Mahanagar Gas share price target: Should you buy MGL stock post 15% fall?

A sharp knee-jerk selloff in shares of city gas distributor Mahanagar Gas Ltd (MGL) could be viewed as an ideal buying opportunity, Nuvama Institutional Equities said post CNG price cuts. This came a day after Citi downgraded the MGL stock to 'Sell' from 'buy' citing regulatory risks.

Nuvama said more than half the CNG price cut (Rs 1.70) is led by easing spot (10 per cent input mix). CNG, it noted, is 50 per cent more competitive now than petrol and 35 per cent than diesel, which would boost volume . While the PNGRB stated that MGL’s Mumbai monopoly ended in April 2021; Nuvama argued that this can extend by 10-plus years given precedents.

"Critically, entrants cannot market at stations MGL already dispenses at, minimising competition. And nothing can move forward till pending court cases are resolved. iv) At 11 times FY25E PE (IGL 15 time), MGL shall re-rate in our view; reiterate ‘BUY’," Nuvama said.

Nuvama said while the PNGRB has stated that MGL’s monopoly ended in Mumbai on April 11, 2021 and as per regulations, this is extendable for ten years, for which precedents exist in other geographies. Hence, it is essentially a non-issue as marketing exclusivity opens up once the court case is resolved, Nuvama noted.

"Moreover, the regulation clearly stated competition cannot start their own marketing at stations already fitted with MGL’s dispensation. This leaves less than 30 per cent outlets available for setting up gas dispensation—almost all likely to be ultra-low output outlets. Besides, MGL would earn a 12 per cent RoIC on the pipeline distribution for even the volumes sold by competition. In a nutshell, the barrier to entry is high and the impact on volumes rather insignificant," Nuvama said.

On the margin front, Mahanagar Gas earned a margin of Rs 13 per scm in the December quarter and its  long-term guidance stands at Rs 10 per scm. Nuvama insisted that CNG’s competitiveness on petrol/diesel will rise post the price cut, which should boost volumes further.

Finally, it said penetration of 35–40 per cent in geographical areas (GAs) I and II and 15–20 per cent in GA III implies tremendous scope for growth over coming years. It expects MGL to maintain a long-term volume CAGR of 6 per cent. Mahanagar Gas planned capex for FY24 stood at Rs 700-800 crore and FY25 at Rs 900 crore.

"We believe MGL likely to continue to re-rate given discounted valuation to long-term average (-1SD PE/PB) amid healthy demand, and expansion to new GAs. It is debt-free with high cash of Rs 200 crore-plus and a dividend yield of 3 per cent. We hence reiterate ‘BUY/SO’ on the stock with an unchanged shar price target of Rs 1,601," Nuvama said.