ICICI Securities Bullish On This Small Cap City Gas Distribution Stock, Reiterates BUY For 17% Gains

Mahanagar Gas Limited (MGL) reported its Q2FY23 EBITDA at Rs 2.53bn (down 16% YoY, 11.5% QoQ) vs our estimate of Rs3.1bn. Adjusted PAT dipped 19.7% YoY (down 11.5% QoQ) to Rs1.64bn (I-Sec: Rs2bn). The miss was due to weaker-than-estimated margins even as volumes were broadly in-line.

ICICI Securities is bullish on MGL, Reiterate BUY with a target price of Rs 1,025 per share. According to the target price, the brokerage claims a potential upside of up to 17% in the share price from its current level.

Mahanagar Gas Ltd is a small-cap Gas & Petroleum sector company engaged in the business of City gas distribution (CGD). Presently, the company supplying natural gas in the city of Mumbai including adjoining areas and the Raigad District in the state of Maharashtra. It has a market cap of Rs 8,695.41 crore.

Stock Outlook & Returns

The stock's last traded share price on NSE is Rs 880.30 per share. It has given 1% negative returns in 1 week, whereas, in 1 month it gave 8.89% positive returns. In the past 1 year, the stock has given 12.77% negative returns. The stock in 3 years has given 14.54% negative returns and in 5 years 21.03% negative returns, respectively. The returns indicate the stock didn't perform well in the 5 years.

The stock recorded 52-week high on 16 November 2021 at Rs 1,023.60, and its 52-week low at Rs 665.80 on 20 June 2022, respectively.

Gas costs to see some respite; pricing actions have been positive

Domestic gas costs have risen by >US$3.5/mmbtu from Apr'22 with spot LNG blending at ~8- 9% of priority sector allocations as of now. However, with the government looking at revising the domestic gas price formula downward via the Kirit Parikh Committee, and some quantity of premium domestic gas from RIL (aggregate volumes of 0.4- 0.5mmscmd), we expect pressure on gas cost to reduce over FY23E-FY24E. Also, MGL has passed on all of the domestic gas cost hikes promptly over FY23-TD, which creates comfort on margins. 

 

Volume growth prospects improving

Volume growth picked up sharply in H2FY22 post the covid crisis and we do believe annual volume growth will average a stronger 17%/6% over FY23E/FY24E. Management stated that potential demand from MMR/Raigad will support 5-6% growth over the next 5-6 years. However, we note MGL had disappointing results in recent bids, winning no new areas. We therefore believe growth beyond FY25E will get tougher, hampering prospects over the longer term. 

 

 

Brokerage maintain BUY for RS 1,025 target price

"With the stock price weakness seen in past one year (down ~14%) and favourable multiples (at CMP, stock trades at 9.4x FY24E EPS and 3.7x EV/EBITDA), we remain bullish on MGL for next 12-18 months. We estimate an EPS CAGR of 24% over FY22-FY24E, supported by volume CAGR of ~11.6% p.a., gross margins of Rs14.3/scm and EBITDA/scm of Rs9.3/scm. Longer-term growth beyond FY25E-FY26E does seem challenging, but current valuation gaps and growth prospects are worth looking at, in our view. Our DCF valuation, factoring-in more conservative assumptions of 3% volume growth and EBITDA/scm of ~Rs9.5/scm, delivers a target price of Rs1,025/sh, ~17% upside from CMP. Reiterate BUY," the brokerage has said. 

Key risks

i) Sharper than expected rise in gas prices.
ii) Inability to pass on gas cost increases.
iii) Sharper than expected fall in alternate fuel prices for CNG (petrol/diesel).

Disclaimer

The stock has been picked from the brokerage report of ICICI Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.