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Margins to taper off; EV policy not a major risk

Mahanagar Gas (MGL) reported robust YoY performance with 89.4%/ 106.4% surge in EBITDA/ PAT benefitted from substantial rise in margins. EBITDA/ scm rose 83.2% YoY albeit moderated 13.3% QoQ to Rs14.6/ scm. QoQ margin moderation was attributed to lower average realisations and slightly higher gas costs. On EV policy for Maharashtra, management commented that the EV adoption to happen gradually and would impact volumes over a 7-8 year period. However, diesel to CNG conversion should partially offset the impact from EV adoption. Nonetheless, management continued to maintain its volume growth guidance of 5-6% for the next 5-6 years with EBITDA/ scm hovering at Rs10-12/ scm. FY24E capex is slated at Rs7-8bn and can go up to Rs9-10bn depending on growth opportunities. Based on 1H numbers and management’s EBITDA/ scm guidance of Rs12/ scm for the next 2-3 quarters, we have upped our EBITDA/ scm assumptions. We have lowered our volume assumptions post FY26E to provide effect of EV adoption while considering 2% terminal growth in our DCF. Based on revision in estimates, we maintain Buy with a DCF-based revised TP of Rs1,189 (earlier Rs1,234).

EBITDA/ scm starts normalising, focus on volume growth 

During Q2, MGL’s EBITDA/ scm moderated 13.3% QoQ to Rs14.6/ scm from Rs16.8/scm. Earlier in October, the company also cut its CNG and PNG prices by Rs3/ scm and Rs2/ scm respectively in Mumbai and adjoining areas. The revised price for CNG and PNG stands at Rs76/ scm and Rs47/ scm respectively. Price revision is expected to aid volume growth while EBITDA/ scm is likely to moderate further. To focus on volume growth, MGL has partnered with OEMs and also introduced incentive scheme for new CNG vehicles.

No immediate impact from Maharashtra EV policy

Management stated that Maharashtra EV policy similar to the Delhi EV policy may impact volumes albeit gradually over a period of 7-8 years. Despite EV policy threat, management still remained confident of 5-6% volume growth over the next 5-6 years. Diesel to CNG conversion is likely to partially offset the impact from EV adoption.

~20% CNG volumes consumed by aggregators in Mumbai

Management provided some estimates on CNG consumption in Mumbai citing that they may not be entirely accurate. As per mgmt., CNG consumption by Ola/ Uber cab aggregators is ~20%, private passenger cars ~30%, autos ~30%, buses+state transport ~7%, and rest from commercial goods vehicles.

Volumes to improve, margins to subside

Management is focusing on volume growth while margins are likely to subside in coming quarters. We have accounted for the threat from EV policy and considered lower volume growth from FY26E onwards despite management guidance of 5-6% volume growth for the next 5-6 years. Based on 1H numbers, we have upped our FY24E/ FY25E EBITDA/ scm estimate from Rs9.5/scm/ Rs12.1/scm to Rs14.1/scm/ Rs11.2/scm. The stock is currently trading at 8.0x/ 10.3x FY24E/ FY25E EPS of Rs127.4/ Rs98.4. We maintain Buy with a revised DCF-based TP of Rs1,189 (earlier Rs1,234).

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