Despite low Q1 volumes, shares of MGL ride on firm margin outlook

Mahanagar Gas Ltd (MGL) continued reaping the benefits of rebounding gas demand and improved gas realizations in the March quarter.

Total gas volumes at 2.89 mmscmd (million metric standard cubic metres per day) and rise 4% sequentially and year-on-year (y-o-y). The higher realizations for compressed natural gas (CNG) and piped natural gas (PNG) helped boost revenues further.

CNG revenues rose 8.5% sequentially following a price hike in early February. CNG volumes grew 5.1%. PNG realizations were also higher as a result of industrial and commercial customers being charged higher prices because of the increase in alternative fuel prices, said analysts at Antique Stock Broking. This helped revenue to grow 7.7% sequentially (4.5% y-o-y), beating analysts’ estimates.

Profitability got a further boost because of soft domestic gas prices. Hence, despite some increase in operating expenses, Ebitda was maintained at the levels seen in Q3. The Ebitda per standard cubic metre (scm) of gas improved significantly from ₹9.6 in the year-ago quarter to ₹12.1.

Overall, the earnings growth rates of the company are sustained, driven by strong demand for cheaper and cleaner fuel. In the near term, however, the fresh set of lockdowns to control the second covid wave are expected to impact volume growth recovery.

The lockdowns, which started on 15 April in Maharashtra, have adversely impacted CNG and PNG volumes, said analysts at Motilal Oswal Financial Services Ltd (MOFSL). They have cut FY22 estimated earnings by 10% and expect volumes to reach pre-covid levels only in the second half.

However, despite the earnings cuts, their FY22 earnings estimates show 12% growth over FY21. Analysts’ confidence on earnings growth despite the impact on volumes also stems from soft domestic gas prices.

“Despite lower volumes, we see low risk to our FY22 earnings estimates,” said analysts at Nomura Research. They see a 8-10% downside risk to their FY22 volume assumption, because of the lockdown in April-May and only a gradual opening in June.

However, they believe higher margins could offset this.Not surprisingly, the stock continues to trade firm and has gained more than 4% post results. Stock valuations at 15.8 times FY22 earnings estimates are not very expensive, said analysts.

On the flip side, the risks of any rise in commissions to oil marketing companies (OMCs) can impact margins.

Negotiations on trade margins are still on, with OMCs asking for higher single-digit commissions on CNG sales, analysts at MOFSL said. As much as 65% of CNG volumes for MGL come from OMC outlets.