INDUSTRY OIL & GAS CMP (as on 1 Aug 2018) Rs 947 Target Price Rs 1,292 Nifty 11,346 Sensex 37,522 KEY STOCK DATA Bloomberg MAHGL IN No. of Shares (mn) 99 MCap (Rs bn) / ($ mn) 94/1,367 6m avg traded value (Rs mn) 431 STOCK PERFORMANCE (%) 52 Week high / low Rs 1,378/772 3M 6M 12M Absolute (%) 6.5 (6.1) (4.9) Relative (%) (0.3) (10.6) (20.1) SHAREHOLDING PATTERN (%) Promoters 65.00 FIs & Local MFs 5.56 FPIs 9.68 Public & Others 19.76 Source : BSE Nilesh Ghuge nilesh.ghuge@hdfcsec.com +912261717342 Robust performance MGL s adjusted 1QFY19 revenue came in at Rs 6.32bn, up 19.1% YoY led by 12.9% YoY increase in volumes to 2.9mmscmd and higher realisations at Rs 24.2/scm (+6.4% YoY). The company has finalised the negotiations with OMCs with respect to trade discounts and accounted additional discount of Rs 129.3mn relating to period from Jan15 to Mar18. This has been netted off from revenue for this quarter. EBITDA stood at Rs 2.24bn up 10.1% YoY and 27.1% QoQ. Per unit EBITDA margin was down 1.6% YoY and up 22.4% QoQ to Rs 8.6/scm. APAT came in at Rs 1.37 bn (+10.1% YoY, +30.6% QoQ). Currently, CNG prices are 3545% discount to Diesel and Petrol respectively. This should provide an adequate cushion and pricing power to MGL to maintain its EBITDA margins above Rs 7/scm over FY1921E. Favourable economics will also accelerate conversion of private vehicles. It will allow the MGL to maintain its volume growth ~5% over FY1921E. In the 9th round of City Gas auctions, PNGRB has planned to roll out CGD network in 86 Geographical RESULTS REVIEW 1QFY19 01 AUG 2018 Mahanagar Gas BUY Areas (GAs), that is, more than double the existing authorised GAs. MGL has bid only for 3 GAs. But the choice of the GAs is well thought of as two (Chennai and Visakhapatnam) out of three GAs are high potential and densely populated among the total GAs offered. Our target is Rs 1,292/sh (27x Jun20E standalone EPS). Maintain BUY. Highlights of the quarter Total volumes were at 2.9mmscmd (+11.9% YoY, +3.8 QoQ). CNG volumes were at 2.1 (+12.6% YoY, +3.3% QoQ). PNG volumes were at 0.8 (+10% YoY, +1.1% QoQ). Price for industrial/commercial customers was up 27% YoY to Rs 35.3/31.11 per kg. Net realisation was Rs 24.2/scm (+146bps YoY, +87bps QoQ), whereas cost of gas was Rs 11.2/scm (+130bps YoY). Raw material cost was lower due to lower SPOT LNG prices. Nearterm outlook: Per unit margins will remain elevated owing to higher than required increase in CNG and PNG prices in 1QFY19. Financial Summary (Standalone) Year Ending March (Rs bn) 1QFY19 1QFY18 YoY Chg. 4QFY18 QoQ Chg FY18 FY19E FY21E Revenues 6.32 5.31 19.1 5.87 7.7 22.3 25.1 25.8 26.8 EBITDA 2.24 3 10.1 1.76 27.1 7.8 7.7 7.9 8.3 APAT 1.37 1.24 10.1 1.05 30.6 4.8 4.7 4.7 4.9 AEPS (Rs) 13.9 12.6 10.1 10.6 30.6 48.4 47.7 47.4 49.1 P/E (x) 19.5 20.4 19.9 19.2 EV/EBITDA (x) 11.0 10.9 10.5 9.8 RoE (%) 24.3 21.3 19.1 18.0 HDFC securities Institutional Research is also available on Bloomberg HSLB <GO> & Thomson Reuters
