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Margin sustainability the biggest question?

* MAHGL reported a beat on our estimates, led by highest ever EBITDA/scm (of INR13.9), on the back of improved realization, with lower gas cost. Total volumes were in line, down 17% QoQ at 2.4mmscmd (CNG down 23%), impacted by the second wave of COVID-led lockdowns.

* The management said that prices of CNG and PNG Industrial/Commercial are linked to prevailing prices of alternate fuels. Negotiations with OMCs on higher commissions to sell CNG are still on, which combined with an increase in domestic APM gas prices could be critical for margin.

* Recent CNG price hike of INR2.6/kg was taken to compensate for a tariff hike in the Uran Trombay pipeline. The case is still ongoing, and discussions are pending (thus, total demand of INR3.1b up to Mar’21 continues to be a contingent liability).

* As highlighted in our recent report, the CNG segment faces the steepest uphill battle ever, domestic gas prices are expected to rise by ~USD1/mmBtu (starting Oct’21), which translates to INR4/kg (excluding taxes). Trend of global gas prices may call for another hike in Apr’22.

* We reiterate our stance that margin for the CNG segment would come under severe pressure as:

* It would be a huge challenge to pass on the highest ever price increase (since the start of the domestic APM pricing regime in Nov’15);

* OMCs are asking for higher single-digit commissions on CNG sales, which would further test its ability to pass on prices to end-consumers. Around 65% of CNG volumes for MAHGL accrue from OMC outlets;

* As Brent prices cool down from USD75/bbl at present, with OPEC+ matching supply with the recent spurt in demand (oil production to increase by 0.4mnbopd every month starting Aug’21, thereby reducing the prices of alternate fuels).

* We expect volume to normalize to pre-COVID levels in 2HFY22 (unchanged) as Mumbai starts emerging from the lockdown. We maintain our Buy rating considering MAHGL’s attractive valuations.

Lower gas cost and operating expenditure leads to margin expansion

* Volumes were in line with our estimate at 2.4mmscmd (-17% QoQ).

* CNG volumes at 1.6mmscmd (-23% QoQ) were impacted by the second wave of COVID-led lockdowns.

* PNG volumes at 0.8mmscmd (+34% YoY, -2% QoQ), with domestic and I/C volumes at 0.5 mmscmd and /0.4mmscmd, respectively.

* EBITDA/scm came in higher than our estimate at INR13.9 (+76% YoY, +15% QoQ) due to higher realization at INR28.2/scm (up INR0.6 QoQ). This was led by a rise in alternate fuel prices, resulting in better realization for PNG I/C.

* Gas cost was lower by INR1.1 QoQ at INR8.8/scm, due to decline in spot LNG prices to USD7/mmbtu (from USD10/mmbtu). Although spot LNG prices have spiked up to USD14/mmbtu currently, it would result in higher gas cost in 2QFY22.

* Gross margin at INR19.4/scm (up INR1.7 QoQ). Opex fell INR0.3/scm QoQ at INR4.6/scm (est. INR5.3 on lower volumes in 1QFY22).

* EBITDA stood at INR3b, with PAT at INR2b (-4% QoQ).

Valuation and view

* BEST is likely to add another 500 CNG Buses over and above the recent induction of 500 Buses. MAHGL is upgrading its CNG infrastructure at three Bus depots to facilitate fueling of these new Buses.

* MAHGL commissioned its first Mobile Refueling Unit (MRU) in Raigad. It is in the process of inviting EoIs to set up MRUs in Thane urban and Raigad. While adding more MRUs will require local permissions and regulatory approvals, it could be a game changer for a company like MAHGL, which is finding it tough to add more infrastructure in crowded cities.

* The management is targeting ~20 new and 25-30 upgrades of CNG stations in FY22, with 8-10 MRUs (one-third of which could be in Raigad).

* All of the above should aid volume growth, along with the increasing need for personal mobility during COVID-19. Factoring in the same, we build in ~6% volume growth over FY23-24E.

* A boost to volumes is expected from further developments at Raigad (peak demand of 0.6mmscmd expected in 3-4 years).

* PNG commercial penetration in MAHGL’s GAs is ~20%. It has the requisite pipeline infrastructure, only last-mile connectivity is required.

* The company is looking forward to the 11th CGD round (~44 GAs are up for offer). It may bid for the same once it opens for bidding.

* MAHGL trades at a discount of ~55% to IGL’s P/E (despite enjoying the highest EBITDA/scm). The stock trades at 14x FY23E EPS of INR80. Valuing it at 16x Sep’23E EPS, we arrive at our TP of INR1,315/share. We maintain our Buy rating.

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