Sell Mahanagar Gas Ltd for the Target Rs.1,266 by Geojit Financial Services Ltd
Lower margins hurt growth prospects
Mahanagar Gas Ltd (MGL) distributes natural gas to households, commercial establishments and industries in India.
• In Q1FY26, the company’s consolidated revenue rose 24.6% YoY to Rs. 2,282cr due to growth in sales volume and the customer base. • Gas volume increased 9.6% YoY to 4.229 MMSCMD, comprising 2.981 MMSCMD compressed natural gas (CNG), 0.569 MMSCMD domestic CNG and 0.679 MMSCMD industrial and commercial segment supply.
• The company has a strong customer base, with over 1.13mn CNG vehicles (vs 1.11mn+ in Q4FY25) and 2.85mn households (vs. 2.83mn+) with piped natural gas.
• UEPL, an MGL subsidiary, reported a strong Q1FY26 performance, with the addition of four new CNG stations, 3,338 new domestic households, and one new industrial customer. It also laid 73.8 km of pipeline, suggesting strong growth momentum with potential for further expansion in the coming quarters.
• EBITDA increased 14.6% YoY to Rs. 501cr, driven by strong revenue growth. However, the EBITDA margin contracted by 190bps to 21.9%, primarily due to a 30.5% increase in the cost of materials and a 22.0% rise in other expenses.
Outlook & Valuation
MGL delivered a steady performance, driven by its robust infrastructure network, strong customer base and a reliable, albeit costlier, gas sourcing strategy. However, looking ahead, we expect MGL’s focus on expanding its footprint in newly acquired geographical areas to come at the behest of discounts as it tries to balance lost volumes due to faster EV adoption and declining institutional demand. Additionally, we also factor in the management’s reduced margin guidance and unpredictability in APM and new well gas allocations. Further pass-through of cost increases could be limited, which can hurt margins. Hence, we downgrade our rating from ACCUMULATE to SELL on the stock, with a revised target price of Rs. 1,266, based on 11x FY27E adj. EPS.
Key concall highlights
• The company has connected approximately 2.85 million households, with 16,348 domestic households added in Q1FY26, indicating a steady expansion of its customer base.
• MGL laid 79.08 kilometres of pipeline in Q1FY26, increasing the total length to 7,538.63 kilometres, demonstrating a significant investment in infrastructure development to support growth.
• It also added 84 new industrial and commercial customers in Q1FY26, increasing the total customer base to 5,161, representing growth in customer acquisition.
• The addition of 20,332 CNG vehicles in Q1FY26 represents a notable increase, demonstrating the company's ability to attract new customers and expand its market share in the CNG segment.
• The scheme of amalgamating Unison Enviro Private Limited (UEPL) with MGL received final approval from the National Company Law Tribunal on July 9, with an appointed date of amalgamation of February 1, 2024.
• The capex for MGL, including UEPL, is expected to be around Rs. 1,100cr to Rs. 1,300cr for the next 2 years.
For More Geojit Financial Services Ltd Disclaimer https://www.geojit.com/disclaimer SEBI Registration Number: INH200000345
