With stake sale overhang behind, Mahanagar Gas could see more gains

Analysts remain positive on the company's earnings driven by soft natural gas prices, volume and geographical expansion

Shares of Mahanagar Gas or MGL gained 7.8 per cent on Tuesday after Shell India sold the final tranche of its 10 per cent stake in the company. A British Gas subsidiary, Shell India along with Gail India (32.5 per cent) held 42.5 per cent in MGL as on end-June 2019. With this latest sale, a major overhang is now behind for the stock which had lost almost 24 per cent since March highs following the stake sale buzz and pressure on broader markets.

The Street’s focus now would shift to fundamentals. A distributor of piped and compressed natural gas (PNG and CNG) to customers in and around Mumbai Region, the company has been doing well recently benefitting from the fall in natural gas prices and the consequent push to margins. MGL had reported all-time high margins during the June quarter, which were also helped by price hikes taken by the company. Gross margins at Rs 15.1 per standard cubic meter (scm) for June quarter were also much better Rs 13-14 per scm estimated by analysts.

Although the volume growth of 3.8 per cent may appear benign (as CNG volumes grew by just 2 per cent), it was on a high base too. MGL has seen average volume growth of 6-6.5 per cent over the last few years. Assuming slightly lower CNG volume growth and also anticipating potential competition for gas distribution companies, analysts say their estimates of volumes still indicate a healthy outlook for MGL. For instance, analysts at ICICI Securities estimate MGL’s volumes to grow 5-6 per cent annually, while Edelweiss pegs volume growth at 6 per cent over the coming years.

Given the cost benefits of natural gas over other alternative fuels in conjunction with rising pollution concerns, analysts feel volume growth should not be a concern. Geographical expansion in Raigarh and Karjat, rising number of three wheelers and new buses being added by state transport entities should help MGL too. The demand for piped natural gas is already growing. Analysts at Prabhudas Lilladher say that they continue to like the company’s business given their dominating share in growing markets of Mumbai and suburbs. Margins too are expected to stay firm. Also, post correction, the stock is trading at reasonable valuations of 12-13 times FY21 estimated earnings. Target prices of Edelweiss, Prabhudas Lilladher and ICICI Securities also indicate potential upside of 12-39 per cent for the stock from current levels of Rs 848.45.