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Aggressive growth plans

Revised volume-focused strategy: MAHGL was focused on strong margins in the past; however, following a litany of concerns about volume growth, the focus is now on volume growth. In Q2FY24, margins were Rs 14.6/scm; while guidance received is for targeting EBITDA spreads of Rs 12/scm to boost volume growth supported by APM price decline and favourable gas sourcing. In October, MAHGL had taken price cut of Rs 3/kg for CNG following reduction in HPHT natural gas prices. CNG is ~50% cheaper to petrol in Delhi and ~30% cheaper than diesel, based on respective mileage.

Sustainable volumes: The monthly conversion of vehicles was ~19,000 per month, with 319 CNG stations in Mumbai, 32 in Raigad. As Mumbai has exhausted land available, upgradation of existing stations is underway while the growth in CNG stations would happen through new geographical areas (GAs). Unison Enviro (UEPL) acquisition has added GAs of Ratnagiri, Latur and Osmanabad in Maharashtra, and Chitradurga and Davanagere in Karnataka. Mumbai and Raigad volumes will continue to grow at 5% for next 5 years.

All eyes on growth: In the next three to five years, company plans to increase customers to about 1m households, operate over 500 CNG stations, expand steel pipeline network to around 600km, and PE pipeline network to over 5,500km. To boost future growth, annual capex spend of Rs 6-8bn has been planned, so are tie-ups with OEMs for CNG variants launch and targeting long haul buses of state corporations to use CNG. Company launched fuel card targeting new users to convert to CNG, with fuel value incentive of Rs 0.2-0.5m depending on vehicle size, aimed at locking in volumes.

CNG supported by VAT cut: The Maharashtra government has recently cut VAT from 13.5% to 3%, which has supported MAHGL in passing on higher input gas costs. This will help maintain stronger margins. This also hints at strong chances of natural gas coming under GST, lower VAT across key states would be further beneficial, if taxes are lowered further.

Unison Environ Pvt Ltd (UEPL): MAHGL acquired UEPL from Ashoka Buildcon for price of Rs 5.31bn. UEPL has been authorised by PNBRG 3 GAs of Ratnagiri, Latur and Osmanabad in Maharashtra and Chitradurga & Davanagere in Karnataka. This acquisition will provide long term growth avenues. In FY23, volumes were 0.1mmscmd, expected to grow to 1.1mmscmd over next 10 years. As new GAs have accessibility to highway, they would be dominated by CNG volumes. MAHGL is reportedly looking for acquisition candidates and would be bidding for GAs if they meet internal IRR requirements.

LNG portfolio: MAHGL has entered LNG contracts with GAIL for five years with 0.38mmscmd and mid-term LNG with GSPC for 18 months with 0.15mmscmd. Coupled with this, MAHGL has bagged 0.3mmscmd gas from RIL KG fields, considering MAHGL’s PNG industrial & commercial demand of ~0.5mmscmd. The company has a spare supply of cheaper contracted LNG to blend with domestic gas to fulfil priority sector requirements. This should help better manage higher EBITDA spreads.

Margins to moderate: We expect margins could taper over FY25-26 vis-à-vis what the company could report in FY24. Any further cut in excise duty on diesel or fall in crude oil price would pose a downside risk to our margin assumptions.

Robust FCF and net cash could raise dividend: MAHGL’s net cash position remains strong with lower capex and better earnings throughout our forecast period, our projected FCF outlook is robust. We hence see an upside to MAHGL’s current ~30% dividend pay-out.

Valuation: We expect a 5% volume CAGR over FY24/25/26 with a spread of Rs 13.9/11.3/11.4/scm. The stock is trading at 11.1x/10.4x PER FY25e/26e and we sense a limited upside. We recommend a ADD with a target price of Rs 1,365/share on strong margins, strong cash flows and balance sheet.

Risks: Slower volume growth, margin compression on lower differentials vs alternatives, regulatory changes, sharp increase in LNG prices, slower infra rollout, competition from alternative fuels like EVs.

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