Buy Mahanagar Gas; target of Rs 1133: HDFC Securities

HDFC Securities' research report on Mahanagar Gas

MGL’s total volume was up merely 3.3% YoY and flat QoQ to 2.97mmscmd. CNG volumes were up 2% YoY to 2.2mmscmd while PNG volumes were up 7% YoY to 0.8mmscmd. The State Department Corporation had scrapped a few buses in Q1 that led to subdued volume growth for CNG. Tendering process to add 500 new buses has been already begun. The company clocked the highest ever per unit EBITDA spread of Rs 10.3/scm vs Rs 8.6/scm in 1QFY19 and Rs7.9/scm in 4QFY19. This is attributable to better spreads earned from industrial/commercial customers (~14% of total volume), for whom 100% gas is sourced on spot. Fall in oil prices is leading to narrower spreads between NG and alternate fuels. Hence, MGL will have to take price cuts. Thus, we do not foresee the current quarter margins sustaining in ensuing quarters. Rather, we expect them to correct to Rs. 8.4/scm for FY20.

Outlook

We maintain BUY on MGL post an impressive performance on spreads albeit disappointing volume growth. Our TP is Rs 1,133/sh (19x Jun-21E standalone EPS).