Mahanagar Gas (MAHGAS)

CMP: | 1165 Target: | 1340 (15%) Target Period: 12 months BUY May 26, 2021 Second wave affects demand recovery... Particulars

Ss Mahanagar Gas’ (MGL) results for Q4FY21 were broadly in line with Particu lar Am o u n t estimates on the operational front. Topline increased 4.2% YoY to | 784 Market Capitaliz ation (₹ Crore) 11,507.6

crore vs. our estimate of | 772.6 crore. Sales volume came in at 2.9 Total Debt (FY 20) (₹ Crore) 49.0 mmscmd, up 3.8% YoY (up 4.4% QoQ) in line with estimate. Gross margins Cash and Investments (FY 20) ( ₹ Crore) 229.5 were marginally better than estimate of | 17.5/scm at | 17.7/scm, up EV (₹ Crore) 11,327.1 | 2.4/scm YoY (flat QoQ). EBITDA at | 316.2 crore (up 29.7% YoY) was 52 week H/L 1257/780 Equity capital (₹ Crore) 98.8 slightly below our estimates of | 321 crore. Other income of | 17.2 crore was Face value (₹) 10.0 lower than expectations of | 27 crore. Reported PAT was at | 212.8 crore, ss ss up 26.7 % YoY (our estimate: | 225.8 crore). Update Result Key Highlights CNG, commercial PNG demand impacted in Q1FY22E  Results largely in line with estimates MGL reported volume growth of 3.8% YoY on a lower base. CNG volume on operational front grew 2.2% YoY to 2 mmscmd in line with estimate. On the PNG front, volumes grew 7.9% YoY to 0.9 mmscmd. While industrial and domestic  Total volumes reported growth of PNG segments reported growth of 21.7% YoY, 8.9% YoY, commercial PNG 3.8% YoY to 2.9 mmscmd volumes were still down 11.6% YoY. Given the cost economics of natural  Margins expected to remain healthy gas over other alternative fuels in conjunction with rising pollution concerns, on the back of price hike achieving higher growth over the long term should not be a concern. The management said that CNG sales volume dipped up to 25-30% in the current  Maintain BUY with target price of |

quarter (Q1FY22-TD) due to the second wave of Covid-19. Accordingly, we 1340/share revise our estimates and expect sales volumes at 2.9 mmscmd and 3.4 mmscmd in FY22E and FY23E, respectively. Among new initiatives, the company is also planning to sell CNG via a mobile unit to increase penetration owing to lack of space to build infrastructure in certain areas. Key risks to Our Call  Slower than expected volume Healthy margin outlook, going ahead recovery can affect profitability

MGL’s gross margins increased | 2.4/scm YoY to | 17.7/scm on account of  Inability to pass on higher costs lower gas prices. Gross margins were flat QoQ. Subsequently, EBITDA/scm to customers can impact Retail Equity Research Equity Retail

also increased by | 2.5/scm YoY to | 12.1/scm (down | 0.3/scm QoQ). The margins, thereby profits company’s discussion with oil marketing companies regarding a hike in – trade margins will also be a key monitorable. With increase in petrol, diesel prices, the competitive advantage of CNG has increased substantially over the past few months. Hence, we believe MGL will be able to pass on higher costs to customers in future also. Going ahead, gross margins are expected to stay strong at | 17.5/scm, | 17.2/scm in FY22E, FY23E respectively. Research Analyst ICICI Securities Securities ICICI Valuation & Outlook Mayur Matani [email protected] The government’s priority allocation of domestic gas to the CGD sector has enabled MGL to access cheaper gas for CNG and domestic business Amogh Deshpande segments (~85% of sales mix). MGL’s strong gas pipeline infrastructure and [email protected] expanding operations in Mumbai, its adjoining areas and Raigad district will enable the company to capture the benefits of the large and growing market given the low penetration. We maintain BUY recommendation with an unchanged target price of | 1340/share (13x FY23E EPS). Key Financial Summary

sss s Key Financials FY19 FY20 FY21E FY22E FY23E CAGR (FY20-23E) Revenue (₹ crore) 3,056.8 3,264.5 2,337.8 3,206.1 3,695.6 4.2 Key Financials FY17 FY18 FY19E FY20E FY21E CAGR (FY19-21E) EBITDA (₹ crore) 885.5 1,052.9 934.0 1,308.6 1,490.6 12.3 PA TRevenue (₹ crore) (| crore) 2,239.1546.5 2,452.9793.5 3,056.8619.6 3,362.8890.4 3,578.11,018.8 8.2 8.7 EPS( EBITDA₹) (| crore) 644.255.3 780.680.3 885.562.7 1,089.690.1 1,106.3103.1 11.8 P/E PAT (x) (| crore) 393.421.1 477.914.5 546.518.6 818.212.9 762.911.3 18.2 P/Book EPS(|) (x) 39.84.8 48.43.9 55.33.5 82.83.0 77.22.5 RoCE P/E (%(x) ) 31.7 25.3 29.7 20.8 18.222.6 12.228.4 13.027.5 RoE P/Book (% ) (x) 22.8 5.4 26.9 4.7 18.7 4.1 3.322.9 2.922.1 Source: Company, ICICI Direct Research Result Update | Mahanagar Gas ICICI Direct Research

