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Strong performance driven by higher EBITDA spreads and volumes

Our View

Mahanagar Gas Limited (MGL) delivered a robust Q3 FY24, exceeding expectations with a 75.2% YoY increase in EBITDA to Rs4.5bn and an 84.3% YoY increase in PAT to Rs3.2bn. Strong CNG volumes with a above normal growth of 6.4% YoY and a new high across PNG segments drove this performance, while EBITDA spreads were stronger but sequentially declined due to price cuts. The volumes would continue to grow at a slower pace, but EBITDA spreads should be lower in FY25 as compared to FY24 (peak profitability) which would result in a decline in earnings. Given the recent stock rally of ~12% in last 2 weeks, we see limited upside from current CMP and maintain an ADD rating on the stock with an unchanged TP of Rs 1,365/shr.

Result Highlights

Performance: EBITDA at Rs4.5bn was up 75.2% YoY but down 6.3% QoQ. PAT at 3.2bn was up 84.3% YoY and down 6.3% QoQ. Overall performance was supported by better spreads and volumes (new high across all segments), EBITDA spreads and volumes better than ours. The consensus EBITDA/PAT at Rs 4.1/2.8bn, however the reported performance is a beat.

Volumes: Overall volumes at 3.67mmscmd (vs our est of 3.61) was up 7.6% YoY and 2.7% QoQ. CNG volumes at 2.63mmscmd (new high) vs our est of 2.62, were up 6.4% YoY and 1.9% QoQ. D-PNG volumes at 0.53mmscmd were up 6.3% YoY and 8% QoQ. Industrial and commercial sales at 0.51mmcsmd (new high), up 15.9% YoY and 1.5% QoQ.

Gross Margins (GM): The gas cost was down by 30% YoY and flat QoQ, this resulted in gross margins improvement on YoY but down QoQ basis. The gross margin was at Rs19.1/scm up 39.3% YoY but down 6.4% QoQ (due to price cuts).

Opex: The opex at Rs5.8/scm (in line with our estimates) was higher by 4.9% YoY and flat QoQ, with other operating expenses higher by 9.9% YoY and 3.8% QoQ.

EBITDA spreads: EBITDA spread at Rs 13.3/scm (higher than our est) is up 62.8% YoY but down 8.8% QoQ. The EBITDA spread improved YoY on better gross margins while declined sequentially due to price cuts.

The company has declared an interim dividend of Rs12/shr and fixed 5th Feb’24 as the record date.

Valuation

We expect a 5% volume CAGR over FY24-26 with a spread of Rs 13.9/11.3/11.4/scm. The stock is trading at 12.6x/11.8x PER FY25e/26e and we sense a limited upside. We recommend an ADD with a target price of Rs 1,365/share on strong margins, strong cash flows and balance sheet.

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