Shares of Mahanagar Gas Ltd gained 5 percent on October 3 after brokerage firm Jefferies India upgraded the stock to 'buy' from 'neutral' amid strong earnings visibility.
The brokerage house has revised its target price to Rs 1,320 a share, up 31 percent from the current market price. At 10.30am, the stock was trading at Rs 1,080 on the BSE, up 5 percent from its previous close.
Mahanagar Gas has recently partnered with car manufacturers to provide free fuel cards worth Rs 20,000 to car buyers. They also offer varying amounts of free fuel (Rs 0.2m/Rs 0.35m/Rs 0.5m) to small, medium, and large commercial vehicle buyers. The company aims to boost CNG adoption among LCV fleet operators and is optimistic about growth. Additionally, 500 diesel buses of MSRTC in MGL's gas areas are being retrofitted with CNG kits. These initiatives are expected to drive volume growth to 7-8 percent.
The company also secured 0.2 mmscmd of high-pressure high-temperature gas and could get more due to CGDs' high allocation priority. With additional volumes expected from RIL and ONGC in FY24-25, Jefferies predicts strong profit margins for Mahanagar Gas, with reduced reliance on LNG.
"Mahanagar Gas's recent OEM partnerships should aid volume growth while lower HPHT gas cost and highest priority in allocation provide strong margin visibility over 2HFY24-FY25, in our view. We raise FY24/25 earnings 6 percent/27 percent on higher volume and margin estimates. Risk-reward is favourable with valuations at 10x fwd PE, 1 SD below the last five-year average and healthy dividend yield of 4 percent," said Jefferies India in its note.
In the bull case scenario, Jefferies expects a price target of Rs 1,400 a share, up 39 percent from current market price. Mahanagar Gas is expanding its CNG stations and experiencing significant CNG volume growth due to a substantial increase in vehicles. Margin expansion is surpassing Jefferies' expectations.
Jefferies said strong margin execution drives EPS growth despite Mumbai's infrastructure limitations. Expect margin expansion to be a key catalyst for Mahanagar Gas, with attractive valuations compared to peers and a promising cash flow profile. Mahanagar Gas also stands out favorably among CGD stocks in terms of valuation, the report added.
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