Mahanagar Gas - Steady Progress Ahead: ICICI Securities

ICICI Securities Report

We met the senior management of Mahanagar Gas Ltd. on June 26, 2023 to get a sense of its recent developments and future outlook. Presented below are the key takeaways:

Reduction in gas costs is a positive, but results may reflect only by Q2FY24:

Post the Rs 8/kg reduction in compressed natural gas prices at the beginning of Q1 FY24, volumes have remained in the range of 3.45-3.65 million metric standard cubic metre per day (flat to 6% YoY growth) in Q1, with the beginning of summer vacations impacting bus volumes. Q2, however, is likely to see stronger momentum, with the reopening of schools, advent of monsoons (increasing time spent on the road) and the flow through of higher conversions due to better pricing to drive stronger growth.

Price differentials are strong; price stability is a strong driver of demand:

In addition to the strong ~40-50% price discount to petrol and diesel driving CNG demand, pricing stability over the next two years may drive a steady demand momentum. With greater development of Raigadh (Maharashtra) and more aggressive progress in geographical area-II (Thane), we believe there is an upside risk to our estimate of ~6% volume growth over the next three-five years. Also, commercial vehicle demand is likely to pick up, with more original equipment manufacturers, contiguous development around Mumbai Metropolitan Region proving refueling options and favorable costs driving demand over the next three-five years. Therefore, quarterly run rate of ~2,500 commercial vehicles can jump to ~3,500 by the end of FY24E.

Unison acquisition on track, volume potential of ~1mmscmd:

The Unison Enviro Pvt. Ltd. acquisition is likely to complete by December 2023 as the transfer lock-in period of five years for two of the three areas of Unison will get over by September 2023. Unison Enviro reported volumes of 0.1 mmcmd for FY23, which should grow to 0.7 mmscmd by FY28.

Sourcing mix remains comfortable, flexibility to aid margins:

Mahanagar Gas now has ~89% of priority sector gas coming via domestic gas (~2.8 mmscmd), premium domestic gas (~0.2 mmscmd), medium-term liquefied natural gas of ~0.4 mmscmd and 0.1 mmscmd from Reliance Industries Ltd. This leaves only ~0.1 mmscmd required via spot LNG, but interestingly, the medium-term LNG contract has a relatively lower take or Pay so Mahanagar Gas can reduce it and take more spot LNG (since prices are now lower than even term LNG prices), which can help margins. Even with a price reduction of ~Rs 5/litre in petrol and diesel, CNG discount should sustain at ~40%, which ensures strong conversions.

Click on the attachment to read the full report:

DISCLAIMER

This report is authored by an external party. BQ Prime does not vouch for the accuracy of its contents nor is responsible for them in any way. The contents of this section do not constitute investment advice. For that you must always consult an expert based on your individual needs. The views expressed in the report are that of the author entity and do not represent the views of BQ Prime.

Users have no license to copy, modify, or distribute the content without permission of the Original Owner.