Mumbai: Shares of Mahanagar Gas Ltd (MGL) have risen by about 7% since the city gas distributor announced its September quarter earnings early last week.

This is at a time when volume performance was below expectations. The company’s September quarter volumes increased by just 1.3% year-on-year. This is the second quarter in a row that the volume growth remained uninspiring. Recall that June quarter volume growth was 3.3%.

Despite the subdued volumes, the MGL stock is burning brighter since its September quarter results. What gives? Investors seem to be pleased with the company’s margin performance. “Indeed, margin expansion led to 4% beat in Ebitda in the September quarter (up 21.1% year-on-year, down 1.5% quarter-on-quarter) but the quality of earnings growth was a tad disappointing," said analysts from Jefferies India Pvt. Ltd in a report on 11 November. Ebitda stands for earnings before interest, tax, depreciation and amortization.

The company’s September quarter volumes increased by just 1.3% year-on-year.
The company’s September quarter volumes increased by just 1.3% year-on-year.

“The margin trajectory of MGL however continues to remain robust with Ebitda margin (adjusted for AS-116 accounting norms) at 9.7 per standard cubic meter (scm) in 2QFY20," added the analysts.

Overall, MGL’s reported net profit stood at 270 crore, far higher than Street estimates, helped by robust margin and deferred tax write-back.

Meanwhile, valuations at about 14 times estimated earnings for FY21 appear reasonable.

Despite the recent appreciation in the share price, the stock has declined by about 2% since the beginning of FY20. Until Shell India sold its remaining 10% stake in MGL in August, shares of the latter suffered from the potential overhang of the stake sale. While that is out of the way now, there are concerns on long-term volume growth.

“Potential from the existing areas of Mumbai Metropolitan region, and the addition of Raigadh district is enough to support 6% p.a growth over the next several years (as per guidance)," said analysts at Centrum Broking Ltd in a report on 13 November.

“We note however that estimated FY20 growth is set to come materially below this level (H1 growth is at 2.3%) and growth beyond FY23-24E is also uncertain, given lack of new areas in MGL’s portfolio," added the analysts.

Having said that, if profit margins remain robust, the MGL stock’s valuations could find support.

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