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During Q1FY24, Mahanagar Gas (MGL) reported stronger operational performance than Q4FY23 with EBITDA/ PAT surging by 82.5%/ 98.9% YoY and 33.8%/ 37.0% QoQ led by robust EBITDA/ scm expansion. EBITDA/ scm in Q4 rose 30.7% QoQ at Rs16.8/ scm vs Rs12.8/ scm in Q4FY23 and jumped 84.5% YoY from Rs9.1/scm. Substantial reduction in gas sourcing costs by 20.9% QoQ and 15.0% YoY due to revision in APM gas price led to the supernormal performance. However, management guided for normalised EBITDA/ scm at Rs10/ scm and steady state volume growth of 5-6. In Q1, the company signed tow MOUs one for a Biogas project with BMC and another for setting up LNG dispensing stations in Maharashtra and outside Maharashtra. LNG is expected to be growth opportunity for the company. Management guided for over Rs6.0-8.0bn capex in FY24E. Based on Q1 numbers and management guidance, we have upped our FY24E EBITDA/ scm while lowering volume assumptions and raising EBITDA/ scm for FY25E. Based on our upward revision in estimates, we upgrade the stock to Buy from Add with a DCFbased revised TP of Rs1,234 (earlier Rs1,141).

Supernormal EBITDA/ scm in Q1, no normalised subsequently Downward revision in APM gas price led to lowering sourcing cost despite marginally lower QoQ allocation at 89% vs 91% in Q4. Despite CNG price revision in early April, lower gas cost led to significant expansion in QoQ EBITDA/ scm at Rs16.8/ scm vs. Rs12.8/ scm in Q4FY23. Consequently, EBITDA surged 82.5% YoY and 33.8% QoQ at Rs5.2bn vs. Rs2.9bn in Q1FY23 and Rs3.9bn in Q4FGY23. EBITDA expansion led to PAT surging by 98.9% YoY and 37.0% QoQ at Rs3.7bn.

Pick up private vehicle conversion, however slowdown in commercial vehicles During Q1, CNG vehicle addition stood at 14,750 with higher conversion observed in June. With reduction in CNG prices, the pace of conversion in rising monthly with higher conversion observed in private vehicles while slowdown in commercial vehicles. MGL is devising schemes to address the slowdown in commercial vehicle conversion. The company may revise CNG prices to attract more conversions.

2 MOUs in Biogas and LNG dispensation MGL signed two MoUs in Q1, one for a Biogas project with BMC and another for a LNG dispensation project with Baidyanath LNG. Management cited that LNG could be a sizable opportunity for long haul transportation on highways. It plans to add 5-6 LNG stations in next one year keeping LNG pricing favourable for conversion.

Margins to taper, steady state volume growth of 5-6% We believe Q1 as an outlier with margins tapering off while volume pick in subsequent quarters. Nonetheless, with robust Q1 EBITDA/ scm and management guidance, we have revised our FY24E EBITDA/ scm from Rs9.5/ scm to Rs12.1 and FY25E EBITDA/ scm from Rs9.5/ scm to Rs9.8. The stock is currently trading at 10.1x/ 12.6x FY24E/ FY25E EPS of Rs104.6/ Rs84.1. We upgrade the stock from Add to Buy with a revised DCF-based TP of Rs1,234 (earlier Rs1,141).

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