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Weak performance impacted by lower EBITDA spreads, while volumes were in line

Our View

Mahanagar Gas Limited (MGL) delivered a weak Q4FY24, missing expectations with a 1% YoY increase in EBITDA to Rs3.94bn and a 1.4% YoY fall in PAT to Rs2.7bn. Strong CNG volumes with a above normal growth of 10.6% YoY and a new high across PNG segments, while EBITDA spreads were weaker due to price cuts and increased gas cost. The volumes would grow by 6-7%, but EBITDA spreads should be lower in FY25 as compared to FY24 (peak profitability). We upgrade our rating on the stock to a BUY from NEUTRAL earlier given a sharp fall in stock price, revised TP of Rs 1,560/shr.

Result Highlights

* despite better volumes (new high across all segments), EBITDA spreads missed but volumes met our expectation. The consensus EBITDA/PAT at Rs 4.3/3bn, however the reported performance is a miss.

* Volumes: Overall volumes at 3.78mmscmd (vs our est of 3.77) was up 12.1% YoY and 3% QoQ. CNG volumes at 2.67mmscmd (new high) vs our est of 2.7, were up 10.6% YoY and 1.3% QoQ. D-PNG volumes at 0.56mmscmd were up 10.4% YoY and 6.2% QoQ. Industrial and commercial sales at 0.55mmcsmd (new high), up 21.9% YoY and 8.3% QoQ.

* Gross realization: Realizations dropped to Rs45.3/scm declining 14.2% YoY and 2.1% QoQ due to price cuts taken by the company (last price cut for CNG on 6- Mar’24 by Rs 2.5/kg).

* Gross Margins (GM): The gas cost was down by 19.6% YoY and flat QoQ, despite this decrease gross margins declined on both YoY and QoQ basis. The gross margin was at Rs17.9/scm down 4.4% YoY and 6.4% QoQ (due to price cuts).

* Opex: The opex at Rs6.4/scm (above our estimates) was higher by 9.8% YoY and 10.4% QoQ, with other operating expenses being higher by 31.9% YoY and 14.4% QoQ.

* EBITDA spreads: EBITDA spread at Rs 11.4/scm (lower than our est) is down 10.8% YoY and 13.8% QoQ. The EBITDA spread deteriorated sequentially due to price cuts and an increase in gas costs.

* FY24 performance: EBITDA/PAT was at Rs 18.4/12.9bn vs Rs 11.8/7.9bn last year. The volumes at 3.6mmscmd (vs 3.4 last year), of which CNG was at 2.6mmscmd vs 2.5. The EBITDA spread was at Rs 13.9/scm vs 9.5 last year.

Valuation

We expect a 6.5% volume CAGR over FY24-26 with a spread of Rs 11/scm. The stock is trading at 12x/11.3x PER FY25e/26e. We recommend a BUY from NEUTRAL earlier with a revised target price of Rs 1,560/share on a sharp fall in the stock price, also expect a strong volume growth versus historical average, support from better cash flows and healthy balance sheet.

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