Retain ‘buy’ on Mahanagar Gas with TP of Rs 1,241

Mahanagar Gas (MGL) reported Q2FY21 Ebitda of Rs 2.2 billion (-19.1% y-o-y), significantly ahead of ours and consensus forecast due to an all-time high gross margin of Rs 17.28/scm, up 17.7% y-o-y. MGL also reported an all time high Ebitda margin, which surged 17% y-o-y as the company cut opex by 53% y-o-y and did not pass on the declining input prices. After falling by 31% y-o-y during 2QFY21, volumes in October and November to date have recovered to ~100% of pre-Covid-19 according to management (versus ~105%/93% at Gujarat Gas/IGL). We believe concerns on margin dilution due to open access are overblown. Retain ‘buy’ with a revised TP of RS 1,241.

Among CGDs, MGL’s volumes took the harshest knock as Mumbai is among the worst-hit by Covid-19. Volumes fell 31% y-o-y during 2QFY21 (versus IGL 12%, GGL+6%).Though CNG volumes fell to 1.3mmscmd (down 42% y-o-y), domestic PNG surged to 0.5mmscmd (up21.6% y-o-y).

Management indicated that volumes will remain modest in FY21 until CNG vehicles are back to pre-Covid-19 in Pune and Mumbai. They further added CNG volumes have recovered to 90–95%, Industrial to ~100%, and domestic to ~130% while still lagging in commercial. Gross and Ebitda margin both scaled all-time highs in Q2FY21, and would remain elevated owing to upcoming winter seasonal demand as we believe MGL may partially retain the benefit of the 25% cut in input gas price.

Capex guidance for FY21 remains at ~Rs 5 billion, and we expect internal cash flow to be sufficient to fund this despite modest earnings. New area–Raigad—volumes were 0.4mmscmd pre-Covid-19 and can add 0.5–0.6mmscmd at peak run rate. They have the PNGRB’s approval for an 8.5km pipeline expansion from Rasayni to Panvel and 5.5km on NH-17 (Goa highway), which will further spur their volumes.