Mahanagar Gas

Shares of Mahanagar Gas Ltd (MGL) have risen 6% since the company announced its March quarter (Q4FY23) results after market hours on Monday. The city gas distributor’s unexpectedly strong margin performance has excited investors, despite an underwhelming volume performance for the quarter.

In the last quarter, MGL reported an Ebitda per standard cubic meter (scm) of Rs12.8, which is a seven-quarter high. Ebitda, or earnings before interest, tax, depreciation, and amortization, was estimated at ₹8.2 by analysts at Motilal Oswal Financial Services.

The improved performance can be attributed to lower gas costs. “Mahanagar Gas benefited from lower feedstock costs as market-linked LNG prices declined sharply during Q4 even as retail price was flat q/q,” said analysts from Jefferies India in a report on 9 May. As such, softening LNG prices augur well for the next couple of quarters. “Softening LNG prices lower feedstock cost aiding strong margins for Mahanagar Gas in H1FY24E. H2FY24E faces risk of higher LNG price (depending on severity of European winter) and risk of price cut in alternate fuels due to four key state elections in December,” pointed out Jefferies’ analysts. Accordingly, the brokerage has broadly kept its FY24 estimated Ebitda unchanged.

In terms of volume, MGL aims to achieve a 5-6% compounded annual growth rate over the next few years, driven by recent reductions in CNG prices and growth potential in the Raigad GA.

However, Q4 results saw MGL’s overall volume decline 1% sequentially to 3.37 million metric standard cubic meters per day (mmscmd). This volume shortfall was primarily the result of lower compressed natural gas (CNG) volumes. MGL’s management attributes this weakness to high retail CNG prices, which reduced the discount compared to liquid fuels and led to falling conversion rates in Q4. Piped natural gas volumes, on the other hand, remained stable.

Factoring in the rise in shares this week, the MGL stock is up as much as 42% in the past one year. While investors seem to be adequately capturing near-term optimism, there are inherent risks. The CNG price cut has been modest, and demand recovery requires closer monitoring.

From a long-term perspective, the widening spread of electric vehicles (EVs) poses a threat to CNG volumes. “Incrementally, much larger share of EV buses is being added versus CNG in Mumbai. Reduced arbitrage for CNG (versus petrol/diesel) and increasing availability of lower-priced EV vehicles (about Rs1 million range) can move discretionary private vehicle demand toward EVs (over CNG), in our view,” said analysts from Kotak Institutional Equities in a report on 9 May.

Leave a Reply