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Margins drive EPS rise; volumes still down YoY

Mahanagar Gas’ (MGL) Q3FY21 EPS was up 17% YoY despite fall in volumes, due to surge in margins to a new high as fall in gas cost and QoQ fall in opex was not fully passed on. 9M recurring EPS was down 30% YoY despite 15% YoY rise in margin, hit by 34% YoY volume fall. CNG and residential PNG prices were raised from 8-Feb’21 and that will boost Q4 margins. We have raised FY22E EBITDA margin to Rs12/scm vs Rs11.3-12.0/scm in 9M and FY21E, and FY23E-FY24E to Rs9.7/scm vs Rs7.9-9.7/scm in FY18-FY20. This leads to upgrade in FY22E EPS by 25% and target price by 18% to Rs1,090 (4% downside). We upgrade MGL to HOLD from Reduce. We assume lofty margins to continue, but they may be lower if competition impact is severe or GoI requires gas cost fall to be passed on.

* Q3FY21 EPS up 17% YoY on margin surge despite volume fall: Q3FY21 EPS was up 17% YoY, despite 9% YoY decline in volumes to 2.8mmscmd, driven by 35% YoY surge in EBITDA margin to a record high of Rs12.4/scm. The surge in EBITDA margin was due to gas cost fall by Rs4.2/scm YoY being steeper than realisation fall and opex rise of Rs0.4-0.6/scm YoY; domestic gas cost was cut from 1-Oct’20 by Rs1.8/scm while MGL cut CNG price by just Rs0.4/scm and opex fell by Rs0.4/scm QoQ driven by 34% QoQ rise in volumes. CNG volumes were down 15% YoY and industrial 9% YoY, but domestic PNG volumes were up 24% YoY.

* Raise FY22E EPS and target price: CNG and residential PNG price was raised from 8-Feb’21, despite no rise in domestic gas cost, which would further boost Q4 margins QoQ. We have kept FY21E EPS unchanged. We have raised FY22E margin to Rs12/scm vs Rs9.7/scm earlier, Rs11.3/scm in 9MFY21 and Rs12/scm in FY21E and FY23-FY24E margin to Rs9.7/scm vs Rs9.2-8.2/scm earlier and Rs7.9- 9.7/scm in FY18-FY20. This led to upgrade in FY22E EPS by 25% and target price by 18% to Rs1,090 (4% downside). We upgrade MGL to HOLD from Reduce.

* Lofty margins assumed to continue; competition or GoI order to pass on gas cost fall are risks: We assume lofty margins to continue as the regulation allowing competition will take time to implement and may fail to have 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. In Feb’14, when CNG was given top priority for access to domestic gas, GoI issued guidelines requiring gas cost fall to be fully passed on if they wanted continued access to cheap domestic gas.

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