Buy Mahanagar Gas Ltd For Target Rs..1090 -Anand Rathi Share and Stock Brokers
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Muted volume growth; on attractive valuations, maintaining a Buy
Mahanagar Gas was hit by lower CNG volume growth in Q3 due to higher gas prices. The gross margin improved despite increase in APM gas prices, which the company passed on. The company was expecting the Kirit Parikh Committee to reduce APM gas prices; this did not come through. It hiked prices in Oct’22 (from Rs80/kg to Rs86) and in Nov’22 (to Rs89.5), which, with falling crude and spot LNG prices, would improve spreads in Q4. We retain a Buy rating on the stock with an unchanged TP of Rs1,090, at 11x FY25e EPS.
In line EBITDA spreads, volume growth disappoints. Q3 FY23 EBITDA at Rs2.56bn was up 148% y/y, 1.3% q/q. PAT at 1.72bn was up 202% y/y, 4.9% q/q. The performance was slightly lower than we estimated on lower volume growth while EBITDA spreads were in line. Overall volumes at 3.41mmscmd (vs our estimated 3.51) were up 3.3% y/y, down 1.4% q/q. CNG volumes at 2.47mmscmd (vs our estimated 2.59) were up 3.5% y/y, down 2.6% q/q. D-PNG volumes at 0.50mmscmd were up 5.4% y/y, 5.9% q/q. Industrial and commercial sales were 0.44mmcsmd, flat y/y, down 1.4% q/q. The gross margin was Rs13.7/scm, up 58.8% y/y, 5.2% q/q. The EBITDA spread at Rs8.16/scm was up 140% y/y, 2.7% q/q, improving on price hikes, more than the increase in gas (input) costs. CNG prices were up Rs7.47/kg q/q while DPNG was up Rs4.21/scm.
Outlook, Valuation. We expect EBITDA spreads of Rs9.5/scm in FY24 and Rs10 in FY25. We prefer Indraprastha Gas to Mahanagar Gas and Gujarat Gas; all three would further benefit from lower gas prices, after Cabinet approval of the Kirit Parikh Committee recommendations. The stock trades at 9.6x/8.6x FY24e/FY25e PE. We maintain a Buy, with a TP of Rs1,090. Risks: Slower volume growth, margin compression on smaller differences than alternatives, regulatory changes, higher LNG prices, slower infrastructure rollout, competition from alternative fuels like electricity for vehicles.
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