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UEPL and LCV initiatives to propel volume growth

* Mahanagar Gas Ltd. (MAHGL) held an analyst meet on 7th Jun’24 which was attended by the senior management of the company. Management reiterated:

1) an overall 6-7% volume growth target, with at least 10% volume growth from the recently acquired UEPL, 2) the current APM gas allocation stands at ~70% and the shortfall is being compensated by additional HPHT volumes, and 3) INR10b of capex that was guided for FY25, of which INR2b will be allocated to UEPL.

* We have a BUY rating on MAHGL with a TP of INR1,565.

Key takeaways from the analyst meet

Industry Outlook:

* Total gas consumption is likely to improve to 500mmscmd in FY30 from 185mmscmd in FY24. Further, the CGD sector’s gas consumption is likely to grow to 103mmscmd in FY30 from 34mmscmd in FY24.

*  India’s gas consumption for FY24 stood at 182mmscmd (98mmscmd domestic and 84mmscmd imported), which signifies that the domestic gas share is improving.

* The government has planned to invest USD67b in the natural gas sector until FY30. Till FY30, India is likely to have 17,500 CNG stations (7,000 stations in FY24) and 120m domestic PNG connections (domestic PNG connections in FY24).

* CNG has an edge over EV in the CV/LCV segments. Moreover, management believes that the CNG consumer base is less likely to be affected by EVs.

New initiatives:

* MAHGL acquired UEPL in Feb’24, which currently has 55 CNG stations. UEPL has marketing exclusivity until Sep’28 in two GA’s and infrastructure exclusivity in one GA until Aug’41 and in two GA’s until Sep’43.

* MAHGL started a joint venture (MLPL) in Dec’23, with 51% holding in the JV. The company plans to set 5-6 LNG stations in FY25.

* MAHGL invested in 3ev Industries Private Limited (31% stake, INR1b investment commitment). 3ev is in the business of manufacturing threewheeler cargo and passenger EVs.

ESG initiatives:

* The compressed CBG plant of 1,000tpd capacity is being planned to be set up in Mumbai.

* Four solar plants with 10kw each are being installed at the existing CNG and LNG retail outlets.

* The 12kw/m wind turbine is being installed at CGS Taloja. Future outlook:

* Management expects a 6-7% volume growth for MAHGL in FY25. With respect to UEPL, volumes are expected to grow by more than 10%.

Capex:

* The company plans to incur INR10b of capex in FY25. Of this, INR8b will be spent by MAHGL, and INR2b will be allocated to UEPL.

* MAHGL plans to build over 25km of infrastructure steel pipeline, a PE of 200km, and 90 CNG stations (60 on a standalone basis and 30 in UEPL).

* The company also aims to establish over 0.3m PNG domestic connections (5-6% growth), 60 industrial connections, and 300 commercial connections.

APM gas allocation:

* MAHGL’s APM allocation is approximately 70% of the priority volumes.

* The decline in APM gas allocation is entirely offset by the higher supply of HPHT gas, which is available on priority. The company also has a 0.5mmscmd term contracts of HPHT.

* Besides, management has good medium-term visibility for APM/HPHT prices.

* Promotional initiatives:

* For passenger vehicles, the scheme ended on 31st Dec’23, but it is still continuing for commercial vehicles and has helped boost conversions. The incentive schemes for passenger vehicles can be reintroduced in the future if needed.

* Impact of inclusion of gas under the GST regime

* GST on gas will be beneficial for consumers since any savings on GST will be passed on to them, leading to lower CNG pricing.

* The consumers registered under GST can take credit of GST paid on gas consumed. This will be especially beneficial to the industrial and consumer segments and boost the acceptability of natural gas as a fuel.

Valuation and view

* We expect a 7% CAGR in volume over FY24-26, driven by multiple initiatives implemented by the company, such as partnering with OEMs to drive conversions of commercial CNG vehicles, and providing guaranteed price discounts to new I/C-PNG customers.

* The stock trades at 12.5x FY26E EPS of INR110.6. We value it at 14x FY26E EPS to arrive at our TP of INR1,565. Reiterate BUY. We continue to prefer MAHGL over IGL owing to its 30% cheaper valuation (on FY26E P/E basis), with broadly similar growth profile in the medium term and relatively lower EV risk.

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