Hold Mahanagar Gas Ltd For Target Rs.850 - ICICI Direct
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Favourable government initiative to benefit…
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 historically reported high gross margins and return ratios
Event: The Maharashtra government has proposed to reduce VAT on natural gas.
* MGL is expected to benefit from the proposal (reduction of VAT from 13.5% to 3%). In a likely scenario of the company passing on partial benefit to its customers (| 2-2.5/scm), we expect a revision in our volume growth estimates (incremental ~2% leading to ~19% YoY growth in FY23E) as the discount of CNG to traditional fuels would widen (upwards of 60-65%) in an environment of fuel price inflation
* Additionally, if the company absorbs the benefit, we expect a revision in our EBITDA margins estimates, keeping the volume growth estimates intact (compared to base case scenario with existing CNG price)
* We build in FY24E EPS of | 81.4 in a base case scenario. We estimate FY24E EPS at | 82.8 and | 85.4 in case of i) partial VAT benefit being passed on to customers, ii) MGL maintaining its prices in the near term, respectively
What should investors do? While the proposal to reduce VAT on natural gas
*sales is positive for the company in the near term, gas sourcing costs trend will be the key monitorable.
* We maintain HOLD recommendation on the stock
Target Price and Valuation: We value MGL at | 850 i.e. ~10x FY24E 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 Q4FY22E to pass on higher costs to customers
* Debt free balance sheet and consistent dividend payout
Alternate Stock Idea: Apart from MGL, in our oil & gas coverage we also like Gail.
* Gail is India’s leading gas transmission company. The company is a beneficiary of increasing gas consumption. Stable volume growth along with higher profitability from gas trading, petchem and LPG segment due to higher oil prices will add value
* BUY with a target price of | 180
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