Per unit raw material cost reduced owing to lower SPOT LNG prices The company has finalised the negotiations with OMCs with respect to trade discounts and accounted additional discount of Rs 129.3mn relating to period from Jan15 to Mar18. This has been netted off from revenue for this quarter The trade discount has been raised to Rs 5/kg from Rs 2.75/kg Sequentially, EBITDA margin was up owing to increase in prices for industrial and commercial segment and lower opex as there was annual maintenance in 4Q Quarterly Financials Snapshot (Rs. bn) 1QFY19 1QFY18 YoY Chg. (%) 4QFY18 QoQ Chg (%) Net Sales 6.32 5.31 19.1 5.87 7.7 Raw material and Traded Goods 2.93 2.31 26.7 2.91 0.5 Employee Expenses 0.17 0.17 3.3 0.16 4.8 Other Operating Expenses 0.99 0.79 24.9 1.03 4.6 EBITDA 2.24 3 10.1 1.76 27.1 Depreciation 0.30 0.25 19.8 0.34 13.1 EBIT 1.94 1.79 8.8 1.42 36.7 Other Income 0.15 0.12 27.7 0.17 11.6 Interest 0.00 0.00 20.0 0.00 166.7 PBT 1.97 1.90 3.3 1.60 23.3 Provision for tax 0.68 0.66 3.4 0.55 24.9 RPAT 1.28 1.24 3.2 1.05 22.5 Oneoffs (0.13) NA NA APAT 1.37 1.24 10.1 1.05 30.6 Margin Analysis 1QFY19 1QFY18 YoY (bps) 4QFY18 QoQ (bps) Raw material as % of Net Sales 46.3 43.6 278 49.6 (331) Employee Expenses as % of Net Sales 2.7 3.3 (62) 2.7 (7) Other Operating Expenses as % of Net Sales 15.6 14.9 72 17.6 (201) EBITDA Margin (%) 35.4 38.3 (288) 30.0 540 Net Profit Margin (%) 21.6 23.4 (177) 17.8 380 Tax Rate (%) 34.8 34.7 5 34.3 44 Page 2
The price hike taken on 1st April (to pass on domestic gas price increase) and on 9th June to pass on the impact of depreciation of rupee (~5.5% during the quarter), increase in proportion of costlier gas from PannaMukta and increase in OMC trade margin and CNG franchise dispensing charges is more than require. This has resulted in expansion in margins Change CNG and PNG volumes in the near term based on 1Q volumes and increase in discount to alternate fuels Quarterly Operational Data 1QFY19 1QFY18 YoY Chg. (%) 4QFY18 QoQ Chg (%) Total Sales Volumes (mmscm) 261.4 233.5 11.9 251.8 3.8 CNG 193.1 171.5 12.6 184.9 4.4 PNG 68.3 62.1 10.1 66.9 2.2 Total Volume (mmscmd) 2.9 2.6 11.9 2.8 2.7 CNG 2.1 1.9 12.6 2.1 3.3 PNG 0.8 0.7 10.1 0.7 1.1 Margins (Rs/scm) 1QFY19 1QFY18 YoY (bps) 4QFY18 QoQ (bps) Realisation 24.2 22.7 145.5 23.3 87.0 Gross Spread 13.0 12.8 15.4 11.7 124.3 Opex 4.4 4.1 29.0 4.7 (32.7) EBITDA Spreads 8.6 8.7 (13.6) 7.0 157.0 PAT 4.9 5.3 (41.4) 4.2 74.7 Change In Estimates FY19E Unit Old New Ch % Old New Ch % Volumes CNG mmscmd 9 2.11 0.7 2.16 2.20 1.8 PNG mmscmd 0.76 0.76 1.2 0.78 0.80 1.6 Exchange Rate Rs/USD 68.00 67.75 (0.4) 67.00 67.00 Revenues Rs bn 24.62 25.10 24.74 25.79 4.3 EBITDA Rs bn 7.39 7.66 3.7 7.51 7.86 4.6 APAT Rs bn 4.49 4.71 5.1 4.45 4.68 5.4 AEPS Rs/sh 45.43 47.73 5.1 45.01 47.42 5.4 Source: HDFC sec Inst Research Page 3
