PL Stock Report: Mahanagar Gas (MAHGL IN) - Q1FY24 Result Update - Lower gas cost drives earnings - Downgrade to 'HOLD'

Mahanagar Gas (MAHGL IN) - Swarnendu Bhushan - Co-Head of Research, Prabhudas Lilladher Pvt Ltd

Rating: HOLD | CMP: Rs1,056 | TP: Rs1,056

Q1FY24 Result Update - Lower gas cost drives earnings

Quick Pointers:

§ Highest ever EBITDA/scm of Rs 16.8/scm during the quarter.

§ Volume declined 1% YoY given drop in CNG volume led by higher prices, decline in CNG buses and and fall in vehicle conversion.

We downgrade our rating from Buy to ‘Hold’ with a TP of Rs 1056 (previous TP of Rs1260) based on 12x P/E on FY25EPS, given no significant anticipation in sales volume growth. Mahanagar Gas (MGL) reported strong operational performance with an EBITDA of Rs 5.2 bn (+34% Q/Q; PLe: Rs 4.1 bn), owing to the fall in gas prices. PAT came in at Rs 3.7 bn (+37% Q/Q; PLe: Rs 2.8 bn). Although gas sales volume declined YoY marginally, fall in gas prices contributed to the margin improvement. We build in 3-5% volume growth and an EBITDA/scm of Rs13.2/10 over FY24/FY25. EPS growth over FY23- FY25 is expected to be 4.9%CAGR, while dividend yield is expected to be in the range of 3-4%. The company has a cash balance of Rs18-20 bn and is currently trading at 7.3x FY25E EV/EBITDA. Downgrade to ‘Hold’.

§ Volumes decline marginally: Gas sales volume stood at 3.41 mmscmd, flattish QoQ. PNG sales at 0.9 mmscmd were down 3% QoQ but were countered by a 3% QoQ growth in CNG sales at 2.5 mmscmd. While domestic PNG sales were down 3% QoQ to 0.5 mmscmd, industrial/commercial volumes at 0.4 mmscmd were down 4% QoQ. On a YoY basis, CNG volumes fell 2% while PNG volumes grew 2%.

§ Significant growth in margins: Revenue for the quarter stood at Rs 15.4 bn, down 5% QoQ due to price cuts undertaken. The company witnessed sharp fall in gas procurement costs due to revision in APM price from US$8.57/mmbtu to a ceiling of US$6.5/mmbtu and continued softening in spot LNG prices. This helped the company achieve a gross margin of Rs 22.3/scm in Q1, up Rs3.6/scm QoQ and Rs 7.9/scm YoY, respectively. Subsequently, EBITDA margin came in at 33.9% with an EBITDA/scm of Rs 16.8/scm, up by Rs 4/scm sequentially and Rs 7.7/scm YoY.

§ Striking a balance between margins and volume: Going ahead, the company envisages to increase its volumes aided by softening of term and spot LNG prices, and revision in domestic gas prices. It is also procuring HPHT gas and securing long term contracts to reduce reliability on spot LNG. The EBITDA/scm is likely to be maintained at Rs 10/scm in the long term. The company has guided for a 5% growth in sales volumes and may undertake price cuts depending on alternate fuel prices and sourcing costs going down.

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