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Healthy margins outlook; CNG near normal in Q2FY22

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 consistently reported high gross margins and return ratios.

Q1FY22 Results: MGL reported Q1FY22 results that were better than estimates.

* Revenue was up 140.3% YoY to | 666.9 crore, driven by sales volume growth of 115.5% YoY and higher realisation at | 30.6/scm

* Gross margins increased | 3.4/scm YoY (and | 1.7/scm QoQ) to | 19.4/scm on account of lower gas costs. Subsequently, EBITDA increased 280% YoY to | 304 crore

* PAT was at | 204.1 crore, up 351% YoY.

What should investors do?

MGL’s CNG sales volume reached near pre-Covid level in Q2FY22-TD and is expected to further grow with relaxations in lockdown.

* We remain positive and maintain our BUY rating on the stock

Target Price and Valuation: We value MGL at | 1340 i.e. 12.5x P/E on FY23E 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

* On account of competitive advantage against traditional auto fuels, MGL has potential for further sales volume growth in Mumbai and adjacent areas

* MGL hiked prices in Q2FY22E. This will lead to healthy margins in near term

* Debt free balance sheet and consistent dividend payout

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

* It offers a play on India’s increasing gas demand. Growing CGD sector and domestic output will lead to stable volumes in the near term. It also derives value from growing market value of its listed subsidiary, Gujarat Gas

* BUY with a target price of | 360.

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