16,000 three wheelers added during the quarter compared to 2,800 in 1QFY18 Volume Trend mmscmd CNG PNG Total 3.5 2.5 2.4 2.5 2.5 2.6 2.6 2.6 2.7 2.7 2.8 2.9 3.0 2.6 2.5 1.5 1.0 0.5 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Margin Trend Rs/scm Gross margin EBITDA margin PAT margin 1 1 10.0 8.0 6.0 2QFY16 3QFY16 4QFY16 1QFY17 2QFY17 3QFY17 4QFY17 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 Change per unit margin in the near term based on higher than required increase in CNG and PNG prices in 1Q. Assumptions FY17 FY18 FY19E FY21E Volumes 2.6 2.7 2.9 3.0 3.1 CNG 1.9 2.1 2.2 2.3 PNG 0.7 0.7 0.8 0.8 0.8 YoY growth of Total Volumes 5.7 5.1 6.3 4.4 Of CNG Volumes 5.5 4.5 6.2 4.5 Of PNG Volumes 6.3 7.1 6.6 4.1 Gross margin (Rs/scm) 10.7 12.2 11.7 11.7 11.8 EBITDA margin (Rs/scm) 6.7 7.9 7.3 7.2 7.3 PAT (Rs/scm) 4.2 4.8 4.3 4.3 4.3 Exchange Rate (Rs/USD) 66.9 67.0 67.8 67.0 67.0 Page 4
CNG Volumes Growth mmscmd CNG CNG YoY Gr (%) RHS % PNG Volumes Growth mmscmd PNG PNG YoY Gr (%) RHS % CNG volumes to grow by ~5% CAGR over FY1821E 2.50 0 1.50 1.00 0.50 0.00 1.90 3.2 1.98 4.5 2.11 6.2 2.20 4.5 2.29 7.0 6.0 5.0 3.0 1.0 0.90 0.80 0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 7.1 0.67 0.72 6.3 0.76 6.6 0.80 0.83 4.1 8.0 7.0 6.0 5.0 3.0 1.0 FY17 FY18E FY19E FY21E FY17 FY18E FY19E FY21E Overall Volume Growth mmscmd Total Overall YoY Gr (%) RHS % EBITDA Margin Trend Rs/scm Overall volumes to grow by ~5% CAGR over FY1821E Per unit EBITDA margin to remain at Rs 7.3/scm over FY1921E 3.50 3.00 2.50 0 1.50 1.00 0.50 2.57 2.70 5.1 2.87 6.3 3.00 4.4 3.12 7.0 6.0 5.0 3.0 1.0 9.0 8.0 7.0 6.0 5.0 3.0 1.0 6.7 7.9 7.3 7.2 7.3 FY17 FY18E FY19E FY21E FY17 FY18E FY19E FY21E Page 5
SOTP Valuation EPS (Rs/sh) Multiple (x) Value Rs/sh Valuation Basis Standalone business 47.8 27 1,292 Value per share 1,292 Source: HDFC sec Inst Research P/E multiple on Peer Valuations Peer valuation MCap (Rs bn) CMP (Rs) RECO TP (Rs) Upside % EPS (Rs/sh) P/E (x) P/BV (x) ROE (%) FY18 FY19E FY21E FY18 FY19E FY21E FY18 FY19E FY21E FY18 FY19E FY21E Reliance Industries 7,070 1,116 BUY 1,200 8 55.9 73.1 80.2 86.2 20.0 15.3 13.9 13.0 2.2 1.8 1.6 11.8 13.9 13.5 13.0 ONGC 2,053 160 BUY 275 72 15.5 21.1 22.5 22.8 10.3 7.6 7.1 7.0 1.1 1.0 0.9 0.9 10.5 13.6 13.5 12.9 Indian Oil Corp 1,507 159 BUY 228 43 22.5 23.0 24.5 26.9 7.1 6.9 6.5 5.9 1.5 1.3 1.2 1.1 20.3 18.7 17.9 17.6 BPCL 767 384 BUY 581 51 39.7 43.2 