Exhibit 1: Variance Analysis Q4FY21 Q4FY21E Q4FY20 YoY (%) Q3FY21 QoQ (%) Comments Total Revenues 784.0 772.6 752.7 4.2 727.3 7.8 Raw materials costs 257.0 250.2 298.5 -13.9 214.4 19.9 Employees Cost 18.2 20.3 17.9 1.3 19.9 -8.7 Other Expenses 192.7 181.1 192.4 0.2 176.3 9.3 Total Expenditure 467.9 451.6 508.8 -8.0 410.6 13.9 EBITDA 316.2 321.0 243.8 29.7 316.7 -0.2 Largely in line with estimates EBITDA margins (%) 40.3 41.5 32.4 793 bps 43.5 -322 bps Depreciation 44.8 43.1 44.0 1.9 44.1 1.6 EBIT 271.3 277.9 199.8 35.8 272.6 -0.5 Interest 1.9 1.5 2.1 NA 1.7 11.6 Other Income 17.2 27.0 27.0 -36.3 20.4 -15.8 Lower-than-expected Extra Ordinary Item 0.0 0.0 0.0 NA 0.0 NA PBT 286.6 303.4 224.7 27.5 291.3 -1.6 Total Tax 73.8 77.7 58.1 27.0 74.1 -0.4 PAT 212.8 225.8 166.6 27.7 217.2 -2.0

Key Metrics Sales Volumes CNG, domestic PNG reported volume growth. Industrial 2.9 2.9 2.8 3.8 2.8 4.4 (mmscmd) PNG grew 21.7% YoY Realisation (|/scm) 30.1 29.5 29.7 1.4 28.5 5.6 Gross Margin (|/scm) 17.7 17.5 15.3 15.6 17.7 -0.2 Slightly higher than estimates Source: Company, ICICI Direct Research

Exhibit 2: Change in estimates FY22E FY23E (| Crore) Old New % Change Old New % Change Comments Revenue 3430.4 3,206.1 -6.5 3657.9 3,695.6 1.0 We revise FY22E estimates taking into account reduced EBITDA 1,362.8 1,308.6 -4.0 1,450.0 1,490.6 2.8 sales volume in Q1FY22E EBITDA Margin (%) 39.7 40.8 109 bps 39.6 40.3 69 bps PAT 953.9 890.4 -6.7 1,018.4 1,018.8 0.0 EPS (|) 96.6 90.1 -6.7 103.1 103.1 0.0 Source: Company, ICICI Direct Research

Exhibit 3: Assumptions es Current Earlier Comments FY20 FY21E FY22E FY23E FY22E FY23E Sales Volumes Reduced sales volume estimates for FY22E on account of 2.95 2.21 2.93 3.41 3.20 3.41 (mmscmd) second wave of Covid-19 in Q1FY22E Realisation (|/scm) 30.2 29.0 30.0 29.7 29.3 29.4 Revised gross margins upwards due to higher realisation and Gross Margin (|/scm) 14.7 17.4 17.5 17.2 16.8 16.8 better pricing power Source: Company, ICICI Direct Research

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Story in charts

Exhibit 4: Volume to grow at steady pace

3.5

3.0 1.0 2.5 0.8 0.8 0.9 2.0 0.8 1.5

mmscmd 2.4 1.0 2.2 2.1 2.0 1.4 0.5 0.0 FY19 FY20E FY21E FY22E FY23E

CNG PNG

Source: Company, ICICI Direct Research

Exhibit 5: Margin trend

20.0 17.5 18.0 17.4 17.2

16.0 14.7 14.0 12.9

|/scm 12.0

10.0

8.0

6.0 FY19 FY20E FY21E FY22E FY23E

Source: Company, ICICI Direct Research

Exhibit 6: Revenues, PAT to continue to show upward trend

1150.0 4800 1050.0 4400 1018.8 793.5 950.0 4000 850.0 890.4 3695.6 3600 750.0 3264.5 3056.8 3206.1 650.0 | crore | 3200 crore | 546.5 619.6 550.0 2800 450.0 2337.8 2400 350.0 2000 250.0 FY19 FY20E FY21E FY22E FY23E

