MGL’s Q2 margins look good, but volume recovery holds key1 min read . Updated: 19 Nov 2020, 10:07 PM IST
Total volume in Q2 fell by almost 31% y-o-y for MGL, compared to a 16% plunge in Indraprastha Gas Ltd
Mumbai-based city gas distributor Mahanagar Gas Ltd’s (MGL) September quarter profit margins have been robust. Earnings before interest, tax, depreciation and amortization (Ebitda) per standard cubic meter stood at ₹11.60.
“MGL reported an all-time high Ebitda margin, which surged 17% year-on-year as the company cut opex by 53% year-on-year and did not pass on the declining input prices," wrote Edelweiss Securities Ltd analysts in 17 November report.
Overall, MGL’s September quarter Ebitda came in at ₹221 crore, down 19% year-on-year but a whopping 176% jump from Q1. Shares of the company have gained by nearly 5% since results were announced last week. Even so, the MGL stock is around 25% away from its pre-covid high seen in January. Investors are concerned about the impact of open access in the city gas distribution sector. But, that’s not all.
“Perhaps the quality of earnings is weak and that’s a disappointment for investors," said an analyst with a multinational brokerage. The analyst added that markets tend to appreciate volume growth more.
Indeed, MGL’s volume performance has been nothing to write home about. Total volumes for Q2 declined by almost 31% year-on-year compared to the 16% volume decline seen by Indraprastha Gas Ltd. On the other hand, Gujarat Gas Ltd saw 5% volume growth due to strong rebound in industrial segment. Analysts from Jefferies India Pvt. Ltd said in a report on 13 November, “Given slower recovery in volumes vis-à-vis peers, we model a 25% year-on-year decline in MGL volumes in FY2021 (IGL 17% decline, Gujarat Gas 6% decline)."
MGL’s revenues for the September quarter declined by 35% over the same period last year to about ₹507 crore. Agreed, this is an improvement from the 65% revenue drop in the June quarter, but with the lockdown restrictions gradually easing, some amount of recovery was anticipated.
In the near future, the prospects for profit margins appear strong. “The near-term margin outlook is solid (8% gross margin uplift on benefit of lower administered pricing mechanism gas price retained in October)," said Jefferies.
With the stock yet to bounce back to pre-covid levels, valuations are not demanding. MGL shares trade at 11 times estimated earnings for financial year 2022, based on Bloomberg data. There are risks, too. “Open access and a potential domestic gas (price) floor are headwinds for longer-term margin outlook," points out Jefferies.