After losing 30 percent of investor wealth in the last 1 year, Mahanagar Gas is seeing some recovery recently. In August so far, the stock has jumped over 8 percent on the back of its June quarter earnings.
The gas market has been in turmoil and seen major volatility since the Russia-Ukraine crisis began leading to a surge in gas prices amid fears of supply disruptions, which has adversely affected the stock.
However, despite the 30 percent fall in the last 1 year, it has outperformed its peers in this period. Gujarat Gas has lost around 40 percent in the last 1 year while Indraprastha Gas is down 32 percent.
In the June quarter, the company's revenues rose 136.36 percent YoY to ₹1,454.75 crore, however, its profit declined 9 percent to ₹185 crore on the back of high gas prices. Its profit came in at ₹204 crore in the year-ago quarter.
The company said that cost of natural gas, which is converted into CNG for sale to automobiles and piped natural gas for sale to households for cooking, jumped to ₹1,004.53 crore from ₹191.04 crore last year.
Its EBIDTA declined by 6 percent to ₹285.55 crore in Q1 FY23 from ₹303.99 crore in Q1 FY22 and EBIDTA margin was 19.63 percent in Q1 FY23 as against 49.39 percent in the same period last year.
Post the results, domestic brokerage house ICICI Securities upgraded the stock to 'buy' from 'add' with a target price of ₹980 per share. This indicates a potential upside of 25 percent for the stock.
According to the brokerage, the stock's risk-reward ratio is strongly tilted in favour of reward on the back of ahead-of-estimated volume growth and abysmal valuations, coupled with robust return ratios.
"With the stock price weakness seen in past six months and favourable multiples, we turn bullish on MGL for next 12-18 months. We estimate an EPS CAGR of 22 percent over FY22-FY24E, supported by a volume CAGR of 10 percent, gross margins of ₹14.8/scm (standard cubic metre) and EBITDA/scm of ₹9.7/scm. Longer-term growth beyond FY25E-FY26E does seem challenging, but current valuation gaps and growth prospects are worth looking at, in our view," explained the brokerage.
Commenting on the earnings, the brokerage said that Mahanagar Gas reported its Q1FY23 EBITDA at ₹286 crore vs our estimate of ₹300 crore. The marginal miss was driven by weaker than estimated margins even as volumes surprised positively for the quarter, it noted. Management has attributed the dip to continued pressure of higher spot LNG costs and higher opex, stated ICICI.
It, however, also noted that both gross margin/scm and EBITDA/scm of grew 8.6 percent QoQ and 20.5 percent QoQ, respectively. This implies the impact of aggressive price increases taken over the past few months, and tie-up(s) of term LNG volumes and premium domestic gas, it pointed out. This should help sustain margins at ₹14/scm (gross) and ₹9.5/scm (EBITDA) for FY23E-FY24E, despite the specter of rising LNG and pooled gas costs, added ICICI.
The brokerage also highlighted that volume growth picked up sharply in H2FY22 post the covid crisis and it believes the annual volume growth will average a stronger 15 percent/6 percent over FY23E/FY24E, respectively versus 5.2 percent over FY21/FY22.
Management also stated that potential demand from MMR/Raigad will support 5-6 percent growth over the next 5-6 years.
However, the brokerage cautioned that MGL had disappointing results in recent bids, winning no new areas, therefore it believes growth beyond FY25E will get tougher, hampering prospects over the longer term.
Sharper than expected rise in gas costs, inability to pass on gas cost increases, and sharper than expected fall in alternate fuel prices for CNG (Petrol/diesel) are key risks, added ICICI Securities.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
