Mahanagar Gas: Robust September quarter margins help earnings
The only hitch is that Mahanagar Gas shares are capturing a good portion of the optimism around CNG volumes—shares are trading 19 times the estimated earnings
The Mahanagar Gas Ltd stock touched a 52-week high of Rs899 during trading hours on Monday. The September quarter results announced after market hours that day showed a robust 41% year-on-year growth in its net profit to Rs102 crore. That compares favourably with a 19% net profit growth seen in the June quarter.
One reason why the company was able to clock better profit growth is lower gas costs. Supported by the cut in domestic gas prices, the gas distributor’s Ebitda/scm was at Rs6.75 (FY16 at Rs5.78; June 2016 quarter at Rs6.7), pointed out Prabhudas Lilladher Pvt. Ltd in a report on 28 November. Ebitda is earnings before interest, tax, depreciation and amortization. SCM is standard cubic metres.
For the September quarter, operating profit margin improved by an impressive 881 basis points to 31%; albeit slightly lower than the 31.5% operating margin clocked in the June quarter. But that shouldn’t bother investors much. What augurs well is that further cuts in domestic gas prices are expected to support margins in the days to come. A basis point is 0.01%.
The company’s revenue (adjusted for excise duty) declined 3.4% compared to the same period last year. Volume traction though decelerated. Compressed natural gas (CNG) sales growth slowed down to 4.4% year-on-year (June quarter: 8% year-on-year) due to base effect and seasonal factors, Nitin Tiwari of Antique Stock Broking Ltd said in a note on 29 November. CNG sales in September 2015 quarter were strong at 1.87 million scm per day, about 9% higher sequentially, resulting in the base effect.
“The conversion of vehicles to CNG, though a tad weaker, however, continued the trend observed in 1Q, with a total conversion of ~19,200 vehicles (1Q: ~20,300) of which 7,348 (1Q: 10,700) were private cars,” added Antique. Piped natural gas sales volume growth for the September quarter was a shade faster than the June one. But that wasn’t enough to compensate. Total sales volume increased 4.8% last quarter compared to 7.5% growth in the June quarter.
It is encouraging that the CNG volume outlook is strong as conversion of vehicles to gas-based fuel is expected to continue. And as mentioned earlier, profit margins are anticipated to remain robust on an overall basis.
The only hitch is that Mahanagar Gas shares appear to be capturing a good portion of the optimism. The stock, which listed in July, is 78% above its issue price. One share currently trades at about 19 times estimated earnings for this fiscal year.