Mahanagar Gas' Q3FY18 results (Outperformer) - In Line quarter, propsects remain robust
Q3FY18 result highlights
- PAT of Rs1240mn (+25% yoy/-0.6% qoq, IDFCe Rs1.29bn); Reported EBITDA of Rs2bn (+20% yoy, IDFCe Rs2bn). Higher gross margins of Rs3.08bn (+19% yoy, IDFCe Rs3.05bn) offset by higher opex.
- Sales volumes of 2.74 mmscmd (+7/1% yoy/qoq, IDFCe 2.7) with CNG/Dom/Ind+comm volumes growth at 6.6/9.8/7.2% respectively.
- Gross margins of Rs12.2/scm up 11.5% yoy but lower than the record levels of Rs12.7/scm seen in Q1FY18. EBITDA margins at Rs8/scm, +12% yoy but 1% lower qoq.
- Average CNG realisation at Rs21.6/scm, +5.8% yoy vs Rs22/scm estimates. Average realisations for PNG segment at Rs26.5/scm, up 12% yoy, IDFCe Rs25.5/scm.
- Average cost of gas at Rs10.7/scm up Rs1.2/scm qoq. Opex/scm increased sharply to Rs4.3/scm (+10% yoy)
Key positives: Strong yoy growth in margins/steady volume growth
Key negatives: 18/10% yoy growth in absolute opex/opex per unit.
Impact on financials: FY18/19/20E EPS reduced ~1% to factor marginally lower margins. TP revised to Rs1300/share.
Valuations & view
MGL has seen below par volume growth over H1FY18 drag the stock price down, underperforming the index by 18%. However we see Q3 volume growth as encouraging, and 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. We estimate a CAGR of ~5.9% in volumes over FY18-20E. The strong growth prospects and steady margins underpin our DCF based target price of Rs1300/sh implying a multiple of 23x FY20E EPS. With the reduction in VAT for industrial consumers to 3% (from 13.5%) and the removal of Octroi (3-4%) from gas purchases, mitigating the GST impact and stronger growth expected over FY19, we remain positive on prospects of MGL. Current valuations of 17.4x FY20E EPS/10.2x EV/E underplays the near term strength in metrics and the 12% EPS CAGR over FY17-20E. Our TP implies 26% upside from here. Reiterate Outperformer.
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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