Moneycontrol Bureau
Kotak Securities has initiated coverage on Mahanagar Gas (MGL) with a buy rating and price target of Rs 675 per share as government initiatives and fall in crude oil prices may support margin and volume growth going ahead.
"Margin improvement and moderate volume growth makes us positive on the growth prospects of MGL. Additionally, debtfree balance sheet, strong free cash flow and healthy return ratios also provide high comfort," the brokerage house reasons.
Mahanagar Gas is India's third largest city gas distribution (CGD) network company with over 20 years of experience in supplying natural gas in Mumbai, Thane and Navi Mumbai.
"There exists a meaningful growth potential for the company in the region due to anticipated growth in the number of compressed natural gas (CNG) operated vehicles considering the current cost effectiveness of CNG as a fuel, potential growth in the number of households in the areas of operation and commencement of gas supply to consumers in the Raigad district," the brokerage house says.
MGL has gas distribution rights in Mumbai till 2020 & its adjoining areas till 2030 and in Raigad district till 2040.
Currently, MGL has a customer base of 0.47 million vehicles (potential of around 2 million vehicles) and 0.86 million households (potential of 3 million plus households) in its geographical area.
To further accelerate its growth momentum, MGL plans to set up 83 CNG stations (188 currently) and lay 675 km pipeline network (4,600kms currently) over the next five years.
Further, the brokerage house says it expects domestic gas price to fall meaningfully on account of fall in international gas prices which can materially improve MGL's margins and volumes.
MGL will be the key beneficiary of the fall in domestic gas prices as it sources 85-86 percent of its requirement domestically. There is a strong co-relation between MGL's raw material cost and its margins.
Domestic gas prices are due for revision in October 2016 and the same are expected to be revised downward, the brokerage feels.
CNG is 37 percent cheaper to diesel and 55 percent economical to petrol, while domestic PNG is 5.3 percent cheaper to subsidized LPG.
Over FY11-16, MGL has posted revenue growth of 14.4 percent CAGR, good operating and free cash flows, generated healthy return on equity of more than 20 percent and maintained 40 perent plus dividend payout.
Kotak expects earnings per share to grow at 12 percent CAGR over the next two years, driven by steady 4-5 percent volume growth and sustainable per unit EBITDA margins at Rs 6.4-6.6/standard cubic meter (scm).
The company has declared a final dividend of Rs.17.5/share (on pre-IPO equity base) with an ex-date of September 15. At current price dividend yield is around 3 percent.
At 10:37 hours IST, the scrip of Mahanagar Gas was quoting at Rs 591, up Rs 4.45, or 0.76 percent on the BSE.Posted by Sunil Shankar Matkar
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