Revenue PAT

Source: Company, ICICI Direct Research

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Exhibit 7: Shareholding Pattern (in %) Mar-20 Jun-20 Sep-20 Dec-20 Mar-21 Promoter 32.5 32.5 32.5 32.5 32.5 FII 31.3 29.9 25.6 29.6 31.1 DII 17.0 18.7 20.1 18.1 17.2 O thers 19.2 18.9 18.9 19.9 19.2 Source: Company, ICICI Direct Research

Exhibit 8: Price Performance

1400 18000 1200 16000 14000 1000 12000 800 10000 600 8000 400 6000 4000 200 2000 0 0 Nov-18 Nov-19 Nov-20 May-18 May-19 May-20 May-21

MAHANAGAR GAS NIFTY Index

Source: Company, ICICI Direct Research

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Financial summary

Exhibit 9: Profit and loss statement | crore Exhibit 10: Cash flow statement | crore (Year-end March) FY20 FY21E FY22E FY23E (Year-end March) FY20 FY21E FY22E FY23E Re ve n u e 3264.5 2337.8 3206.1 3695.6 Profit after Tax 793.5 619.6 890.4 1,018.8 G row th (% ) 6.8 -28.4 37.1 15.3 Add: Depreciation 161.7 173.7 187.4 205.0 Raw material Costs 1379.6 747.3 1066.4 1246.7 Add: Others -44.2 16.6 15.0 15.0 Employee Costs 80.6 87.5 93.7 100.2 Cash Profit 911.0 809.8 1,092.8 1,238.8 Other Expenditure 459.0 383.7 473.8 545.3 Increase/(Decrease) in CL 128.9 157.6 -203.0 137.2 Op. Expenditure 2211.6 1403.8 1897.6 2205.1 (Increase)/Decrease in CA 113.2 -52.3 -123.9 -52.5 EBIT DA 1052.9 934.0 1308.6 1490.6 CF from Operating Activities 1153.1 915.1 765.9 1323.6 G row th (% ) 18.9 -11.3 40.1 13.9 Purchase of Fixed Assets 564.4 350.2 300.0 375.0 Depreciation 161.7 173.7 187.4 205.0 (Inc)/Dec in Investments -467.5 -40.0 -40.0 -40.0 EBIT 891.2 760.3 1121.2 1285.5 O thers 0.0 0.0 0.0 0.0 Interest 6.5 7.2 6.0 6.0 CF from Investing Activities -1,031.8 -390.2 -340.0 -415.0 O ther Income 98.9 80.5 80.0 88.0 Inc/(Dec) in Loan Funds 49.0 8.3 0.0 0.0 PBT 983.5 833.6 1195.2 1367.5 Inc/(Dec) in Sh. Cap. & Res. -1.5 0.0 0.0 0.0 G row th (% ) 17.5 -15.2 43.4 14.4 Less: Dividend Paid 238.2 265.8 300.5 300.5 Tax 190.0 214.0 304.8 348.7 O thers 0.0 0.0 0.0 0.0 Reported PAT 793.5 619.6 890.4 1018.8 CF from financing activities -190.7 -257.5 -300.5 -300.5 G row th (% ) 45.2 -21.9 43.7 14.4 Change in cash Eq. -69.4 267.4 125.4 608.1 EPS 80.3 62.7 90.1 103.1 Op. Cash and cash Eq. 298.9 229.5 496.9 622.3 Source: Company, ICICI Direct Research Cl. Cash and cash Eq. 229.5 496.9 622.3 1,230.4 Source: Company, ICICI Direct Research

