sustainability of per unit margins, as growth in sales volume is more or less likely in accordance with growth in natural consumption in the country. Our sensitivity analysis reveals that for every Rs 1/scm change in EBITDA per unit, the valuation changes by ~9‐10%, cetris paribus.

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