Viewpoint

Mahanagar Gas Limited

Low domestic gas price to drive up margins

Mahanagar Gas Limited’s (MGL’s) Q3FY2020 adjusted PAT grew by

Sector: Oil & Gas
25.9% y-o-y (down 13.1% q-o-q) to Rs. 187 crore, in line with our estimate
Result Update of Rs. 186 crore as miss in EBITDA margin at Rs. 9.2/scm (up 5.1% y-o-y;
down 7% q-o-q) was offset by higher-than-expected other income (up
Change
40% y-o-y) and a marginally lower effective tax rate. Gas sales volume
View: Positive  grew by 3% y-o-y to 3.1 mmscmd. We expect MGL to sustain its high
EBITDA margins given an ability to retain some part of gas cost savings
CMP: Rs. 1,196
(domestic gas prices are likely to drop further in H1FY2021E) and
Upside potential: 15% á could deliver decent volume growth of 5-6% over next couple of years,
supported by ramp-up volumes at Raigad district and addition of 500
á Upgrade  No change â Downgrade
new CNG BEST buses. MGL’s valuation at 13.8x FY2022E EPS is at a
discount of 10% to its historical PE of 15.3x and at a steep 48% discount
Company details to that of IGL on FY2022E PE basis. We expect the valuation gap with
peers to narrow down given MGL’s industry-leading EBITDA margin of
Market cap: Rs. 11,810 cr ~Rs. 9-10/scm and a superior RoE of 25-27%. Hence, we stay Positive on
MGL and expect a 15% upside from current levels.
52-week high/low: Rs. 1,247/755
Key positives
NSE volume: (No of
8.2 lakh ŠŠ PNG gas volume growth of 5% y-o-y to 0.8 mmscmd.
shares)
ŠŠ Industrial gas sales volume has potential to jump 3x to 0.6 mmscmd
BSE code: 539957 based on the National Green Tribunal’s directions to curb pollution.
NSE code: MGL Key negatives

Sharekhan code: MGL ŠŠ Continued slow growth in CNG sales volume at 2.4% y-o-y to 2.2
mmscmd
Free float: (No of Our Call
6.7 cr
shares)
Valuation - Maintain Positive view; expect a 15% upside potential: We
have fine-tuned our FY2020E EPS to factor in 9MFY2020 results and
Shareholding (%) increased our FY2021E-FY2022E EPS to factor in slightly higher EBITDA
margin as domestic gas prices are expected to further decline in H1FY2021E
Promoters 32.5 after a sharp cut of 12.5% to $3.23/mmBtu for H2FY2020. Despite a sharp
run-up of 52% in MGL’s stock price in the last six months, we believe that
FII 31.9 the stock’s valuation of 13.8x its FY2022E EPS (10% discount to average
historical one-year forward PE multiple of 15.3x and 48% discount to that
DII 16.1 of IGL FY22E PE of 26.4x) is attractive and makes it the cheapest stock
in the domestic CGD space. Additionally, the company’s industry-leading
Others 19.5
EBITDA margin of ~Rs. 9-10/scm and superior RoE of 25-27% would help
narrow its valuation gap vis-à-vis IGL. Hence, we maintain our Positive
view on MGL and expect a 15% upside from current levels.
Price chart
1300 Key Risks
1200
1100
Change in domestic gas allocation policy, depreciation of Indian rupee,
1000 and any adverse regulatory changes could affect volumes, margins and
900 valuations.
800
700
Valuation (standalone) Rs cr
Feb-19

Feb-20
Jun-19

Oct-19

Particulars FY18 FY19 FY20E FY21E FY22E

Revenues 2,233 2,791 3,069 3,355 3,603
OPM (%) 34.9 31.7 34.1 34.2 34.1
Price performance Adjusted PAT 478 546 750 808 854
% y-o-y growth 21.5 14.3 37.3 7.8 5.7
(%) 1m 3m 6m 12m
Adjusted EPS (Rs.) 48.4 55.3 75.9 81.8 86.5
Absolute 15.2 25.1 49.7 29.5 P/E (x) 24.7 21.6 15.7 14.6 13.8
P/B (x) 5.6 4.9 4.2 3.7 3.2
Relative to EV/EBITDA (x) 15.0 13.0 10.8 9.5 8.5
14.4 23.6 33.2 15.1 RoNW (%) 24.3 24.3 28.9 27.0 24.9
Sensex
RoCE (%) 34.2 34.3 35.2 33.7 31.4
Sharekhan Research, Bloomberg
Source: Company; Sharekhan estimates

