02-04-2024 02:39 PM | Source: Motilal Oswal Financial Services Ltd
Buy Mahanagar Gas Ltd. For Target Rs.1665 Motilal Oswal Financial Services

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Taking measures to propel volume growth

-      Mahanagar Gas Ltd.’s (MAHGL) EBITDA increased by 75% YoY to INR4.5b in 3QFY24, mainly driven by a 63% YoY rise in EBITDA/scm to INR13.3. Volumes grew 8% YoY to 3.7mmscmd driven by CNG and I/C-PNG.

-      CNG growth was led by an increase in vehicle conversions to 22.4k vehicles in 3Q from ~20k in 2Q and ~15k in 1Q. There was a 30% uptick in CNG passenger vehicle conversions in 3Q due to the ‘CNG Mahotsav’ scheme launched by the company. MAHGL spent INR100m in 3Q on the scheme and intends to spend INR200m in 4Q.

-      I/C PNG growth was driven by high consumption among new customers. The company guarantees a 10% discount on gas prices compared to alternate fuels for the first three years to new customers in GA3 region. In GA2, the same benefit is provided to new customers with high gas offtake.

-      According to the management, CNG is currently 50% cheaper than petrol and 18-19% cheaper than diesel on a calorific value basis. MAHGL does not expect CNG volumes to be meaningfully impacted by INR5-10/lit cut in petrol prices. However, the diesel price cut may affect commercial vehicle conversions and the company may consider price cuts in case volume declines significantly.

-      The stock trades at 11.7x FY25E EPS of INR114.9. We value it at 14x Dec’25E EPS to arrive at a TP of INR1,665 and maintain BUY rating on the stock. We continue to prefer MAHGL over IGL owing to its 30% cheaper valuation (on FY26E PE basis) with largely similar growth profile in the medium term and relatively lower EV risk. 

Performance in line with expectations

-      Total volumes were in line with est. at 3.7mmscmd (up 8% YoY).

·         CNG volumes stood at 2.6mmscmd (up 6% YoY).

·         PNG total volumes came in at 1mmscmd (up 11% YoY).

-      EBITDA/scm came in line with our estimate at INR13.3 (up 63% YoY).

·         Resultant EBITDA was also in line at INR4.5b (up 75% YoY).

·         PAT was also in line at INR3.2b (up 84% YoY).

-      For 9MFY24, revenue stood at INR46.8b (flat YoY), EBITDA at INR14.5b (up 82% YoY), and PAT at INR10.2b (up 96% YoY).

·         EBITDA/scm was at INR14.9 (up 77% YoY).

·         Total volume stood at 3.6mmscmd (up 3% YoY).

-      The company has declared an interim dividend of INR12.

·         PNGRB in Dec’23 approved a transfer of 100% equity shares held by existing shareholders of UEPL. MAHGL is in the process of consummating the acquisition as per the SPA.

·         MAHGL in Oct’23 signed an agreement with Baidyanath LNG Pvt. Ltd. to form a joint venture firm, under which Mahanagar LNG Pvt. Ltd. was incorporated in Dec’23.

-      However, it is still in the process of issuing equity shares to shareholders for subscription and is yet to commence its business operations.

Valuation and view

-      During the quarter, MAHGL connected 118,215 households and added 98 PNG-I/C customers. For Raigad GA, 75,432 households were connected and 11km of pipeline was laid.

-      We expect a 4% 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 11.7x FY25E EPS of INR114.9. We value it at 14x Dec’25E EPS to arrive at a TP of INR1,665 and maintain BUY rating on the stock.


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