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Margins at record high; second wave hit volumes

Mahanagar Gas’ (MGL) Q1FY22 EPS was up 4.5x YoY on a low base driven by surge in margins and volumes, but down 4% on QoQ basis due to lower volumes on covid-induced lockdown. EBITDA margin was at a record high aided by full benefit of CNG and PNG price hikes made on 8-Feb’21 and lower opex. Spot LNG surge is likely to hit margins on industrial and commercial volumes in Q2. Thus, margins may be down QoQ in Q2, but higher than our FY22E estimate. Margins in H2 would depend on MGL’s ability to pass on the rise in APM gas (to be up 58%) and spot LNG prices. We keep our estimates unchanged. Retain HOLD.

* Q1FY22 EPS up 4.5x YoY on a low base, down 4% QoQ hit by volume fall: Q1FY22 EPS was up 4.5x YoY on a low base due to 76% YoY (15% QoQ) rise in EBITDA margin to a record high of Rs13.9/scm, and 115% YoY rise in volumes to 2.4mmscmd. However, Q1 EPS was down 4% QoQ hit by 17% QoQ fall in volumes. CNG volumes were down 23% QoQ (up 3.2x YoY) due to lockdown induced by covid second wave. Industrial and commercial (I&C) volumes were down 7% QoQ (up 86% YoY) while PNG domestic volumes were up 9% YoY and 4% QoQ. The YoY surge in EBITDA margin was due to gas cost and opex fall by Rs1.0-2.8/scm YoY and realisation rise of Rs2.3/scm YoY (Rs0.6/scm QoQ) due to CNG and PNG price hikes of Rs1.1-0.95/scm w.e.f. 8-Feb’21.

* Margins may be down QoQ in Q2, but higher than FY22E estimate: Margins on I&C volumes are likely to decline as spot LNG, which MGL uses for 75% of I&C volumes, is likely to be up 49% QoQ to US$14.4/mmbtu in Q2FY22E. It could mean Q2 margin to be down QoQ to Rs13/scm, but higher than our FY22E estimate of Rs12.2/scm. CNG and PNG prices were hiked by Rs1.9-0.55/scm w.e.f. 14-Jul’21 to pass on the rise in transportation cost of Uran-Trombay pipeline.

* Lofty margins assumed to continue; downside not ruled out: We assume the 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 lower if MGL cannot fully pass on the rise in gas cost and possible 90-100% (Rs3.3-4.0/kg) hike in commissions to OMCs on CNG. APM gas price is estimated to rise to US$3.15/mmbtu (up 58% HoH) in H2FY22E, US$5.25-6.15/mmbtu (up 67-17% HoH) in H1-H2FY23E, and spot LNG price by 49-11% QoQ to US$14.4-16.0/mmbtu in Q2-Q3FY22E.

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