February 10, 2020 30

 Viewpoint
Miss in operating profit due to slightly lower-than-expected EBITDA margin; adjusted PAT was in-line
with our estimates: MGL’s Q3FY2020 operating profit at Rs. 259 crore (up 8.3% y-o-y; down 5.3% q-o-q) was
marginally below our estimate of Rs. 268 crore. The miss in operating profit was on account of lower-than-
expected EBITDA margin at Rs. 9.2/scm (up 5.1% y-o-y; down 7% q-o-q and versus our estimate of Rs. 9.6/scm).
The sequential decline in the margins can be attributed to lower realisation in the Industrial/Commercial (I/C)
PNG segments as prices of alternative fuels declined by 2-17% q-o-q. The gas sales volume at 3.1 mmscmd
(up 3% y-o-y) was in line with our estimates. CNG volume grew by only 2.4% y-o-y to 2.2 mmscmd and PNG
volume increased by 4.8% y-o-y to 0.8 mmscmd in Q3FY2020. Adjusted PAT grew by 25.9% y-o-y (down
13.1% q-o-q) to Rs. 187 crore, in-line with our estimate of Rs. 187 crore as miss in operating profit was offset by
higher-than-expected other income (up 40.2% y-o-y) and lower-than-expected effective income tax rate at
23.9% (vs our assumption of 25.2%).
Key result conference call highlights
ŠŠ The management highlighted that 500 BEST CNG buses (100 buses already added) are expected be
added, which could add 1-2 percentage points to volume growth.
ŠŠ CNG vehicle addition was at 6,000/month (3,500/month from private cars and 2,500/month from auto).
ŠŠ Management has maintained its long-term gas sales volume growth guidance of 5-6% annually. However,
near term volume could get impacted by infrastructure work in Mumbai.
ŠŠ Industrial gas sales volume has potential to jump 3x to 0.6 mmscmd based on actions taken by the
National Green Tribunal to curb pollution.
ŠŠ Gas sourcing mix - APM 49%, Non-APM 28%, PMT at 10% and spot at 14% in December 2019.
ŠŠ Industrial PNG price is at Rs. 26.2/scm and commercial PNG price is at Rs. 32.97/scm. The prices were
down q-o-q basis due to a decline of 2-17% in prices of alternative fuels (like bulk LPG).
ŠŠ Margin outlook is positive, given anticipation of further cut in domestic gas prices and low spot LNG prices.
ŠŠ The company plans to open 25 new CNG stations in FY2020 and has guided for a capex of Rs. 450-500
crore for FY2020E and Rs. 500 crore for FY2021E. The capex for 9MFY2020 stood at Rs. 300 crore.

February 10, 2020 31

 Viewpoint
Results Rs cr
Particulars Q3FY20 Q3FY19 y-o-y (%) Q2FY20 q-o-q (%)
Net Sales 745 753 -1.1 784 -5.0
Total Expenditure 486 514 -5.4 510 -4.8
Reported operating profit 259 239 8.3 273 -5.3
Adjusted operating profit 259 239 8.3 273 -5.3
Other Income 29 20 40.2 23 24.3
EBITDA 287 259 10.8 296 -3.0
Interest 2 0 NA 1 11.7
Depreciation 41 33 26.5 39 6.0
Exceptional income/(expense) -1 0 NA 56 NA
Reported PBT 244 227 7.8 256 -4.5
Adjusted PBT 245 227 8.1 200 22.4
Tax 58 78 -25.5 -15 -494.5
Reported PAT 186 148 25.4 271 -31.3
Adjusted PAT 187 148 25.9 215 -13.1
Equity Cap (cr) 10 10 10
Reported EPS (Rs) 18.8 15.0 25.4 27.4 -31.3
Adjusted EPS (Rs) 18.9 15.0 25.9 21.8 -13.1
Margins (%) BPS BPS
Adjusted OPM 34.8 31.8 300.3 34.9 -12.3
Adjusted NPM 25.1 19.7 537.3 27.4 -234.9
Source: Company; Sharekhan Research

