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Our View

Mahanagar Gas Limited (MGL) delivered a marginally better than expected Q1FY25, with a 6.3% QoQ increase in EBITDA to Rs4.2bn and a 7.4% QoQ increase in PAT to Rs2.8bn. Strong CNG volumes with a above normal growth of 11.7% YoY and 4% QoQ while EBITDA spreads were stronger despite price cuts and marginally lower gas cost sequentially. The volumes would grow by 7-8%, but EBITDA spreads should be lower in FY25 as compared to FY24 (peak profitability). We maintain our NEUTRAL rating on the stock given a sharp rally in the stock price, revised TP to Rs 1,860/shr (vs earlier Rs 1,730)

Result Highlights

* Performance: EBITDA at Rs4.2bn was down 19.7% YoY and up 6.3% QoQ. PAT at 2.8bn was down 22.8% YoY and up 7.4% QoQ. Overall performance was better than consensus estimates and marginally better than ours with CNG volume reaching new highs. EBITDA spreads positively surprised as realizations stood better and opex lower.

* Volumes: Overall volumes at 3.86mmscmd (vs our est of 3.86) was up 13.1% YoY and 2.1% QoQ. CNG volumes at 2.77mmscmd (new high) vs our est of 2.72, were up 11.7% YoY and 4% QoQ. D-PNG volumes at 0.55mmscmd were up 10.5% YoY but down 2.8% QoQ. Industrial and commercial sales at 0.54mmcsmd fell from last quarter’s high, is up 23.8% YoY but down 2.1% QoQ.

* Gross realization: Realizations stood strong at Rs45/scm despite CNG price cut, declining 8.8% YoY and flat QoQ, probably supported from higher industrial PNG realizations. The CNG price was cut by the company on 6-Mar’24 by Rs 2.5/kg to Rs73.5/kg.

* Gross Margins (GM): The gas cost was flat YoY and down 1.1% QoQ despite a falling APM supply. The gross margins were at Rs17.9/scm, declined 19.7% YoY and stood flat on QoQ basis.

* Opex: The opex at Rs6/scm (lower than our estimates) was higher by 8.5% YoY and lower by 6.5% QoQ, with other operating expenses being higher by 26.3% YoY and lower by 5.5% on QoQ basis.

* EBITDA spreads: EBITDA spread at Rs 11.9/scm (higher than our est of 11.1) is down 29% YoY and up 4.1% QoQ. The EBITDA spread stood strong sequentially despite a price cut in CNG.

Valuation

We expect a 7.7% volume CAGR over FY24-26 with a spread of Rs 11.5/scm. The stock is trading at 16x/14.9x PER FY25e/26e. We maintain a NEUTRAL with a revised target price of Rs 1,860/share (vs earlier Rs 1,730/shr), also expect a strong volume growth versus historical average, support from better cash flows and healthy balance sheet

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