Buy Mahanagar Gas; target of Rs 1285: Sharekhan

Sharekhan's research report on Mahanagar Gas

MGL is well-suited among city gas distributors (CGDs) to shield its margins from any cut in petrol/diesel prices (going by media reports) given its industry-leading EBITDA margin would help it easily absorb Rs2-3/kg CNG price cut. Sharp differential of 26% between CNG and petrol prices in Mumbai and savings of ~37% in CNG running costs versus petrol would significantly aid the shift to CNG going ahead. We model a gas sales volume CAGR of 6% over FY23-25E (in line with management guidance). Favourable CNG economics versus petrol offers scope for an upside to volume growth. UEPL acquisition is likely to be completed in FY24, allaying volume growth concerns versus peers. UEPL’s Ratnagiri GA seems a strategic fit for MGL, as it is next to the latter’s Raigad GA, and would aid faster ramp-up of the Ratnagiri GA.

Outlook

Though MGL’s stock price has run up 23% so far in 2023, its valuation of 10x its FY25E EPS is attractive and at a steep discount to peers and its own historical PE. We see scope for valuation re-rating as recent UEPL acquisition could drive long-term volume growth. Hence, we maintain a Buy with an unchanged PT of Rs. 1,285.