Buy Mahanagar Gas Ltd for the Target Rs.1,700 by Motilal Oswal Financial Services Ltd
FY26 margin and volume guidance moderated
* Mahanagar Gas (MAHGL)’s 1QFY26 adj. EBITDA margin of INR9.7/scm was below our est. of INR10.6/scm (reported EBITDA: INR12.9/scm). Total volumes were in line with our estimate at 4.2mmscmd (up 10% YoY). On a QoQ basis, adj. EBITDA margin expanded by INR1.3/scm (lower than our est. of INR2.2/scm growth), as adj. realization improved INR0.6/scm and opex decreased INR0.7/scm. Gas cost remained flat QoQ at INR32.1/scm.
* MAHGL reported a soft 7.5% YoY growth in CNG volumes, led by lower CNG vehicle additions in 1Q and a sequential decline in BEST bus volumes. Further, the 7% QoQ decline in CNG APM gas allocation offset the gains from higher New Well (NW) gas allocation and the benefit of lower-priced Henry Hub-linked gas (with HH index down 23% QoQ in 1Q), leading to a broadly flat overall gas cost on a sequential basis.
* Management has guided for an INR0.6-0.7/scm CNG EBITDA margin impact due to PNGRB’s upcoming shift from a 3-zone to 2-zone gas transmission tariff regime. While we continue to believe that MAHGL is best-placed to pass on the cost increase to customers, we lower our adj. EBITDA/scm margin assumption for FY26/FY27 by INR1/INR0.5 to INR9.2/INR9.5.
* We model MAHGL’s volumes to clock a 9% CAGR over FY25-27 and estimate an EBITDA margin of INR9.2-9.5 per scm during the period. MAHGL currently trades at 13.2x FY27E SA P/E, while its one-year forward LTA is 13.7x P/E. Reiterate BUY.
Volume growth and EBITDA margin guidance lowered slightly
* Management expects high-single-digit YoY growth in volumes in FY26, mainly led by CNG. EBITDA margin is expected to range around INR9-9.5 per scm in FY26.
* Other key takeaways from the conference call
* CNG volume growth moderated to ~7.5% YoY in 1Q, likely due to a slowdown in CNG vehicle additions owing to higher vehicle costs, lower volumes from the bus segment, and a marginal impact from the early onset of the monsoon.
* UEPL merger update: The merger is expected to be completed by 15 Aug’25, and the company is set to report merged financials starting 2QFY26. The merger is also likely to yield some tax benefits.
* Zonal tariff split and margin impact: Currently, Zone 1 accounts for 68-70% and Zone 2 makes up 30-32% of volumes. The revised zonal tariff is estimated to impact CNG EBITDA margins by around INR0.6-0.7/scm.
* In 1Q, CNG APM allocation stood at 37% (vs. 44% in 4QFY25). MAHGL sourced ~1.69/0.5/ 1.15/0.5/0.4 mmscmd gas from APM/New Well Gas/ Henry Hub linked/ HP-HT / via IGX.
* The company plans to incur a capex of INR11-13b in FY26.
Provision reversal drives beat; volumes in line
* Total volumes were in line with our estimate at 4.2mmscmd (+10% YoY)..
* Both CNG and D-PNG volumes came in line with estimates. I/C PNG volumes stood 11% above our estimate.
* EBITDA/scm came in above our estimate at INR12.6. However, adjusted EBITDA/scm came in at INR9.7 (our est. INR10.6).
* The margin beat was on account of the reversal of provisions amounting to INR1.1b (impact of INR2.9/scm), based on negotiations with OMCs with respect to the trade margins.
* On a QoQ basis, adj. EBITDA/scm margin expanded by INR1.3 (lower than our est. of INR2.2 growth), as adj. realization improved INR0.6/scm and opex decreased INR0.7/scm. Gas cost remained flat QoQ at INR32.1/scm.
* Reported EBITDA came in 20% above our est. at INR4.9b (+16% YoY).
* MAHGL’s PAT also came in 18% above our est. at INR3.2b (+14% YoY).
* Depreciation stood above our est., while other income was below our est.
Valuation and view
* We expect a 9% CAGR in volume over FY25-27, 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 13.2x FY27E EPS of INR111.9. We value it at 15x FY27E EPS to arrive at our TP of INR1,700. Reiterate BUY.
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