Mahanagar Gas: Retain ‘buy’ with higher TP of Rs 1,390

By: |
June 12, 2020 7:46 AM

Q4FY20 PAT was up 25% y-o-y (higher Ebitda, lower tax rate) but fell 11% q-o-q. Management has indicated volumes to be ~ 25-30% of normal in lockdown (Apr/May).

mahanagar gas, investment in mahanagar gas, where should I invest, expert advise on investments, should I invest in mahanagar gas, analyst cornerWe build in CNG volume at ~ 50% of normal during Q1FY21E. (Image: Reuters)

MGL’s Q4 volumes fell 9% q-o-q (one week of lockdown). But gross margin expanded sharply to Rs 15.3/scm (JEFe: Rs 14.6/scm) while the Ebitda margin (Rs 9.4/scm) was a tad ahead due to the higher opex. Lower gas costs and partial pass-through could boost margins further amid weak volume in FY21E (lockdown: Total volume 25-30% and implied CNG,I/C 13-19% of normal). With valuations also reasonable at 11x FY22E and 7% FCF yield, we maintain ‘buy’ with a higher Rs 1,390 PT.

MGL volumes fell 7% y-o-y and 9% q-o-q to 2.8 mmscmd in Q4FY20, driven by a week of lockdown. But adjusted for the lockdown impact, we think volumes would have been at 3.0 mmscmd (3% lower q-o-q which isn’t negative considering commuting had reduced since mid-March, affecting CNG volume).

Gross margin rose sharply to Rs 15.3/scm, coming ahead of expectations (JEFe: Rs 14.6/scm, Q3FY20: Rs 13.9/scm). While Rs 0.7-0.8/scm can be explained by the realignment of PMT gas leading to lower domestic gas costs, margins in the industrial segment must have improved too.

Ebitda margin expanded to Rs 9.4/scm (Q3: Rs 9/scm) but came only slightly ahead of JEFe (Rs 9.3/scm) due to higher opex (Rs 5.9/scm), which rose 12% q-o-q even on an absolute basis (Rs 133 crore), despite lower volumes. This could partly normalise in the coming quarters though (as we saw after Q4FY19).

Ebitda rose 11% y-o-y to Rs 240 crore but was down 6% q-o-q still coming 6% ahead of JEFe, largely driven by volume beat. Q4FY20 PAT was up 25% y-o-y (higher Ebitda, lower tax rate) but fell 11% q-o-q. Management has indicated volumes to be ~ 25-30% of normal in lockdown (Apr/May). Since domestic piped gas volume was unaffected, this implies CNG and industrial/ commercial volumes to be ~ 13-19% of normal.

We build in CNG volume at ~ 50% of normal during Q1FY21E but this could recover to normal levels by Q3FY21E. With CNG station additions and CNG vehicle conversions potentially challenging in the near term, we build in a modest 3.1%/3.7% FY20-22E CAGR in CNG/overall volumes. And yet, margin could be a tailwind for earnings. APM gas cost was reduced by ~ 25% on Apr 2020, which was partially passed through (price cut of Rs 2/kg in CNG vis-a-vis estimate margin neutral cut of ~ Rs 3.4/kg). While margins rose in FY20 (in line with our investment thesis), we expect a further rise in margins to Rs 15.6/scm (gross) and RS 10.1-10.4/scm (Ebitda) in FY21-22E.

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