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Steady progress ahead

* Reduction in gas costs is a positive, but results may reflect only by Q2FY24: Post the Rs8/kg reduction in CNG prices at the beginning of Q1FY24, volumes have remained in the range of 3.45-3.65mmscmd (flat to 6% YoY growth) in Q1, with the beginning of summer vacations impacting bus volumes. Q2, however, is likely to see stronger momentum, with the reopening of schools, advent of monsoons (increasing time spent on the road) and the flow through of higher conversions due to better pricing to drive stronger growth.

* Price differentials are strong; price stability is a strong driver of demand: In addition to the strong ~40-50% price discount to petrol and diesel driving CNG demand, pricing stability over the next 2 years may drive a steady demand momentum. With greater development of Raigadh (Maharashtra) and more aggressive progress in GA-2 (Thane), we believe there is an upside risk to our estimate of ~6% volume growth over the next 3-5 years. Also, commercial vehicle demand is likely to pick up, with more OEMs, contiguous development around MMR proving refueling options and favourable costs driving demand over the next 3- 5 years. Therefore, quarterly run rate of ~2,500 CVs can jump to ~3,500 by the end of FY24E.

* Unison acquisition on track, volume potential of ~1mmscmd: The Unison Enviro (UEPL) acquisition is likely to complete by Dec’23 as the transfer lock-in period of 5 years for 2 of the 3 areas of Unison will get over by Sep’23. UEPL reported volumes of 0.1mmcmd for FY23, which should grow to 0.7mmscmd by FY28 (refer here). Sourcing mix remains comfortable, flexibility to aid margins: MGL now has ~89% of priority sector gas coming via domestic gas (~2.8mmscmd), premium domestic gas (~0.2mmscmd), medium-term LNG of ~0.4mmscmd and 0.1mmscmd from RIL. This leaves only ~0.1mmscmd required via spot LNG, but interestingly, the medium-term LNG contract has a relatively lower take or Pay (ToP) so MGL can reduce it and take more spot LNG (since prices are now lower than even term LNG prices), which can help margins. Even with a price reduction of ~Rs5/ltr in petrol and diesel, CNG discount should sustain at ~40%, which ensures strong conversions.

* Maintain BUY: The stock has performed strongly in recent months (absolute return of 36% in 12 months, outperforming Sensex by 15%). We remain bullish, with favourable multiples (at CMP, stock trades at just 10.1x FY25E EPS and 4.9x EV/EBITDA) and stronger prospects. We estimate an EPS CAGR of 13% over FY23-FY25E, supported by volume CAGR of ~6.5% p.a., gross margin of Rs15.9/scm and EBITDA/scm of Rs10.6/scm. Our DCF valuation (3% volume growth and EBITDA/scm of ~Rs10/scm) delivers a target price of Rs1,290/sh, ~25%upside from CMP. Reiterate BUY.

* Key downside risks: i) Higher gas prices, ii) inability to pass on gas cost increases, iii) sharper fall in alternate fuel prices for CNG (petrol/diesel). Key upside risks: i) Softer LNG prices, ii) faster execution of new area development, iii) aggressive regulatory support in MMR region. INDIA Market Cap Rs102bn/US$1.2bn

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