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About the stock: Mahanagar Gas (MGL) is a city gas distribution company and operates in Mumbai, its adjoining areas and Raigad district, Maharashtra.

* CNG sales contribute more than 70% of its total sales volume

* It has historically reported high gross margins and return ratios

Q4FY23 Results: MGL’s results were above our estimates on the profitability front.

* Revenue was up 49% YoY to | 1772 crore due to price hikes taken by the company, in line with I-direct estimate of | 1785 crore, with realisation at | 58.4/scm

* Sales volume was at 3.37 mmscmd, up 6.4% YoY vs. I-direct estimate of 3.41 mmscmd. Gross margins increased | 5.4/scm YoY to | 18.7/scm. Subsequently, EBITDA increased 81% YoY to | 390 crore

* PAT came in at | 268.8 crore, up 1x YoY

What should investors do? APM gas price has been revised with a ceiling of US$6.5/mmbtu (floor price of US$4/mmbtu) for the next two years. The company has passed on most of the benefit to customers and again made CNG lucrative visà-vis petrol and diesel. In the current quarter (Q1FY24-TD), spot LNG prices have further softened to ~US$10/mmbtu. Along with this, the company acquired three new GAs via Unison Enviro. Owing to these reasons, growth in sales volume will be key monitorable, going ahead.

* We maintain our BUY rating on the stock

Target Price & Valuation: We value MGL at | 1300 i.e. ~14x P/E on FY25E EPS

Key triggers for future price performance:

* MGL is a beneficiary of India’s aim to increase the share of natural gas in the energy mix from 6% to 15% by 2030

* APM gas price trend

* Debt free balance sheet and consistent dividend payout

Alternate Stock Idea: Apart from MGL, in our oil & gas coverage we also like IGL.

* Indraprastha Gas (IGL) is one of India’s leading CGD companies, which primarily operates in the NCT of Delhi and will benefit from stricter environmental regulations in Delhi

* BUY with a target price of | 550

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