ICICI Securities research report on Mahanagar Gas
We met the senior management of Mahanagar Gas (MGL) on 26th June ’23 to get a sense of its recent developments and future outlook. Presented below are the key takeaways: Reduction in gas costs is a positive, but results may reflect only by Q2FY24: Post the Rs8/kg reduction in CNG prices at the beginning of Q1FY24, volumes have remained in the range of 3.45-3.65mmscmd (flat to 6% YoY growth) in Q1, with the beginning of summer vacations impacting bus volumes. Q2, however, is likely to see stronger momentum, with the reopening of schools, advent of monsoons (increasing time spent on the road) and the flow through of higher conversions due to better pricing to drive stronger growth. Price differentials are strong; price stability is a strong driver of demand: In addition to the strong ~40-50% price discount to petrol and diesel driving CNG demand, pricing stability over the next 2 years may drive a steady demand momentum. With greater development of Raigadh (Maharashtra) and more aggressive progress in GA-2 (Thane), we believe there is an upside risk to our estimate of ~6% volume growth over the next 3-5 years. Also, commercial vehicle demand is likely to pick up, with more OEMs, contiguous development around MMR proving refueling options and favourable costs driving demand over the next 3- 5 years. Therefore, quarterly run rate of ~2,500 CVs can jump to ~3,500 by the end of FY24E.
Outlook
The stock has performed strongly in recent months (absolute return of 36% in 12 months, outperforming Sensex by 15%). We remain bullish, with favourable multiples (at CMP, stock trades at just 10.1x FY25E EPS and 4.9x EV/EBITDA) and stronger prospects. We estimate an EPS CAGR of 13% over FY23-FY25E, supported by volume CAGR of ~6.5% p.a., gross margin of Rs15.9/scm and EBITDA/scm of Rs10.6/scm. Our DCF valuation (3% volume growth and EBITDA/scm of ~Rs10/scm) delivers a target price of Rs1,290/sh, ~25%upside from CMP. Reiterate BUY.
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