Buy Mahanagar Gas; target of Rs 1285: Sharekhan

Sharekhan's research report on Mahanagar Gas

Q4FY23 PAT of Rs. 269 crore (up 56% q-o-q) was significantly above our estimate led by large beat in EBITDA margin at Rs. 12.8/scm (up 57% q-o-q) on lower gas costs, which offset a marginal miss in gas sales volume at 3.4 mmscmd (down 1.2% q-o-q) Surge in EBITDA margin was driven by replacement of expensive spot LNG with HP-HT gas and steep decline in spot LNG prices to $17/mmBtu (versus $33/mmBtu in Q3FY23). CNG volumes declined by 2.6% q-o-q to 2.4 mmscmd while D-PNG/I&C volume grew by 2.4%/2.9% q-o-q to 0.51/0.49 mmscmd. The management maintained its 5-6% volume CAGR guidance for next few years but expects upside as recent cut in CNG price (post capping of APM gas price at $6.5/mmBtu) would improve CNG conversions going forward. Gas costs now seem in comfortable position and the management expects to sustain current margin for a quarter. We have increased our FY24-FY25 earnings estimate by 11-12% to factor higher margin assumption.

Outlook

Despite a sharp 27% rise in stock price in CY23YTD, valuation of 10.5x its FY25E EPS is attractive given steep discount to peers as well as to MGL’s historical PE. We see scope for valuation re-rating as recent acquisition of Unison Enviro could allay low volume growth concerns for MGL. Hence, we maintain a Buy on MGL with an increased PT of Rs. 1,285.

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