Operating performance
Particulars Q3FY20 Q3FY19 y-o-y (%) Q2FY20 q-o-q (%)
Volume (mmscmd) 3.1 3.0 3.0 3.0 1.8
EBITDA margin (Rs/scm) 9.2 8.8 5.1 9.9 -7.0
CNG volume (mmscmd) 2.2 2.2 2.4 2.2 1.0
PNG volume (mmscmd) 0.8 0.8 4.8 0.8 3.8
Source: Company; Sharekhan Research

February 10, 2020 32

 Viewpoint
Outlook
Strong margin outlook on low gas prices: We expect MGL to be the biggest beneficiary of expectation of a
cut in the domestic gas prices for H1FY2021E as CNG and domestic PNG contribution is the highest for MGL at
~86%. Hence, we see a strong case for margin expansion for MGL over FY2020E-FY2021E, given the benefit
of lower gas cost. The management has been guiding for a decent volume growth of 5-6% CAGR for the next
five years, led by higher adoption of CNG-fitted four-wheelers and increased penetration of PNG. Ramp-up
of the Raigad GA, addition of new CNG buses and any regulatory support for use of CNG in public transport
services and could act as key catalysts for long-term volume growth.
Valuation
Maintain positive view; expect a 15% upside potential: We have fine-tuned our FY2020E EPS to factor in
9MFY2020 results and increased our FY2021E-FY2022E EPS to factor in slightly higher EBITDA margin as
domestic gas prices are expected to further decline in H1FY2021E after a sharp cut of 12.5% to $3.23/mmBtu
for H2FY2020. Despite a sharp run-up of 52% in MGL’s stock price in the last six months, we believe that the
stock’s valuation of 13.8x its FY2022E EPS (10% discount to average historical one-year forward PE multiple
of 15.3x and 48% discount to that of IGL FY22E PE of 26.4x) is attractive and makes it the cheapest stock in
the domestic CGD space. Additionally, the company’s industry-leading EBITDA margin of ~Rs. 9-10/scm and
superior RoE of 25-27% would help narrow its valuation gap vis-à-vis IGL. Hence, we maintain our Positive
view on MGL and expect a 15% upside from current levels.

One-year forward P/E (x) band – trading near trough valuation

30

25 24.4x

20

15 15.3x
P/E (x)

10 9.8x

0
Feb-18

Feb-19

Feb-20
Jun-17

Jun-18

Jun-19
Dec-17

Dec-18

Dec-19
Oct-17

Oct-18

Oct-19
Aug-17

Aug-18

Aug-19
Apr-17

Apr-18

Apr-19

P/E (x) Avg. P/E (x) Peak P/E (x) Trough P/E (x)
Source: Sharekhan Research

February 10, 2020 33

 Viewpoint
About company
Mahanagar Gas (MGL) is a dominant CGD player in and around Mumbai with CNG/PNG sales volumes of 2.2
mmscmd/0.8 mmscmd in FY2019. MGL derives 73% of its volumes from CNG, 13% from domestic PNG and the
remaining 14% from commercial/industrial PNG. The company sources its entire gas requirement for CNG and
domestic PNG from low-cost domestic gas. The company has 248 CNG stations, 1.24 million PNG customers
and a pipeline network of 5,513 km.

Investment theme
The government’s aim to increase the share of gas in India’s energy mix to ~15% by 2030 (from 6% currently)
and the thrust to reduce air pollution provides a regulatory push for strong growth in CNG and domestic PNG
volumes for MGL. The company’s margins are expected to remain strong given expectation of downward
revision in the domestic gas prices for H2FY2020E and low spot LNG prices and MGL’s strong pricing power
for CNG and domestic PNG.

Key Risks
Change in domestic gas allocation policy, depreciation of Indian rupee and any adverse regulatory changes
could affect volumes, margins and valuation.

Additional Data
Key management personnel
Dr Ashutosh Karnatak Chairman
Sanjib Datta Managing Director
Deepak Sawant Deputy Managing Director
Sunil M Ranade Chief Financial Officer
Source: Company Website

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 Schroders PLC 5.7
2 SBI Life Insurance Co Ltd 4.1
3 L&T Mutual Fund Trustee Ltd/India 3.2
4 Vanguard Group Inc/The 1.3
5 HDFC Asset Management Co Ltd 1.0
6 Wells Fargo & Co 1.0
7 Aditya Birla Sun Life Asset Manage 0.9
8 Bajaj Allianz Life Insurance Co Lt 0.8
9 IDFC Mutual Fund/India 0.8
10 FMR LLC 0.8
Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

February 10, 2020 34

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