Mahanagar Gas stock valuations turn attractive after 30% fall in 8 months. Time to buy?

Mahanagar Gas share price in focus today: Mahanagar Gas, which is engaged in the business of City Gas Distribution (CGD), has seen its share price hammered by Dalal Street investors in recent months, resulting in a 30% decline over the past eight months, falling from ₹1,988 to the current trading level of ₹1,393 apiece. 

The weakness in the stock was driven by pressure on margins due to higher raw material costs, coupled with multiple APM de-allocations and a lack of clarity regarding future APM allocations. However, domestic brokerage firm Motilal Oswal believes the recent correction has made the stock's valuation attractive and maintains a positive stance on the stock.

The brokerage said that company fundamentals are undergoing a transformative shift, citing two emerging tailwinds: weaker crude prices and a lower pricing slope for natural gas.

It notes that the weak crude price outlook, along with an impending LNG glut, will likely lower gas costs for CGD companies. While Brent crude prices averaged USD 75.8 per barrel in Q4FY25, Motilal forecasts Brent to average USD 65 per barrel in FY26 and FY27.

According to the brokerage, every USD 10 per barrel decline in Brent prices reduces the landed cost of natural gas by USD 2.3 per mmbtu. Further, Motilal's discussions with the listed and unlisted Indian CGD companies indicate that new long-term gas contracts are already being signed for a 1.0-3% lower slope, given the expected surge in LNG supply in 2HFY26 and beyond.

Multiple initiatives will drive volume growth

The company, in the recent analyst meet, maintained its over 10% YoY volume growth guidance for the next 2-3 years, while Motilal expects a 10% CAGR in volume over FY25-27, driven by multiple initiatives implemented by the company, such as collaborating with OEMs to drive conversions of commercial CNG vehicles and providing guaranteed price discounts to new I/C-PNG customers.

According to the management, EVs have limited overlap with the typical CNG customer base. Further, 15 BEST depot CNG stations shall now be available for specific commercial vehicles for fueling, subject to prior registration.

By FY30, the company aims to add 250 CNG filling stations and upgrade existing stations. Further, the 1 GW battery manufacturing factory, entailing a capex of ₹9 billion (MGL’s equity stake: 40%), shall start in 12-14 months. Further, while both CBG and LNG business segments are at the initial stages, the company believes in scaling up these businesses rapidly over the next few years, said the brokerage.

Stock trades at attractive valuation

Mahanagar Gas remains the brokerage's preferred pick among CGDs and retained its estimates as it forecasted the company's volumes to clock a 10% CAGR over FY25-27 and estimated an EBITDA margin of ₹10/scm during the period. It reiterated 'buy' with a price target of ₹1,760 apiece.

The stock currently trades at 11x FY27E EPS of ₹121. The brokerage valued the stock at 15x FY27E EPS to arrive at its price target of ₹1,760.

Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.