Mahanagar Gas Ltd posted September quarter (Q2) net profit that crossed consensus estimates of a Bloomberg analysts’ poll by 5%, thanks to sales volumes that grew above expectations. The city gas distribution company supplies natural gas in Mumbai, its adjoining areas and Raigad district in Maharashtra.

Last quarter, the company’s sales volumes increased by 9.5% over the year-ago quarter. Both segments—compressed natural gas (CNG) and piped natural gas (PNG)—performed well on the volume front, with overall PNG growth being a bit better comparatively. Vehicle conversions to CNG during the quarter were at around 21,000 compared to 10,000 in the same quarter last year.

Overall, average realizations increased about 19%. Accordingly, Mahanagar Gas’s total operating revenues increased by a healthy 30% year-on-year to 697 crore. The company derived nearly two-thirds of this revenue from the CNG business.

Despite robust revenue growth, profit growth wasn’t commensurate. Earnings before interest, tax, depreciation and amortization (Ebitda) increased at a relatively slower pace of 11% to 221 crore. Ebitda margin at 31.8% declined from 34.1% in the June quarter, as input costs increased. Finally, net profit increased by 9.2% to 136 crore.

Hereon, for the Mahanagar Gas stock, investors should watch whether volume growth will sustain. Note that this is the second consecutive quarter of notable volume growth for the company. This means for the half-year ended September, sales volume has increased by 10.7%.

Management continues to conservatively maintain medium-term volume growth guidance of 6-7%, said Edelweiss Securities analysts in a report dated 14 November.

The brokerage firm estimates a compound annual growth rate of 7.8% in volumes over 2018-23, led by the accelerating conversion of vehicles to CNG. Worsening traffic conditions are expected to support higher consumption of CNG.

So far this fiscal year, the Mahanagar Gas stock has underperformed the BSE 500 index. Currently, the stock trades at 15.4 times estimated earnings for FY19, based on Bloomberg data.

Given the underperformance this year, analysts reckon valuations aren’t too demanding. As mentioned earlier, the volume trajectory is crucial.

On the margin front, Mahanagar Gas has taken price hikes in October and that should have a positive impact.

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