Exhibit 11: Balance sheet | crore Exhibit 12: Key ratios | crore (Year-end March) FY20 FY21E FY22E FY23E (Year-end March) FY20 FY21E FY22E FY23E Source of Funds Per share data (₹) Equity Capital 98.8 98.8 98.8 98.8 Book V alue 298.9 334.7 394.5 467.2 Preference capital 0.0 0.0 0.0 0.0 Cash per share 136.8 167.9 184.6 250.2 Reserves & Surplus 2,853.9 3,207.7 3,797.6 4,515.9 EPS 80.3 62.7 90.1 103.1 Shareholder's Fund 2,952.7 3,306.5 3,896.4 4,614.7 Cash EPS 96.7 80.3 109.1 123.9 Loan Funds 49.0 57.3 57.3 57.3 DPS 35.0 23.0 26.0 26.0 Deferred Tax Liability 160.7 177.3 192.3 207.3 Profitability & Operating Ratios Minority Interest 0.0 0.0 0.0 0.0 EBITDA Margin (% ) 32.3 40.0 40.8 40.3 Source of Funds 3162.4 3541.0 4146.0 4879.3 PAT Margin (% ) 24.3 26.5 27.8 27.6 Fixed Asset Turnover (x) 1.3 0.9 1.1 1.2 Application of Funds Inventory Turnover (Days) 2.1 3.0 3.0 3.0 Gross Block 2,617.8 2,892.8 3,167.8 3,442.8 Debtor (Days) 7.7 15.0 15.0 15.0 Less: Acc. Depreciation 568.6 740.9 928.3 1,133.3 Current Liabilities (Days) 105.1 170.0 100.0 100.0 Net Block 2,049.2 2,151.9 2,239.5 2,309.5 Return Ratios (%) Capital WIP 486.5 560.3 585.3 685.3 RoE 26.9 18.7 22.9 22.1 Total Fixed Assets 2,535.7 2,712.2 2,824.8 2,994.8 RoCE 29.7 22.6 28.4 27.5 Investments 1,121.5 1,161.5 1,201.5 1,241.5 RoIC 54.0 44.6 52.6 58.4 Inventories 18.6 19.2 26.4 30.4 Valuation Ratios (x) Debtor 68.5 96.1 131.8 151.9 PE 14.5 18.6 12.9 11.3 Cash 229.5 496.9 622.3 1,230.4 Price to Book V alue 3.9 3.5 3.0 2.5 Loan & Advance, Other CA 154.8 178.9 260.0 288.3 EV /EBITDA 10.8 11.9 8.4 6.9 Total Current assets 471.3 791.1 1040.4 1701.0 EV /Sales 3.5 4.7 3.4 2.8 Current Liabilities 939.8 1088.8 878.4 1012.5 Leverage & Solvency Ratios Provisions 26.3 35.0 42.4 45.4 Debt to equity (x) 0.0 0.0 0.0 0.0 Total CL and Provisions 966.2 1123.8 920.8 1057.9 Interest Coverage (x) NA NA NA NA Net Working Capital -494.8 -332.7 119.6 643.0 Debt to EBITDA (x) 0.0 0.1 0.0 0.0 Miscellaneous expense 0.0 0.0 0.0 0.0 Current Ratio 0.5 0.7 1.1 1.6 Application of Funds 3162.4 3541.0 4146.0 4879.3 Quick ratio 0.5 0.7 1.1 1.6 Source: Company, ICICI Direct Research Source: Company, ICICI Direct Research

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Exhibit 13: ICICI Direct Coverage Universe (Oil & Gas) CMP TP M C ap EPS (₹) P/E (x) EV/EBITDA (x) Ro C E (%) Ro E (%) Sector / Com pany Ratin g (₹)(₹) (₹ Cr) FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E FY20 FY21E FY22E BPCL (BHAPET) 461 350 Hold 67,267 36.3 13.6 48.4 12.7 33.8 9.5 10.1 20.8 8.3 13.1 3.5 12.2 19.4 8.1 24.2 GAIL (India) (GAIL) 146 150 Hold 65,848 14.7 10.8 14.6 9.9 13.5 10.0 8.2 11.5 7.7 13.7 7.8 12.4 15.1 10.5 13.2 Gujarat Gas (GUJGA) 512 505 Buy 35,246 17.3 17.8 21.2 29.5 28.7 24.2 22.3 17.5 14.8 25.2 32.1 31.8 36.3 28.2 25.8 Indian Oil Corp (INDOIL) 104 115 Hold 95,850 1.4 23.8 11.3 73.0 4.4 9.2 5.1 2.5 3.4 4.8 13.8 7.9 1.4 21.3 9.7 Indraprastha Gas (INDGAS) 502 595 Hold 35,140 16.2 14.6 20.9 30.9 34.3 24.0 21.7 22.4 16.0 25.0 20.8 25.2 22.5 17.7 21.2 Mahanagar Gas (MAHGAS) 1165 1340 Buy 11,508 80.3 62.7 90.1 14.5 18.6 12.9 10.8 11.9 8.4 29.7 22.6 28.4 26.9 18.7 22.9 Petronet LNG (PETLNG) 236 275 Hold 35,400 18.0 20.1 21.5 13.1 11.8 11.0 8.6 7.1 6.4 22.3 26.3 29.0 24.6 26.1 26.6 Source: Company, ICICI Direct Research

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RATING RATIONALE ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock

Buy: >15% Hold: -5% to 15%; Reduce: -15% to -5%; Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093 [email protected]

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ANALYST CERTIFICATION

II/We, Mayur Matani, MBA, Amogh Deshpande, PGDM, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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