Optimism in natural gas distribution co MGL's stock appears fully priced in

MGL distributes gas through an extensive CGD network of pipelines, and supplies CNG to 0.77 million vehicles and PNG to 1.53 million domestic households

Mahanagar Gas (MGL) has just hiked prices for compressed natural gas (CNG) and domestic piped natural gas (PNG) in the Mumbai Metro Area. The distributor raised prices by Rs 1.50 per kilogramme (kg) for CNG, bringing the price up to Rs 75 per kg, including taxes. Domestic PNG prices were hiked from Rs 1 per standard cubic meter (SCM) to Rs 48 per SCM, inclusive of taxes.

MGL also hosted its analyst meet in June, highlighting a strong FY24 performance, and gave guidance of a 5-year volume CAGR of 6-7 per cent (standalone) versus 5 per cent during FY19-24 and around 10 per cent CAGR for recently acquired subsidiary Unison Enviro Private Limited (UEPL). The management indicated a focus on infrastructure creation with a capex target of Rs 1,000 crore for FY25, split between standalone and UEPL at Rs 800 crore and Rs 200 crore, respectively. APM (administered pricing mechanism) based gas allocation is around 70 per cent of priority volume now and the shortfall is met via HP-HT gas.

The company targets 5-6 new LNG stations per annum. It could see some margin reduction as it pushed volume growth. However, it has operating efficiencies, and high population density in its favour as one of the largest city gas distributors (CGDs) since it is the sole authorised distributor of CNG and PNG in Mumbai, Thane urban and adjoining municipalities and Raigad district (Maharashtra). CNG is used in vehicles and PNG is for domestic household, commercial and industrial use.

MGL distributes gas through an extensive CGD network of pipelines. It supplies CNG to 0.77 million vehicles and PNG to 1.53 million domestic households. The company has established connectivity for nearly 2.49 million households in the three gas-licensed areas that it covers. MGL laid 226.04 kilometres of steel and PE pipeline during Q4FY24, for an aggregated pipeline length of 6,968 km. It also added 28 CNG stations during Q4FY24, taking it to a total of 347 CNG stations. MGL also added 108 industrial and commercial customers during this quarter to reach a total of 4,769 industrial customers. There’s a strong balance sheet and it incurred capex of Rs 775 crore in FY24.

Average sales volume for FY24 was 3.609  million standard cubic meters per day  (mmscmd), up from 3.423 mmscmd in FY23 for an increase of 5.45 per cent in overall sales volume Y-o-Y. Revenue for FY24 stood at Rs 6,245 crore, while Ebitda was Rs 1,843 crore versus Ebitda of Rs 1,184 crore in FY23, up 56 per cent year-on-year. PAT for FY24 was Rs 1,289 crore, up from Rs 790 crore in FY23, an increase of 63 per cent.

Climate change concerns are a big driver for gas uptake amidst a policy push to curb CO2 emissions. Per capita consumption is expected to increase from 185 (FY24) to 500 mmscmd by 2030. There are rumours that natural gas may be included in GST, which would reduce the overall impost of aggregated excise, sales tax and VAT and simplify the tax regime. This could be a trigger for faster gas adoption. Many analysts are positive about MGL, especially after the recent hike. According to a Bloomberg poll of a dozen analysts in July, five have a ‘buy’ rating and four are ‘neutral’; the rest are bearish. Their average one-year target price is Rs 1,617 versus current price of Rs 1,715 (post over 35 per cent rally since early June).