45.9 49.8 9.7 8.9 8.4 7.7 2.2 1.9 1.7 1.4 24.8 23.3 21.5 20.3 HPCL 421 276 BUY 463 68 41.7 31.9 30.7 33.3 6.6 8.7 9.0 8.3 1.8 1.6 1.4 1.3 28.7 19.0 16.4 15.9 Petronet LNG 347 231 BUY 316 37 13.9 13.5 16.8 19.9 16.7 17.2 13.8 11.6 3.6 3.2 2.7 2.3 23.3 19.6 21.4 21.7 GAIL 819 363 BUY 360 (1) 20.4 23.2 24.6 27.0 17.8 15.7 14.7 13.5 1.9 1.7 1.6 11.7 12.5 12.2 12.4 Oil India 235 207 BUY 338 63 23.5 30.6 32.5 33.3 8.8 6.8 6.4 6.2 0.8 0.7 0.7 0.6 9.4 11.7 11.1 10.2 Indraprastha Gas 207 295 BUY 427 45 9.6 11.3 13.1 13.4 30.8 26.2 22.5 2 5.9 5.1 4.5 3.9 20.9 20.9 21.2 19.1 Mahanagar Gas 94 947 BUY 1,292 36 48.4 47.7 47.4 49.1 19.5 20.4 19.9 19.2 4.5 3.6 3.3 24.3 21.3 19.1 19.2 Asian Oil Field Services* 4 94 NA 168 79 5.4 13.9 16.8 16.7 17.3 6.8 5.6 5.6 3.3 2.4 1.8 1.4 23.7 31.7 28.3 2, * Fair Price Page 6
Standalone Income Statement (March ending) (Rs bn) FY17 FY18 FY19E FY21E Revenues 20.34 22.33 25.10 25.79 26.84 Growth % (2.2) 9.8 12.4 2.8 4.1 Raw Material 10.18 10.29 12.72 12.98 13.44 Employee Cost 0.60 0.67 0.69 0.72 0.76 Other Expenses 3.11 3.56 3 4.24 4.36 EBITDA 6.44 7.81 7.66 7.86 8.28 EBIDTA Margin (%) 31.7 35.0 30.5 30.5 30.8 EBITDA Growth % 25.6 21.2 (1.8) 2.5 5.4 Depreciation 0.95 1.11 1.22 1.42 1.63 EBIT 5.49 6.69 6.45 6.43 6.65 Other Income (Including EO Items) 0.53 0.57 0.50 0.66 0.69 Interest 0.01 0.00 0.00 0.00 0.00 PBT 6.01 7.27 6.94 7.09 7.34 Tax 7 2.49 2.36 2.41 2.49 RPAT 3.93 4.78 4.58 4.68 4.85 EO (Loss) / Profit (Net Of Tax) (0.13) APAT 3.93 4.78 4.71 4.68 4.85 APAT Growth (%) 27.5 21.5 (1.3) (0.6) 3.6 AEPS 39.8 48.4 47.7 47.4 49.1 Standalone Balance Sheet (Rs bn) FY17 FY18P FY19E FY21E SOURCES OF FUNDS Share Capital 0.99 0.99 0.99 0.99 0.99 Reserves And Surplus 17.41 19.97 22.29 24.72 27.31 Total Equity 18.40 20.95 23.28 25.71 28.30 Longterm Debt 0.03 0.01 0.01 0.01 0.01 Shortterm Debt Total Debt 0.03 0.01 0.01 0.01 0.01 Deferred Tax Liability 1.38 1.75 1.75 1.75 1.75 Longterm Provision 0.14 0.16 0.16 0.16 0.16 TOTAL SOURCES OF FUNDS 19.95 22.87 25.20 27.62 30.21 APPLICATION OF FUNDS Net Block 13.05 15.32 16.84 18.41 19.77 Capital WIP 4.12 3.57 3.57 3.57 3.57 LT Loans And Advances 1.12 1.46 1.46 1.46 1.46 Total Noncurrent Investments Inventories 0.24 0.24 0.30 0.30 0.31 Debtors 0.95 0.91 1.03 1.06 1.10 Cash and Cash Equivalents 6.15 7.80 10.02 11.01 12.47 Other Current Assets 0.63 0.81 0.91 0.93 0.97 Total Current Assets 7.96 9.76 12.25 13.29 14.85 Creditors 1.49 1.10 1.36 1.39 1.44 Other Current Liabilities & Provns 4.81 6.13 7.57 7.72 7.99 Total Current Liabilities 6.30 7.23 8.93 9.11 9.43 Net Current Assets 1.67 2.52 3.33 4.19 5.42 TOTAL APPLICATION OF FUNDS 19.95 22.87 25.20 27.62 30.21 Page 7
