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Mahanagar Gas' Q4FY18 results (Outperformer) - One offs spoil a steady quarter

Q4FY18 result highlights

• PAT of Rs1bn (+6% yoy/-15% qoq, IDFCe Rs1.26bn); Reported EBITDA of Rs1.8bn (+8% yoy, IDFCe Rs2bn). Miss driven by Rs120mn of additional provision in gas costs of which only 40mn was pertaining to the qtr.
• Sales volumes of 2.8 mmscmd (+6.7/2% yoy/qoq, IDFCe 2.76) with CNG/Dom/Ind+comm volumes growth at 6.7/9.0/5% respectively.
• Gross margins of Rs11.6/scm up 5% yoy but lower than the average levels of Rs12.2/scm seen in 9MFY18. EBITDA margins at Rs7/scm, +1.3% yoy but 12% lower qoq.
• Average CNG realisation at Rs21.5/scm, +3.8% yoy vs Rs22/scm estimates. Average realisations for PNG segment at Rs27.6/scm, up 7.5% yoy, IDFCe Rs26.5/scm.
• Average cost of gas at Rs11.6/scm up Rs0.9/scm qoq. Opex/scm increased sharply to Rs4.7/scm (+10% yoy) 

Key positives: Strong yoy growth in volumes, gross margins remains highest among peers 

Key negatives: 18/10% yoy growth in absolute opex/opex per unit.

Impact on financials: FY18/19/20E EPS reduced ~4/5% to factor lower margins. TP revised to Rs1040/share.    

Valuations & view

We see the current 17% underperformance to the Sensex of MGL stock as an attractive opportunity to buy. The recent quarter has seen some one offs on gas costs, higher LNG prices and maintenance costs drag profitability, but 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 decision to bid for upto 24 new Geographic Areas (GAs) ensures inorganic growth will come over FY19-23E. We estimate 6.4% CAGR in volume growth over FY18-20E, with upside risk from regulatory actions and/or higher CNG conversion rates in MMR. We value MGL on 20x FY20E EPS, delivering a target price of Rs1040/sh, 32% upside, Reiterate outperformer.