Mahanagar Gas Ltd. was downgraded to 'sell' by Citi as margins are more susceptible to regulatory pressure from the government.
This concern gained traction after the oil minister at an recent industry event hinted of taking measures to pass on the benefits of the gas reforms to end-consumers.
The brokerage also cuts Mahanagar Gas' target price by 5% to Rs 1,405 apiece to reflect slightly lower longer-term Ebitda per standard cubic meter of gas.
Petroleum Minister's Statements On Passing Price Cuts To Consumers
Citi attributes the rising concerns to the latest statements by Petroleum Minister Hardeep Singh Puri at an industry meet, wherein he said that the full benefits of the government's gas reforms have not been passed on to the end-consumers, as is evident from the strong financial performance of the city gas distributors.
The minister indirectly attributed the monopoly CGD companies enjoy in their respective geographical areas to the Petroleum and Natural Gas Regulatory Board inability to enforce compliance with regulations and targets due to a lack of adequate punitive measures.
Puri noted that all 12 city gas distribution bidding rounds are complete, which means that 100% of India's areas have now been bid out for gas distribution, Citi said. The government will consider measures to ensure that the full benefits of the gas reforms are passed on to the end-consumers, Citi said quoting the minister.
Why Mahanagar Gas Stands To Lose The Most?
Mahanagar Gas' margins are more susceptible to any drastic steps undertaken by the government in the future due to the premium in margins it enjoys compared to its peers. The brokerage states that any measures undertaken could renew concerns about exclusivity as well as margins.
Mahanagar Gas stands to lose more than its competitors, given its current per-unit Ebitda margins of Rs 13 per standard cubic metre of gas compared to its competitors, Indraprastha Gas and Gujarat Gas, Citi said.
The brokerage also highlighted that MGL currently trades at a FY26 forward price-to-earnings ratio of 13 times, which is in line with peer Indraprastha's valuation. IGL currently has better volume growth.
Potential Overhang For Margin Sustainability
The Petroleum and Natural Gas Regulatory Board has issued guidelines to end the market exclusivity enjoyed by gas distribution companies and launch open access several times in the past, but no such guidelines have materialised.
However, the Petroleum and Natural Gas Regulatory Board also announced in February 2024 that the board will be setting up a high-level expert committee to review the existing regulatory framework. Citi interprets this as creating a potential overhang on the sustainability of high margins for city gas distributors.
Mahanagar Gas Cuts CNG Prices
Mahanagar Gas also cut its compressed natural gas price in and around Mumbai on Tuesday, with effect from 12:00 a.m. on March 6. The company has cut CNG prices in Mumbai by Rs 2.5 per kilogram to Rs 73.5 per kilogram.
Mahanagar Gas' new CNG prices now offer consumers in Mumbai a 53% and 22% savings compared to petrol and diesel, respectively. The last CNG price cut undertaken by the company was back in October 2023.
Mahanagar Gas's stock fell as much as 12.9% during the day to Rs 1,363 apiece on the NSE. It was trading 11.24% lower at Rs 1389.4 apiece, compared to a 0.08% advance in the benchmark Nifty 50 as of 9:49 a.m.
It has risen 43.2% in the last 12 months. The total traded volume so far in the day stood at 12 times its 30-day average. The relative strength index was at 40.5.
Twenty out of the 34 analysts tracking the company have a 'buy' rating on the stock, eight recommend a 'hold' and six suggest a 'sell', according to Bloomberg data. The average of 12-month analyst price targets implies a potential downside of 0.1%.
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