Standalone Cash Flow Rs bn FY17 FY18P FY19E FY21E Reported PBT 6.01 7.27 6.94 7.09 7.34 Nonoperating & EO Items (0.53) (0.57) (0.63) (0.66) (0.69) Interest Expenses 0.01 0.00 0.00 0.00 0.00 Depreciation 0.95 1.11 1.22 1.42 1.63 Working Capital Change 0.80 0.94 1.42 0.12 0.23 Tax Paid (1.90) (2.11) (2.36) (2.41) (2.49) OPERATING CASH FLOW ( a ) 5.34 6.64 6.60 5.57 6.02 Capex (2.54) (2.83) (2.74) (2.99) (2.99) Free Cash Flow (FCF) 2.81 3.80 3.86 2.58 3.03 Investments (0.02) (0.49) Nonoperating Income 0.53 0.57 0.63 0.66 0.69 Others INVESTING CASH FLOW ( b ) (3) (2.75) (2.11) (2.33) (2.29) Debt Issuance/(Repaid) (0.67) 0.02 0.00 Interest Expenses (0.01) (0.00) (0.00) (0.00) (0.00) FCFE 2.12 3.82 3.86 2.58 3.03 Share Capital Issuance 0.09 Dividend (2.26) (2.26) (2.26) (2.26) (2.26) FINANCING CASH FLOW ( c ) (2.85) (2.24) (2.26) (2.26) (2.26) NET CASH FLOW (a+b+c) 0.46 1.65 2.23 0.98 1.46 EO Items, Others Closing Cash & Equivalents 6.15 7.80 10.03 11.01 12.47 Standalone Key Ratios FY17 FY18P FY19E FY21E PROFITABILITY % EBITDA Margin 31.7 35.0 30.5 30.5 30.8 EBIT Margin 27.0 30.0 25.7 24.9 24.8 APAT Margin 19.3 21.4 18.8 18.2 18.1 RoE 22.1 24.3 21.3 19.1 18.0 Core RoCE 24.2 25.4 21.2 19.9 19.2 RoCE 20.4 22.3 19.1 17.7 16.8 EFFICIENCY Tax Rate % 34.5 34.2 3 33.9 33.9 Fixed Asset Turnover (x) 0.8 0.8 0.8 0.7 0.7 Inventory (days) 4 4 4 4 4 Debtors (days) 17 15 15 15 15 Other Current Assets (days) 11 13 13 13 13 Payables (days) 27 18 20 20 20 Other Current Liab & Provns (days) 86 100 110 109 109 Cash Conversion Cycle (days) (80) (86) (97) (96) (96) Net Debt/EBITDA (x) (1.0) (1.0) (1.3) (1.4) (1.5) Net D/E (0.3) (0.4) (0.4) (0.4) (0.4) Interest Coverage 0.0 0.0 0.0 0.0 0.0 PER SHARE DATA (Rs) EPS 39.8 48.4 46.4 47.4 49.1 CEPS 49.5 59.6 58.7 61.8 65.6 Dividend 19.0 19.0 19.0 19.0 19.0 Book Value 186.3 212.1 235.7 260.2 286.5 VALUATION P/E (x) 23.7 19.5 20.4 19.9 19.2 P/Cash EPS (x) 19.1 15.8 16.1 15.3 14.4 P/BV (x) 5.1 4.5 3.6 3.3 EV/EBITDA (x) 13.5 11.0 10.9 10.5 9.8 EV/Revenue (x) 4.3 3.8 3.3 3.2 3.0 Dividend Yield (%) OCF/EV (%) 6.1 7.8 7.9 6.8 7.4 FCFF/EV (%) 3.2 4.4 4.6 3.1 3.7 FCFE/M Cap (%) 2.3 4.1 4.1 2.8 3.2 Page 8
RECOMMENDATION HISTORY Mahanagar Gas 1,300 1,200 1,100 1,000 900 800 TP Date CMP Reco Target 28Dec17 1,097 NEU 1,211 11Jan18 1,097 NEU 1,209 12Feb18 1,030 NEU 1,240 12Apr18 914 NEU 1,263 22May18 790 BUY 1,259 9Jul18 814 BUY 1,215 1Aug18 947 BUY 1,292 Rating Definitions 700 Aug17 Sep17 Oct17 Nov17 Dec17 Jan18 Feb18 Mar18 Apr18 May18 Jun18 Jul18 Aug18 BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period NEUTRAL : Where the stock is expected to deliver ()10% to 10% returns over the next 12 month period SELL : Where the stock is expected to deliver less than ()10% returns over the next 12 month period Page 9
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