Buy Mahanagar Gas Ltd For Target Rs.1,850 by Motilal Oswal Financial Services Ltd
Remains the preferred play among CGDs
* MAHGL’s standalone performance was in line with estimates in 3Q amid steady margins and strong volume growth (both in line with estimates). While CNG volumes were 4% below our estimates, I&C-PNG volumes came in 18% above estimates. The impact of APM twin de-allocation was clearly visible as margins declined INR2.4/scm QoQ. Spot LNG prices have remained high, averaging ~USD14/mmbtu, over the past four months and are expected to remain elevated in the mid-term.
* While margins are likely to remain under pressure in 4Q amid high Spot LNG prices, MAHGL has also entered into long-term gas contracts to reduce the impact. The management has guided for 4Q margins to be better than 3Q, as the impact of price hikes taken in Nov’24 and Jan’25 will be fully visible.
* MAHGL currently trades at 11.5x FY26E P/E, which we think is inexpensive. We reiterate BUY on the stock with a TP of INR1,850, based on 16x Dec’26E EPS.
Robust volume growth guidance amid steady margin
* Management expects ~12.5%-13% YoY growth in volumes in FY25. Further, it has guided for 10% YoY volume growth for FY26, with CNG being the key growth driver. EBITDA margins are expected to range between INR9 and INR11 per scm moving forward.
* During the earnings call, management highlighted that volume growth guidance could have upside risk in the long term, should CNG penetration in Mumbai and adjoining areas increase significantly due to government initiatives aimed at reducing pollution. According to a media article, the Bombay High Court took suo motu cognizance and filed a PIL concerning the worsening pollution crisis in the city and its suburbs. Management stated that phasing out MS/HSD vehicles over the long term could be a key action resulting from this development.
Other key takeaways from the conference call
* In 9MFY25, the company had incurred a capex of ~INR6.5b (INR2b-INR2.5b to be incurred in 4Q). Major capex is being spent on steel and low-pressure pipelines.
* UEPL generates cash EBITDA of INR550m per annum.
* The company expects an APM cut of around 5-7% in Apr’25.
* MAHGL is expected to have an INR0.25 margin impact for every INR1/USD change in the exchange rate.
Standalone performance in line; UEPL’s EBITDA declines sequentially QoQ
* Total volumes were in line with est. at 4.1mmscmd (+12% YoY).
* While CNG volumes were marginally below our estimates, I&C-PNG volumes came in 18% above estimates.
* EBITDA/scm came in line with our estimate at INR8.3 (-38% YoY). Gas costs and other expenses were higher QoQ.
* The resultant standalone EBITDA was in line with our estimate at INR3.1b (-30% YoY).
* While other income was higher than expected, depreciation also exceeded our estimates.
* Hence, PAT came in line with our estimate at INR2.3b (our est. INR2.2b, -29% YoY).
* Consolidated figures include Unison Enviro Private Limited (UEPL).
* In 3QFY25, net sales stood at INR18.5b (+3% QoQ).
* EBITDA stood at INR3.3b (-21% QoQ), led by a decline in margins and higher employee benefits expenses QoQ.
* On a QoQ basis, UEPL’s EBITDA declined sharply (-30% QoQ) in 3QFY25, leading to lower consolidated EBITDA QoQ.
* The Board has declared an interim dividend of INR12/share (FV INR10). The record date has been set for 3 rd Feb’25.
Valuation and view
* During the quarter, MAHGL connected 98,469 domestic households and added 83 PNG-I/C customers. The company has also added 83 industrial and commercial customers, bringing the total count to 4,974.
* We expect a 9% CAGR in volume over FY24-27, driven by multiple initiatives implemented by the company, such as collaborating with OEMs to drive conversions of commercial CNG vehicles and providing guaranteed price discounts to new I/C-PNG customers.
* The stock trades at 11.5x FY26E EPS of INR110.3. We value it at 16x Dec’26E EPS to arrive at our TP of INR1,850. Reiterate BUY.
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