Buy Mahanagar Gas; target of Rs 1306: CD Equisearch

CD Equisearch's research report on Mahanagar Gas

According to IEA report, the global gas consumption in 2022 witnessed a drop of 1.5% in gas consumption - similar drop was also experienced in 2020. This decline was driven by factors ranging from sharp increase in gas price which led to gas to coal switching dynamics in the power sector and depressed gas use in energy intensive sector to policy actions focusing on energy efficiency and deployment of renewable energy in a structural manner. Bulk of the decline in demand was concentrated in key import market such as Europe and Asia. However, spot gas prices across the key markets experienced a drop of 70% between mid-December 2022 and the end of first quarter 2023, while storage site ended the heating season well above their five-year average which can help increase the demand momentum in the market. According to Modern Intelligence report, India city gas distribution is set to grow at a CAGR of 10% during 2023-2028. In order to capture the benefit of the growing CGD sector, MGL added 128 km to its aggregate steel and PE pipeline network (in total 6535 km) and 12 CNG stations (in total 313 stations) in FY23. After investing over Rs 700 crs in capital assets in FY23, MGL has drawn plans to further invest Rs 600 crs in each of the next two financial years for strengthening its CGD network. Yet risks of regulatory bottlenecks cannot be undone as laying down network requires no small regulatory clearances.

Outlook

However, looming threat of Russia and Ukraine war, Saudi Arabia curtailing oil production and possibility of alternative fuel option becoming more cost effective could jeopardize MGLs volume targets. Challenges in creating distribution network, friction in sourcing natural gas and unexpected regulatory setbacks require investor scrutiny. On balance, we retain our ‘buy’ rating on the stock with a revised target price of Rs 1306 (previous target Rs 1012) based on 12x FY25e EPS of Rs 108.86.

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