Markets
Mahanagar Gas had a bumper FY24. This year, it may be a bit squeezed
Summary
- MGL’s valuations aren’t pricey, but margin concerns may weigh on the stock
Every year cannot be a bumper one. That, in short, summarises Mahanagar Gas Ltd’s near-term outlook. After a solid year of profitability, the city gas distribution company’s margin is expected to taper this financial year.
MGL’s Ebitda per standard cubic meter (scm) had scaled up to a multi-year high of about ₹14 in 2023-24, thanks to lower cost of gas procurement despite marginally lower revenue. For the next 2-3 years, however, MGL expects its Ebitda per scm to drop to ₹9-11, the company told analysts at its recent investor meeting.
That said, MGL, which currently has a presence in Maharashtra, expects volume growth of 6-7% as it expands its network coverage.
In keeping with the company’s forecast, Centrum Broking estimates MGL’s FY25 earnings per share to drop 26%, followed by a 2.7% EPS increase in FY26.
“We believe, incrementally MGL’s volume growth to largely determine its earnings growth provided the company is able to maintain its Ebitda/scm," Centrum’s analysts said in a research note. MGL’s total volume in FY24 stood at 3.6 million standard cubic metres per day.
This financial year, lower sale prices rolled out in March and a drop in the share of administered price mechanism (APM) gas are expected to weigh on MGL’s margin. The company’s management has indicated that APM gas share has fallen to about 70% in the April-June quarter, from 75% earlier.
MGL plans to invest about ₹1,000 crore this financial year in laying pipelines and building other associated infrastructure, including ₹200 crore in its recently acquired gas distribution company Unison Enviro Pvt. Ltd.
UEPL holds licences to distribute natural gas in three districts in Maharashtra, and has already begun supplies in one. UEPL’s current volume is 0.14 million standard cubic metres per day, with growth expected to be about 10%.
MGL also entered into a joint venture with Baidyanath LNG Pvt. Ltd in December to set up liquified natural gas retail outlets. The joint venture will establish six stations in the first phase to supply LNG to heavy-duty vehicles such as trucks.
MGL has also entered into a pact with the Mumbai municipal corporation to set up a 1,000-tonne per day compressed biogas plant to convert solid waste, entailing an investment of ₹500 crore.
Yet, the biggest trigger for MGL would be the inclusion of natural gas under the goods and services tax, allowing consumers to claim credit for input tax paid and possibly lower the cost of gas for them; and increase usage among industrial and commercial consumers.
The MGL stock trades at about 12 times its FY25 estimated earnings, show Bloomberg data. It has gained 20% so far in 2024. But in the near future, margin concerns may weigh on sentiment even as MGL’s valuations aren’t pricey.
