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Higher gas cost weighs in on lower profitability

* Mahanagar Gas (MAHGL) reported a miss on our estimates. Although, total volumes were in line at 3.5mmscmd (+11% YoY), EBITDA/scm was lower at INR7.9 (v/s our estimate of INR9.3 and INR9.1 in 1QFY23). Thus, EBITDA stood at INR2.5b (our estimate of INR3b, -16% YoY, -11% QoQ) in 2QFY23.

* The management highlighted that the decline in EBITDA (v/s 1QFY23) was mainly due to the increase in weighted average cost of gas and lower price realizations in case of I/C customers.

* Spot LNG prices in 3QFY23 to date have fallen to USD28.9/mmBtu v/s USD45/mmBtu in 2Q. A further cooling of these prices will result in a volume recovery in the industrial segment. We estimate an EBITDA/scm of INR8.5/ INR9.0 in FY23/FY24 v/s INR8.4 in FY22.

* We reiterate our view that CNG segment’s margins would come under pressure:

* The APM gas price revision for 2HFY23 stands at USD8.6/mmBtu – the highest since the adoption of the gas pricing formula in 2014. Moreover, we expect further price hikes in 1HFY24 unless the pricing formula is changed.

* Continued blending of LNG or other high-cost gas for CNG/PNG-domestic amidst likely fall in petrol/diesel prices may test volume growth.

* Considering the above, we believe it is unlikely for MAHGL to retain its EBITDA margin at higher levels of FY21. We keep our FY23–24 margin assumption unchanged as highlighted above. The stock trades at 12x FY24E EPS of INR73, and valuing it at 14x FY24E EPS we arrive at our TP of INR1,025. Maintain BUY owing to its relatively cheaper valuations.

Volumes and revenue in line; miss on margin

* Total volumes were in line with est. at 3.5mmscmd (+11% YoY). CNG volumes were at 2.5mmscmd (+14% YoY). PNG total volumes were at 0.9mmscmd (-6% below est., +3% YoY, +1% QoQ) in 2QFY23.

* EBITDA/scm stood below our est. at INR7.9 (v/s our est. of INR9.3). Thus, EBITDA was also a miss at INR2.5b (v/s est. of INR3b, -16% YoY, -11% QoQ). PAT stood at INR1.6b (v/s est. of INR2b, -20% YoY, -11% QoQ) in 2QFY23.

* For 1HFY23, revenue stood at INR30.2b (+109% YoY). EBITDA was at INR5.4b (-11% YoY), with EBITDA/scm at INR8.5 (v/s INR12.2 in 1HFY22). Reported PAT was at INR3.5b (-14% YoY).

* Total volumes were at 3.5mmscmd (+25% YoY). CNG volumes stood at 2.5mmscmd (+34% YoY), and total PNG volumes were at 0.9mmscmd (+5% YoY).

Valuation and view

* The company added five new CNG stations, ~62k households, 86 PNG-I/C customers and 39km of steel and PE pipeline in 2QFY23. For Raigad GA, ~60k households were connected, with 7km of pipeline completed that would help MAHGL unlock the demand potential at this GA.

* We expect a volume growth of 8% during FY22-24 with the management guiding for a volume CAGR of 6% over the next 3-5 years (volume growth of FY23 being higher).

* The stock trades at 12x FY24E EPS of INR73, and valuing it at 14x FY24E EPS we arrive at our TP of INR1,025. Maintain BUY owing to its relatively cheaper valuations.

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