IGI Logo

Thrust on core, combined with new forays

Mahanagar Gas (MGL) hosted its analyst meet on 7-Jun-24, highlighting its strong FY24 performance, and guided to a steady 5-year volume CAGR of 6- 7%/>10% in standalone (SA)/Unison Enviro (UEPL) vs. ~5% during FY19-24. Management indicated a clear focus on infrastructure creation to spur demand growth, with capex target for FY25 at Rs10bn—split between SA and UEPL at Rs8bn and Rs2bn, respectively. APM gas allocation is ~70% of priority vol. now and the shortfall is being met via HP-HT gas. Company targets opening 5-6 LNG stations p.a. with Baidyanath LNG. It could see some margin downtick to spur volume growth, but margin superiority vs. peers could sustain on operating efficiencies, high population density, etc. We retain BUY on MGL and our Mar25E TP of Rs1,680/sh, implying an attractive consol. target P/E of 13.2x.

Infrastructure and Volumes:

MGL plans to add 0.3mn DPNG connections p.a. and this would aid DPNG volume growth of 5-6%. Mgmt. estimates that FY25 SA volume growth of 6-7% would be supported by lower CNG prices and conversions; CNG is currently at 20%/50% discount to diesel/petrol. Company plans to add 60/30 CNG stations in SA/UEPL, respectively, in FY25, besides expanding its pipeline network. Mgmt. expects further decline in APM allocation going ahead, as CGD demand rises. MGL has 0.5/0.75mmscmd of HP-HT/term contracts to meet the APM shortfall/I-C demand. Current volumes at UEPL stand at ~0.13mmscmd vs 1.2mmscmd potential in 7-8 years.

LNG Retailing:

MGL is setting up LNG stations via its 51:49 JV with Baidyanath LNG. It targets setting up 5-6 LNG stations p.a. with the first coming up in Aurangabad. Its initial focus will be on logistics & manufacturing hubs in Maharashtra, with GoI target to set up 50 LNG stations p.a. Capex cost per LNG station is Rs50-60mn, and Mgmt. indicated need for 200 trucks to run an LNG station with reasonable profit. Currently, LNG is being priced at 15-20% discount to diesel. MGL intends to run an asset-light LNG retailing model. MGL is working with Ashok Leyland for LNG trucks and has received 12 such trucks for transporting gas through cascades. Tata and Volvo are also working on LNG trucks for India; mgmt. pointed that if LNG replaces 5% of diesel demand in India, it would require a 1,000 LNG station-network. Mgmt. indicated that setting up LNG stations in own GAs would be favorable as boil off gas could be used for CNG-PNG operations. The LNG retail network is likely to come up in the steel & cement corridors of India.

Other Key Points:

Discussions are under way to get natural gas under the GST regime, whereas savings on GST implementation would have to be passed on to customers. Mgmt. expect GST rate at 12% (vs current structure of excise duty at 14.5% + state VAT + procurement tax); this could benefit stakeholders across the value chain. Comments have been sought by end Jun-24 on the new central excise bill. The next hearing on common carrier norms is on 31-Jul-2024 with the Delhi HC and the matter is sub-judice till then. Earlier, DPE norms had return on investment as a criteria for evaluating performance vs. shareholder returns and PAT growth now among others.

Incentive scheme:

Company has discontinued its incentive program for PVs since end Dec23, but may restart it later in collaboration with OEMs. On the CV front, the incentive program was closed by end Mar-24, and CVs required incentives as well as assurances to shift to CNG after CNG prices rose in FY24 due to spike in APM gas prices. Customers using retrofits had range-anxiety as well as quality-related doubts, both of which have been well addressed by the company. The incentive scheme for CVs may be revived soon, whereas OEMs are currently offering 30 factory-fitted vehicle options, going up to a 20-ton capacity. Current, monthly runrate of retrofit/OEM sales is 200/400-500. Regulations do not allow plying of >8-year diesel truck in Mumbai; hence, this could result in sustained retrofitment-led demand.

EV and CBG:

Company has invested Rs960mn in 3ev Industries Pvt for 31% equity stake, with Rs500mn invested till Mar-24, with the balance being milestone-based going ahead. Mgmt. intends to learn about the EV eco-system through this investment. 3ev Industries is a manufacturer of L5 category three-wheel cargo, passenger and ICE-to-EV converted electric vehicles to meet e-commerce needs, retail, and last-mile logistics. 3ev currently has operations in Bangalore, and plans to venture into AP and Maharashtra as well. 3ev has ~30% stake in 3eco, which is operating an EV-based 3W fleet to transport goods for last-mile logistics and one vehicle can carry up to 800kg, thereby competing with Tata Ace. EV norms in Delhi are more stringent due to higher pollution as well as policy focus, whereas the Mumbai EV policy was introduced in 2022, but detailed contours are missing. However, the Mumbai EV policy mentioned conversion of 25% of aggregator cab additions to become EVs. MGL is working to firm up a concession agreement with the BMC for setting up a CBG plant of 1,000tpd capacity in Mumbai with municipal solid waste as feedstock

For More  Emkay Global Financial Services Ltd Disclaimer http://www.emkayglobal.com/Uploads/disclaimer.pdf & SEBI Registration number is INH000000354