There were two major areas of disappointment for investors. One, Ebitda (earnings before interest, taxes, depreciation and amortization) margin was below expectations. Two, the company’s overall volume growth of 7.4% year-on-year in Q4 has moderated from the previous three quarters.
On a per-unit basis, Ebitda per standard cubic metre stood at ₹7.90, down by about 10% compared to the December quarter, according to analysts from Jefferies India Pvt. Ltd. Gross margin declined sequentially, too.
In general, analysts were expecting profit margin to improve vis-à-vis the December quarter, as there were no big negative surprises on raw material costs. Jefferies India had expected gross margin to be stronger quarter-on-quarter given that compressed natural gas (CNG) price and APM gas price (about 75-80% of feedstock for CNG segment) were both flat. Plus, the rupee was slightly strong during the quarter. APM gas is administrative price mechanism gas and refers to domestic gas where prices are regulated.
But staff costs and other operating expenses rose at a higher-than-expected rate, resulting in lower operating margins.
The CNG segment contributed 73% of the company’s overall volume for the March quarter. The remaining volumes came from the piped natural gas (PNG) segment. CNG volumes increased by 6.9% year-on-year, whereas PNG volumes increased at a slightly faster pace of 9%.
Overall, Mahanagar Gas saw net profit growth of 27% over the corresponding period of last year to ₹133 crore, lower than the ₹148 crore in the December quarter.
While the March quarter margin was disappointing, some good news can be expected, going ahead. The price hike in CNG taken in April was stronger than expected and should bode well for the company’s margins in the first half of FY20, point out Jefferies India analysts. Still, investors should watch out for an increase in other costs, such as staff costs, and other operating expenses.
Apart from margin improvement, better volume growth is crucial for valuations to expand hereon. Already, volume growth has shown some moderation in the March quarter. Investors should watch whether that trend persists.
Currently, the Mahanagar Gas stock trades at about 15 times estimated earnings for FY20, based on Bloomberg data. Unless volume growth picks up and margins stabilize, valuations would look unjustified.