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Margins remain high; 2nd wave to hit volumes

Mahanagar Gas’ (MGL) Q4FY21 EPS was up 28% YoY driven by margin rise as CNG and PNG prices were hiked, volumes were up modestly QoQ and YoY. FY21 recurring EPS was down 17% YoY despite 19% YoY rise in margin, hit by 25% YoY volume fall. Factoring in lockdown in Apr-May’21, which may mean ~20% QoQ volume fall in Q1FY22E, has meant cut in FY22E volume estimate by 5%. We have raised our FY22E margin estimate by 1% to Rs12.15/scm (same as Q4FY21). The net impact of these changes and one-year rollover of DCF is cut in FY22E EPS by 4% but upgrade in target price by 2% to Rs1,107 (3% downside). We retain HOLD on MGL. We assume lofty margins will continue, but risks are not ruled out.

Q4FY21 EPS up 28% YoY on margin surge; volumes up:

Q4FY21 EPS was up 28% YoY driven mainly by 26% YoY surge in EBITDA margin to Rs12.15/scm (down 2% QoQ). The surge in EBITDA margin was due to opex and gas cost fall by Rs0.2-1.9/scm YoY and realisation rise of Rs0.5/scm YoY (Rs1.4/scm QoQ) due to CNG and PNG price hikes of Rs0.15/scm (Rs1.5/kg) from 8-Feb’21. Volumes were up 4% YoY and QoQ to 2.89mmsmcd; CNG volumes were up 1% YoY (5% QoQ), industrial 6% YoY/QoQ and domestic PNG volumes up 8% YoY (down 12% QoQ).

Cut FY22E EPS; raise target price:

Second wave of covid, which led to lockdowns in Apr-May’21 in Mumbai, may mean ~20% QoQ fall in volumes in Q1FY22E. Volume fall may hit margin but full benefit of CNG and residential PNG price made on 8-Feb’21 despite no rise in domestic gas cost, would support margins. We have cut our FY22E volume estimate by 5% to factor in the impact of the ongoing lockdown but raised margin by 1% to Rs12.15/scm (same as Q4FY21); FY23- FY24E margin remains at Rs9.7/scm vs Rs7.9-9.7/scm in FY18-FY20. These changes mean a cut in FY22E EPS by 4% but together with one-year roll forward of DCF have boosted target price by 2% to Rs1,107 (3% downside).

Lofty margins assumed to continue; risks not ruled out:

We assume lofty margins to continue as the regulation allowing competition will take time to implement and may fail to have any significant impact as, in its present form and interpretation, it limits OMCs’ ability to compete. Margins may be significantly lower if competition has more impact than expected or GoI requires fall in gas prices since Dec’19 to be passed on (as required under guidelines GoI issued in Feb’14). Not being able to fully pass on possible 90-100% (Rs3.3-4.0/kg) hike in commissions to OMCs on CNG may also hit margins; clarity is likely on this issue in 4-6 months.

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