Buy This Small Cap Gas Distribution Stock For High Returns, Target Price Rs 1,082, Says Geojit

Geojit, a leading brokerage firm, is bullish on Mahanagar Gas Limited (MGL), a small-cap gas distribution company having a market capitalisation of Rs 8,961.61 crore. The firm expects the share price to rise 21% in the next 12 months from its current level, with a target price of Rs 1,082 per share.

MGL distributes natural gas to domestic customers, including hospitals, nursing homes, hotels, flight kitchens, and restaurants. Q2FY23 revenue rose 89.2% YoY to Rs. 1,717.5cr (+7.8% QoQ), mostly owing to higher realization due to rise in natural gas & 10.8% growth in volume.

Stock Outlook & Returns Over The Years

The stock of Mahanagar Gas on NSE last traded at Rs 907.25 per share, gaining 0.83% as compared to its previous close. Its 52-week high is Rs 938 recorded on 3 December 2021, and its 52-week low is Rs 665.80 recorded on 20 June 2022, respectively. In 1 and 3 months, the stock surged by 3.53% and 4.04%, respectively. However, it fell 1.51% in 1 year, 12.4% in 3 years, and 17.15% in 5 years, respectively.

Volume growth remains resilient

Net sales witnessed 89.2% YoY growth to Rs. 1,717.5cr in Q2FY23 due to rising demand for CNG/PNG and a 10.8% YoY increase in volume to 318.2 Standard Cubic Meter million (SCMmn) in the current quarter. CNG/PNG revenue stood at Rs. 1,094cr/462cr vs. Rs534cr/290cr in Q2FY22 and a sales volume of 234SCMmn (+13.7% YoY) and 84.4SCMmn (+3.1% YoY), respectively. Average gas sales volume for the half year was 3.45MMSCMD (+10.53% YoY). Sales for domestic PNG have increased 4.4% YoY to 0.471MMSCMD (vs. 0.451MMSCMD in Q2FY22), mainly driven by increasing household connections.

Key concall highlights

• In Q2FY23, the total aggregated pipeline length was ~6,325 km, including 39 km of steel pipeline the company laid during the quarter. In Raigad, the company has laid ~7 km of pipeline, bringing the total pipeline length to 365 km.
• Total CNG stations stood at 296 (+5 in Q2FY23), with 4,427 industrial and commercial consumers (+86 in Q2FY23).
• Capital expenditure of Rs. 300cr has been done until Q2FY23. Management expects to maintain the guidance at Rs. 650-800cr for FY23.

Margins sustain input cost pressures

MGL registered an EBITDA decline of 16.2% in Q2FY23, reaching Rs. 252.8cr. EBITDA margin shrank 1850bps YoY to 14.7%, mainly due to an increase in the weighted average cost of gas and a lower price realisation in the case of industrial and commercial customers amid lower prices of alternative fuel. Consequently, PAT fell 19.7% YoY to Rs. 164cr (-11.5% QoQ).

Valuation

The company enjoys a dominant position in all three of its geographical areas of operation, primarily due to infrastructure exclusivity and/or first-mover advantage. The company has been able to successfully pass on higher input costs to customers by steadily increasing fuel prices. In addition, gas prices are expected to recover in the medium term, supported by government initiatives, thereby leading to improved margins. "We upgrade our rating to BUY on the stock, with a revised target price of Rs. 1,082 based on 13x FY24E adjusted EPS," Geojit said.

Disclaimer

The stock has been picked from the brokerage report of Geojit. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.