MOSL: MAHANAGAR GAS (Buy)-Volume growth remains strong; margin concerns remain unanswered
(MAHGL IN, Mkt Cap USD1.3b, CMP INR997, TP INR1200, 20% Upside, Buy)
- Mahanagar Gas (MAHGL) reported mixed 2QFY22 results, with volumes 11% higher than our estimate at 3.1mmscmd, while EBITDA/scm was lower at INR10.5 (v/s our estimate of INR12.5 and INR13.9 in 1QFY22). Thus, EBITDA came in line (at INR3b) with our estimate.
- The volume recovery was strong as economic activities returned to normal, with total volumes growing further by 7-8% in Oct’21 (~3.34mmscmd).
- The EBITDA margin decline in 2QFY22 was due to a sharp spike in spot LNG prices. The demand for CNG went up drastically post the easing of the second COVID lockdown, due to which MAHGL had to use spot LNG for ~5% of priority gas volumes. This percentage increased further as volumes ramped up. MAHGL has requested the Ministry for using average gas volumes for 2Q to allocate priority gas volumes for 2HFY22.
- MAHGL took two price hikes totalling INR4.3/kg in order to pass on the entire increase in APM gas prices for 2HFY22. That said, it might take further pricing action in the immediate future to compensate for the deficit in priority gas volumes and increase in spot LNG prices (up 2x QoQ).
- The current environment has further strengthened our view that the CNG segment’s margin will come under severe pressure:
- As per our calculations, the APM gas price revision for 1HFY23 could be at USD5.0-5.5/mmbtu since the adoption of the gas pricing formula in 2014, with the likelihood of further increase in APM gas price for 2HFY23 as well.
- The demand by OMCs for higher single-digit commissions on CNG sales will further test the company’s ability to pass on the prices to end consumers. Notably, ~65% of MAHGL’s CNG volumes come from OMC outlets.
- As highlighted in our report, – we maintain our stance on normalization of Brent prices by the end of FY22. Falling Brent prices will reduce saving of CNG to liquid fuels, thereby impacting volume growth.
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.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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