Buy Mahanagar Gas Ltd For Target Rs. 2,000 By Yes Securities Ltd
In line performance led by strong volume growth, spreads remain subdued on higher gas costs
Mahanagar Gas Limited (MGL) delivered a resilient Q3FY25, with a 21.1% QoQ decline in EBITDA to Rs3.1bn and a 20.3% decline in PAT at Rs2.3bn. Strong CNG volumes with in-line growth of 12.1% YoY and 1.8% QoQ while EBITDA spreads were weaker on falling APM supply despite price hikes in CNG. We expect the volumes to grow by ~8%, but EBITDA spreads should be lower in FY25 as compared to FY24 (peak profitability). We maintain our BUY rating on the stock, with a TP of Rs 2,000/share
Result Highlights
? Performance: EBITDA at Rs3.1bn was down 29.9% YoY and 21.1% QoQ. PAT at 2.3bn was down 28.9% YoY and 20.3% QoQ. Overall performance was marginally higher than ours and in line with consensus estimates with CNG volume reaching new highs. The volumes and EBITDA spreads are marginally higher than ours, with lower-than-expected gas costs and in line opex per unit.
? Volumes: Overall volumes at 4.12mmscmd (vs our estimate of 4) was up 12.1% YoY and 1.8% QoQ. CNG volumes at 2.92mmscmd (new high) meeting our estimates, were up 10.9% YoY and 1.2% QoQ. D-PNG volumes at 0.55mmscmd were up 3.9% YoY and 4.3% QoQ. Industrial and commercial sales at 0.65mmcsmd at high (was a surprise), is up 27.1% and 2.9% QoQ.
? Gross realization: Realizations stood strong at Rs46.2/scm on CNG price increase, flat YoY and QoQ, was lower than our expectations. The CNG price was increased by the company on 22-Nov’24 by Rs 2/kg to Rs77/kg, followed by a hike of Rs 1/kg to Rs78/kg a month later.
? Gross Margins (GM): The gas cost was up 16.3% YoY and 9.6% QoQ on falling APM supply and higher spot LNG prices. The gross margins were at Rs14.6/scm, declined 23.7% YoY and 14.1% on QoQ basis.
? APM Allocation shortfall: During Q3FY25, the APM gas allocation for the CNG segment was reduced twice, impacting the company's gas sourcing strategy. The first reduction occurred on 16th Oct'24, bringing the allocation down from 63% to 51%. A further reduction to 37% was implemented on 16th Nov'24. However effective 16th Jan'25, the APM gas allocation was increased back to 51%, a positive development expected to alleviate sourcing pressures in the coming quarters.
? Opex: The opex at Rs6.3/scm (close to our estimates) was higher by 7.9% YoY and flat QoQ, with other operating expenses being higher by 21% YoY and 2.3% on QoQ basis.
? EBITDA spreads: EBITDA spread at Rs 8.3/scm (marginally higher than our estimate of 8.1) is down 37.5% YoY and 22.5% QoQ. The EBITDA spread stood weaker sequentially despite a price increase in CNG mainly due to sharp increase in gas cost following the APM allocation cuts in Oct’24 and Nov’24.
? 9MFY25 performance: EBITDA/PAT was at Rs 11.3/7.9bn vs Rs 14.5/10.2bn last year. The volumes at 4mmscmd (vs 3.6 last year), of which CNG was at 2.9mmscmd vs 2.6. The EBITDA spread was at Rs 10.3/scm vs 14.8 last year.
? The company has declared an interim dividend of Rs 12/shr, ~15% dividend payout on 9MFY25 earnings with the record date of 3rd Feb’25.
Valuation
We expect a 7.9% volume CAGR over FY25-27 with a spread of Rs 10.1/10.8/11/scm in FY25/26/27. The stock is trading at 12.1x/10.5x/9.5x PER FY25e/26e/27e. We maintain our BUY rating on the stock, with a target price of Rs 2,000/share, expect a strong volume growth versus historical average, support from better cash flows and healthy balance sheet.
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