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Mahanagar Gas stock is about 17% shy of its 52-week high seen on 30 January.
Mahanagar Gas stock is about 17% shy of its 52-week high seen on 30 January.

Strong Q4 margin kindles Mahanagar Gas stock

  • Going ahead, the impact of the extended lockdown in April and May would affect overall volumes for financial year 2021 and that is understandable
  • MGL maintains daily sales volumes recorded during the lockdown has been in the range of 25% to 30% compared to volumes recorded pre lockdown period

MUMBAI: The lockdown that began in the last week of March was expected to take a toll on Mahanagar Gas Ltd’s (MGL) volumes during Q4 FY20. That has expectedly come through. The city gas distributor’s volumes declined by 9% compared to the December quarter and by 7% on a year-on-year basis.

What is encouraging is that the company’s profit margins have been resilient, thanks to a decline in gas prices. This, along with lower tax outgo, helped MGL post a healthy 25% year-on-year net profit growth at a time when revenues have declined.

Jefferies India Pvt. Ltd’s Pratik Chaudhuri wrote in a report on 10 June, “Ebitda margin expanded to 9.4 per standard cubic meter (3QFY20: 9/scm)." Note that this was just slightly ahead of Jefferies’ estimates of ( 9.3/scm), as operating expenses remained higher despite lower volumes. Ebitda is earnings before interest, tax, depreciation and tax -- a key profitability measure.

Notwithstanding the hit on volumes in Q4FY20, the robust margin performance is positive. Not surprisingly, the MGL stock was trading about 4% higher in early trade on Thursday.

MGL’s revenues for the March quarter declined by 5% over the same period last year to 687 crore. Note, for the nine-month ended December, revenues had increased by 10.5%. For the March quarter, robust margin helped pre-tax earnings increase by almost 10% year-on-year to 225 crore.

Going ahead, the impact of the extended lockdown in April and May would affect overall volumes for financial year 2021 and that is understandable. MGL maintains daily sales volumes recorded during the lockdown has been in the range of 25% to 30% compared to volumes recorded pre lockdown period.

In this backdrop, robust margins can be expected to save the day. Domestic gas prices have been revised downwards by 26% to $2.39 per million British thermal units for the half-year ending September 2020. “Lower gas costs and partial pass-through could boost margins further amid weak volume in financial year 2021," pointed out Jefferies’ Chaudhuri.

After taking into account Thursday’s early gains, the MGL stock is about 17% shy of its 52-week high seen on 30 January. The shares currently trade at about 13 times estimated earnings for financial year 2022, according to Bloomberg data. If profit margins continue to surprise, investors could well be willing to allocate higher multiples.

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