Buy Mahanagar Gas Ltd for the Target Rs. 1,760 by Motilal Oswal Financial Services Ltd
Adj. EBITDA margin disappoints
* Mahanagar Gas (MAHGL)’s adj. EBITDA margin was below our est. at INR8.35/scm (est. INR10/scm; reported EBITDA: INR10/scm). CNG volumes came in slightly below our est. at 2.9mmscmd (est. 3mmscmd). While MAHGL’s realization spiked ~INR3/scm QoQ, primarily on account of an INR633.5m provision reversal, gas costs/opex rose 0.3/ 1 per scm QoQ. This led to ~INR1.7/scm QoQ improvement in EBITDA/scm margin.
* We believe MAHGL’s current EBITDA margin should improve, and the following factors should drive margin expansion: 1) the recent CNG price hike of INR1.5/kg and D-PNG price hike of INR1/scm on 8th Apr’25 will support margins; and 2) raw material costs have declined in 1QFY26’td. Lower crude oil and Henry Hub index prices, coupled with INR appreciation QoQ, should reduce gas costs going forward.
* We model MAHGL’s volumes to clock a 10% CAGR over FY25-27 and estimate an EBITDA margin of INR10/scm during the period. MAHGL currently trades at 12.6x FY26E SA P/E, while its one-year forward LTA is 13.6x P/E. Reiterate BUY.
Robust volume growth guidance amid steady margin
* Management expects ~10% YoY growth in volumes in FY26, with CNG being the key growth driver. EBITDA margin is expected to range between INR9 and INR11 per scm going forward.
* Other key takeaways from the conference call
* Elevated marketing/CSR spending of INR110m/INR100m, coupled with higher maintenance activities and pipeline rents, contributed to the sharp rise in 4Q opex.
* Large industries are driving PNG volume growth. I/C sales can reach 1- 1.1mmscmd in the next couple of years (current: 0.6-0.7mmscmd).
* The company's 4QFY25 gas sourcing split was: 2mmscmd APM gas, 1.35- 1.4mmscmd gas via term contracts (1.27/0.1mmscmd was HH/Brent-linked), 0.6mmscmd HP-HT gas, and the rest was sourced through IGX (majority HPHT gas). MAHGL’s current domestic gas allocation is 1.67mmscmd APM gas, and 0.65mmscmd NW gas.
* The company plans to incur a capex of INR13b in FY26.
Adj. EBITDA margin below our estimate in 4Q
* Total volumes were in line with our estimate at 4.2mmscmd (+11% YoY).
* Both CNG and D-PNG volumes came in line with estimates. I/C PNG volumes stood 12% above our estimate.
* EBITDA/scm came in above our estimate at INR10. However, adjusted EBITDA/scm came in at INR8.35 (our est. INR10).
* Resultant EBITDA stood in line with our est. at INR3.8b (-4% YoY).
* MAHGL’s PAT also came in line with our est. at INR2.5b (-5% YoY).
* Depreciation and interest costs stood above our est., while other income came in below our est.
* In FY25, MAHGL’s net sales grew 11% to INR69b, while EBITDA/PAT declined 18%/19% YoY to 15.1b/10.5b.
* The Board recommended a final dividend of INR18/sh (FV: INR10/sh; dividend for the entire year: INR30/sh).
Valuation and view
* During the quarter, MAHGL connected 0.15m domestic households. The company has also added 164 industrial and commercial customers, bringing the total count to 5,105.
* We expect a 10% 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 12.6x FY26E EPS of INR111.5. We value it at 15x FY27E EPS to arrive at our TP of INR1,760. Reiterate BUY.
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