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  • Company Update: Mahanagar Gas Ltd – BUY – TP Rs.948

    Publish date: 27th June, 2018

    On a growth curve: MGL's stock price has seen 35% correction during the last eight months due to ongoing concerns of rupee depreciation, hike in domestic gas price, stake sale by BG Asia Pacific Holdings Pte Limited (one of the promoters) and uncertainty regarding price hike to pass on the burden of higher raw material cost. The Company has already taken gas price hike which reflects its pricing power and recent correction in the stock price makes the valuation attractive, we opine.

    Key Highlights

    Strong basics: Our positive bias towards MGL is supported by a combination of factors such as monopoly status, favorable government policies, and sustainable long term growth potential.

    Driving towards sustainability: With the recent price hike undertaken, we expect Q1FY19 operating margins/earnings to be better. Further, margin improvement will also be supported by industrial & commercial segment and lower Opex in H1FY19.

    Favorable cost economics vs liquid fuel: Despite, the recent gas price hike of CNG by 4.4% (Rs1.95/kg) to Rs. 46.17 and PNG by 1.4% (Rs. 0.38/scm) to Rs. 27.25/scm, CNG is still priced 45% discount to diesel and 60% discount to petrol which makes it attractive for end-users.

    Leaps and bounds: Currently, natural gas penetration is just 30% in Maharashtra, reflecting huge growth potential. MGL has indicated plans to bid for 20 city gas distribution (CGD) license areas. We are optimistic that MGL will win large deals in the ongoing city gas bidding which will improve its future growth prospects. Hence, future earnings will be supported by both existing and new CGD areas.

    Volume growth: We expect improvement in gas volumes on the back 1). addition of new three wheelers which will increase CNG consumption, 2). geographical expansion to Raigad and Karjat and 3). Government's push for PNG's domestic connections will support PNG volumes.

    Key triggers-Natural gas under GST: Government has indicated that it intends to bring natural gas under the ambit of GST which will be positive for the sector and also for MGL, we opine. Currently, the taxes on CNG in Maharashtra is roughly around 29% (i.e. 14% excise duty and 13.5% Maharashtra VAT). With GST, we expect the rates to be lower which will support volume growth, we opine.

    Valuation & outlook

     We believe there exists a meaningful growth potential for MGL due to anticipated growth in the number of CNG operated vehicles considering cost effectiveness of CNG as a fuel, potential growth in the number of households in the areas of operation and gas supply to consumers in the Raigad district. We expect an EPS of Rs.51.6 for FY19E and an EPS of Rs.53.5 for FY20E (earlier Rs. 53.2). Based on our estimates, at CMP is trading at 7.7x EV/EBIDTA and 15.5x P/E on FY20E earnings. We maintain BUY on MGL with an unchanged DCF based price target of Rs.948.


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