IGI Logo

Solid performance; valuation expensive

Mahanagar Gas Ltd (MGL) distributes natural gas to hospitals, nursing homes, hotels, flight kitchens and restaurants in India.

* In Q1FY25, MGL’s consolidated revenue surged 8.4% YoY to Rs. 1,832cr, supported by strong volume growth.

* EBITDA declined 16.2% YoY to Rs. 437cr, with margins contracting to 23.8% due to increase in natural gas costs.

* Increased capital expenditure, expanding city gas distribution (CGD) infrastructure, and OEM partnerships are expected to support MGL’s performance. Strong volume growth and improvement in margin from recent CNG price hikes are also expected to augur well for MGL.

* However, we downgrade the stock to SELL amidst expectation of weak earnings growth & ROE in FY26, declining APM allocations and current high valuations. We suggest a revised target price of Rs. 1,673 based on 13.5x FY26E adjusted EPS.

Volume growth drives topline

In Q1FY25, MGL reported a significant revenue increase of 8.4% YoY, reaching a total of Rs. 1,832cr, driven by substantial volume growth. Net compressed natural gas (CNG) sales experienced a marginal decline of 0.2% YoY, totalling Rs. 1,106cr despite an impressive 11.7% YoY volume growth, reaching 252.3 standard cubic metre million (SCMmn). The growth was largely attributed to the addition of ~20,800 odd vehicles by the Maharashtra State Road Transport Corporation. However, net sales of piped natural gas (PNG) demonstrated a notable increase of 12.0% YoY, totalling Rs. 474cr, fuelled by a 10.5% YoY rise in domestic PNG volumes, reaching 49.8 SCMmn, and a 23.8% YoY increase in industrial PNG volumes, totalling 49.0 SCMmn. Additionally, Unison Enviro Private Limited (UEPL), subsidiary of MGL, achieved an average sales volume of 0.168 million metric standard cubic meters per day (mmscmd). Thus, the total sales volume for the quarter reached 4.026 mmscmd.

Increased costs weigh on margins

EBITDA declined 16.2% YoY to Rs. 437cr, while margins dropped 700bps, reaching 23.8%. Such decline was primarily due to increased costs associated with natural gas, traded items, excise duty and other expenses. As a result, the reported profit after tax fell 21.6% YoY to Rs. 289cr, largely due to elevated depreciation and interest costs.

Key concall highlights

* In Q1FY25, MGL expanded its CGD infrastructure, connecting 35,544 new domestic households and 104 industrial/commercial customers. UEPL also connected 341 additional domestic households.

* MGL extended its steel and polyethylene pipeline network by 85.51 km, reaching a total length of 7,054 km.

* The company invested Rs. 250cr in capital expenditure for Q1FY25. It added two CNG stations, reaching a total of 348, while UEPL added one. Plans are underway to add 75 CNG stations in FY25, with 50 by MGL and 25 by UEPL.

* The company expects a strong volume outlook, with 7% growth for MGL and mid-teens growth for UEPL for the coming quarters.

Valuation

Robust volume growth drove the company's revenue performance in Q1FY25. MGL’s strategic initiatives should continue to support its performance. However, decreasing APM allocations, weak expectations of earnings growth and ROE in FY26 and current high valuations provide limited upside potential. Hence, we downgrade the stock to SELL rating, with a revised target price of Rs. 1,673 based on 13.5x FY26E adjusted EPS.

For More Geojit Financial Services Ltd Disclaimer https://www.geojit.com/disclaimer 

SEBI Registration Number: INH200000345