BUY GAIL-Backed PSU Natural Gas Stock For Rs 1,565 Target, Up 22% YTD; Motilal Oswal

Brokerage Motilal Oswal has recommended BUY in a PSU natural gas stock that is backed by Maharatna company GAIL India. This is none other than Mahanagar Gas (MGL) who is a leading supplier of PNG and CNG in the country. YTD, MGL shares have zoomed by 22% on BSE.

In its latest research report, Motilal Oswal highlighted that Mahanagar Gas Ltd. (MAHGL) held an analyst meet on 7th Jun'24 which was attended by the senior management of the company. Management reiterated: 1) an overall 6-7% volume growth target, with at least 10% volume growth from the recently acquired UEPL, 2) the current APM gas allocation stands at ~70% and the shortfall is being compensated by additional HPHT volumes, and 3) INR10b of capex that was guided for FY25, of which INR2b will be allocated to UEPL.

MGL's management expects a 6-7% volume growth for MAHGL in FY25. With respect to UEPL, volumes are expected to grow by more than 10%. Also, the company plans to incur INR10b of capex in FY25. Of this, INR8b will be spent by MAHGL, and INR2b will be allocated to UEPL.

Additionally, MGL plans to build over 25km of infrastructure steel pipeline, a PE of 200km, and 90 CNG stations (60 on a standalone basis and 30 in UEPL). While it also aims to establish over 0.3m PNG domestic connections (5-6% growth), 60 industrial connections, and 300 commercial connections.

On the valuation, Motilal Oswal said, "We expect a 7% CAGR in volume over FY24-26, driven by multiple initiatives implemented by the company, such as partnering with OEMs to drive conversions of commercial CNG vehicles, and providing guaranteed price discounts to new I/C-PNG customers."

Finally, the brokerage added, "The stock trades at 12.5x FY26E EPS of INR110.6. We value it at 14x FY26E EPS to arrive at our TP of INR1,565. Reiterate BUY. We continue to prefer MAHGL over IGL owing to its 30% cheaper valuation (on FY26E P/E basis), with broadly similar growth profile in the medium term and relatively lower EV risk."

Currently, MGL shares are at Rs 1461.10 apiece, with a market cap of Rs 14,432.42 crore. The stock's 52-week high and low is at Rs 1,579 apiece and Rs 971.40 apiece respectively. YTD, the stock is up by 21.6% on BSE. While in a year, the stock zoomed by 40%.

Last month, the company announced a final dividend of Rs .18/-per equity share having face value of Rs.10/-each (i.e.180%) for the financial year 2023-24.

This is in addition to the Interim Dividend of Rs. 12/-per equity share (i.e. 120%) paid to all the eligible equity shareholders, as declared by the Board of Directors at its meeting held on 23rd January 2024.

Accordingly, the total dividend for the financial year 2023-24 will be Rs.30/-per equity share having face value of Rs. 10/-each (i.e. 300%).

Mahanagar Gas Limited, (MGL) one of the India's leading Natural Gas Distribution Company was incorporated on 8th May 1995. GAIL (India) Limited (Maharatna Company of Govt. of India) is the promoter of MGL.

Disclaimer: The recommendations made above are by market analysts and are not advised by either the author nor Greynium Information Technologies. The author, nor the brokerage firm nor Greynium would be liable for any losses caused as a result of decisions based on this write-up. Goodreturns.in advises users to consult with certified experts before making any investment decision.