Jefferies Financial Group Inc. has upgraded its rating of Mahanagar Gas Ltd. to a 'buy' on the back of strong earnings visibility from the second half of the current financial year through the next fiscal.
The brokerage revised its target price for the natural-gas-distribution firm upwards to Rs 1,320, a 28.4% upside to the stock's previous closing price of Rs 1,028, according to a note on Oct. 1.
Mahanagar Gas' recent original-equipment-manufacturer partnerships will aid volume growth, and the lower high-pressure and high-temperature gas costs provide a strong margin outlook, it said.
Jefferies raised the company's earnings estimates for the current and next fiscals by 6% and 27%, respectively. It said the risk-reward balance is favourable because of the healthy 4% dividend yield, and the valuation, which stands at 10 times the forward price-to-earnings ratio, is lower than the five-year historical average.
Volume Growth
Adoption of compressed natural gas among light-commercial vehicle operators remains low. Mahanagar Gas aims to drive growth in this sector through recent partnerships with passenger vehicle manufacturers, Jefferies said.
These partnerships include incentives like free-fuel cards worth Rs 20,000 for car buyers and fuel worth Rs 2 lakh, Rs 3.5 lakh, and Rs 5 lakh for small, medium, and large commercial vehicle buyers, respectively, it said.
The Maharashtra State Road Transport Corporation is also retrofitting 500 diesel buses with CNG kits in the company's geographical areas. The company expects volume growth to accelerate to 7–8% on the back of these measures, according to Jefferies.
It upgraded its fiscal 2025–26 volume estimates to 6% from 4% previously.
HPHT Gas Allocation
Jefferies said the company secured 0.2 million standard cubic metres per day of high-pressure, high-temperature gas and can secure more volumes as it enjoys the highest gas allocation priority at 7%.
With incremental volumes from Reliance Industries Ltd. and Oil & Natural Gas Corp. available over the fiscal 2024–25 estimates, Jefferies sees healthy margin visibility for Mahanagar Gas as its dependence on liquefied natural gas remains low.
The company benefits from favourable CNG economics. The reduction in HPHT gas prices to $9.96 per million British thermal units in the second half of the fiscal helps mitigate the impact of steep LNG price increases on the margin, it said.
Jefferies estimates the company to maintain Ebitda per standard cubic metre in the Rs 12–13 range with new HPHT gas production commencing in the second half of the fiscal to the next fiscal.
Medium-Term EV Risk
Jefferies said the risk of electrical vehicles over the medium term is manageable. According to management, the adoption of electric vehicles faces challenges in the Mumbai Metropolitan Region due to limitations in establishing charging infrastructure, unlike in the National Capital Region.
Three-wheelers, which account for 30% of CNG volumes, lack sufficient space for charging. Public buses, which make up 7% of CNG volumes, encounter problems with extended charging times and maintenance issues, affecting their operational efficiency.
Shares of Mahanagar Gas were trading 6.69% higher at Rs 1,097.7 apiece compared to a 0.64% decline in the benchmark NSE Nifty 50 at 10.56 a.m. The stock surged 7.3% during the day to Rs 1,104 apiece.
Twenty-three out of the 32 analysts tracking Mahanagar Gas maintain a 'buy' rating on the stock, six recommend 'hold', and three suggest 'sell', according to Bloomberg data. The average of 12-month analyst price targets implies a potential upside of 9.9%.
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