IDFC Securities - Mahanagar Gas (MGL) Mahanagar Gas Q2FY19 results (Outperformer) - Another good quarter

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IDFC Securities

Mahanagar Gas' Q2FY19 results (Outperformer) - Another good quarter

Q2FY19 highlights

Mahanagar Gas (MGL) delivered another strong quarter, with reported EBITDA/PAT of Rs2.2bn/Rs1.36bn growing 10.6/9.3% yoy respectively, on the back of strong volume growth and resilient margins. Earnings were above IDFCe EBITDA/PAT of Rs2/1.25bn.
Overall volumes of 2.96mmscmd, +9.5% the second successive quarter of above trend volume growth (Average growth of 5.4% over FY14-18) – above IDFCe 2.9 mmscmd. CNG/Dom PNG/Ind+Comm volumes grew 9.2/11.7/8.9% yoy to 2.2/0.4/0.4 mmscmd. IDFCe were at 2.1/0.35/0.4 mmscmd.
Gross margins of Rs12.3/scm (+0.5/scm, IDFCe Rs11.8/scm) and EBITDA margins of Rs8.1/scm (flat yoy, IDFCe 7.6/scm)
Opex/unit of Rs4.4/scm, flat qoq higher than Rs3.9/scm, driven by higher other opex.

Key positives: Strong volumes, strong margins

Key negatives: Sharp increase in opex

Impact on financials: revise FY19/20E EPS by 8% each to factor marginally higher volumes/stronger margins. However TP reduced to 1075 as we move to DCF from multiples to factor longer term prospects.

Valuations & View: Keep the faith

We see the 12 month 29% underperformance to the Sensex as an attractive opportunity to buy. H1FY19 has seen a sharp reversal of the weakness seen in Q4FY18 and we see prospects turning stronger ahead. We expect softer domestic gas prices, competitiveness with alternate fuels and growing penetration of the domestic segment in the Mumbai region (MMR) to drive higher volumes, with management guidance to add 0.2mn connections p.a and increase CNG network by 35 stations in FY19E (new+ upgrades) supporting the same. Also the Rs2.25/kg and Rs1.5/scm price hike in CNG/PNG in October is higher than the gas cost increase which should support margins over H2 as well. We estimate 7.7% CAGR in volume growth over FY18-20E (up from 6.9% earlier), with upside risk from regulatory actions and/or higher CNG conversion rates in MMR. We value MGL on DCF, delivering a price target of Rs1075/sh, 26% upside, Reiterate outperformer.

27/11/2018 7 EN

Underlying

Mahanagar Gas

Mahanagar Gas Limited is a city gas distribution company. The Company is engaged in the distribution of compressed natural gas (CNG) and piped natural gas (PNG) in Mumbai and its adjoining areas and in the Raigad district in the state of Maharashtra, India. It also supplies CNG for vehicles, including rickshaws, taxis and cars in Mumbai, Thane, Mira-Bhayander, Navi Mumbai. It supplies CNG to Brihanmumbai Electricity Supply and Transport/Thane Municipal Transport/Maharashtra State Road Transport Corporation/Navi Mumbai Municipal Transport (BEST/TMT/MSRTC/NMMT) buses, light commercial vehicles (LCVs)/ tempos/ trucks/private buses. It offers PNG for domestic, commercial and industrial purpose. It offers PNG for various industries, including metal, pharmaceuticals, food and beverages, printing and dyeing, oil mills, power generation and air conditioning. It also installs gas geysers. Its commercial PNG has various applications in hospitals, hotels, power, charitable trusts and industries.

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INE002S01010 National Stock Exchange of India India

Provider

IDFC Securities

IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.

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