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Remain positive amid government distractions

* MAHGL’s stock price declined over 15% on 6th Mar’24 after Mr. Hardeep Singh Puri, Minister of Petroleum and Natural Gas, said that the full benefits of gas sector reforms have not reached the end user and that CGDs are posting strong profits. He also declared the government’s commitment to ensuring the benefits of gas reforms reach end-consumers directly.

* The market likely believes that the recent CNG price cut by the company is driven by the minister’s statements about CGDs making high EBITDA/scm margins. We believe that the current stock price correction is partly an overreaction and partly driven by profit-booking following the strong run-up in the last six months.

* We believe that the current weakness is a good opportunity to buy a franchise with decent volume growth visibility at reasonable valuations. We remain positive on MAHGL and retain our BUY rating.

Government focuses on volume growth rather than regulating prices

* We believe it is premature to infer that the government will regulate either pricing or returns in the CGD sector. It does, however, show the government’s relentless focus on gas volume growth and on driving gas penetration to over 15% vs. 6% currently in the country.

* CGD volume growth recently has been weak (even without accounting for EV impact) given slow infrastructure build-up by companies. Weak volume growth has been the underlying reason for our negative stance on the CGD sector in the last few quarters.

* If oil prices remain above USD 80/bbl, we believe that the government could push CGD players to expand network more aggressively and build more CGD stations and expand pipeline connectivity, accordingly.

End of infrastructure exclusivity does not automatically imply that market is ripe for new entrants

* As per current regulations, after the end of the infrastructure exclusive period, 80% of the network capacity will be reserved for incumbent and only 20% for the new entrant. This gives a huge advantage to the incumbent. Given that this is a commodity business with little differentiation, we believe that the scale is the key and a new entrant will find it tough to upstage entrenched players.

* We believe that new players could prefer consolidation over head on competition with incumbent players. New players would rather focus on acquiring other GAs next to existing GAs that could help build scale, give network advantage and build CNG clusters for themselves.

* PNGRB had allowed some relaxation in Minimum Work Program (MWP) norms due to Covid-19. Smaller players have struggled to meet MWP targets, especially with respect to piped gas, and we expect further consolidation in the industry in coming years should some of the GAs are surrendered.

MAHGL’s ROE in line with IGL’s

* MAHGL’s ROE is in line with IGL’s but lower than GUJGA’s. We acknowledge MAHGL’s higher EBITDA/scm vs. both IGL/ GUJGA. On a one-year forward P/E basis, MAHGL/IGL/GUJGA are trading at 12.7x/17.3x/26.5x.

* After the price cut, CNG price in Mumbai is comparable with price in Delhi. As such, we do not believe that MAHGL’s margin faces significant risk.

* We are already building in EBITDA margin of INR12.5/scm in FY25/FY26, down from INR13.3/scm in 3QFY24, and as such we do not see any significant earnings downside for the company. 4QFY24 earnings should also see the benefit of lower spot LNG prices, which have corrected from average of USD15.8/mmBtu in 3QFY24 to INR8.3/mmBtu currently.

Valuation and view

* We expect a 4% CAGR in volume over FY23-26, 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.

* We maintain our BUY rating and TP of INR1,665 per share, valuing it at 14x Dec’25E EPS. The stock currently trades at 11.7x FY25E EPS of INR114.9, and our TP implies a multiple of 14.5x FY25E EPS. We believe MAHGL’s valuations should continue to converge closer to IGL’s, given a largely similar volume growth profile and lower EV risk.

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