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Pick of the Week: Buy Mahanagar Gas at CMP and add on declines to Rs872- Rs876 band - IndiaNotes.com
Pick of the Week: Buy Mahanagar Gas at CMP and add on declines to Rs872- Rs876 band
HDFC Sec | Published: 12 Feb, 2018  | Source : IndiaNotes.com

Investment rationale:


- MGL is in the process of expanding the CGD network in the Geographic Area of Raigarh District


- Sourcing and cost advantage for Natural Gas could protect its margins


- Proposal of unified tariffs could be positive for MGL


- Growth through wins in CGD bidding rounds could help report inorganic growth, going forward


- Expanding infrastructure to strengthen its network could help generate additional revenue, going forward


- Maharashtra Government’s City Taxi norms to shift the fuel source from diesel to CNG - positive for MGL


- Strong financial profile, with healthy profitability and return indicators


Concerns:


- Largely dependent on CNG business


- Delay in commissioning new CNG filling stations


- Delay in approvals from multiple regulatory bodies could impact its future growth


- Competition with other existing players in Maharashtra


View and valuation


MGL has a monopoly position in Greater Mumbai (GA1) and the surrounding expansion areas (GA2) and it has diversified its customer profile. MGL could continue to enjoy a dominant market share because of its first-mover advantage, as is evident from its established infrastructure network. Additionally, there are significant entry barriers for third-party marketers. These are arising mainly from concerns regarding availability of gas at competitive prices. MGL is in a sweet spot given the existing large customer area and the new area (Raigarh district), modest penetration in the existing areas, favourable feedstock allocation and gas pricing, strong financial profile, strong robust free cash flows and strong robust return ratios. Markets could gradually correct the under-valuation that it is giving to MGL currently.


We feel investors could buy the stock at the CMP, and add on dips to the Rs. 872-876 band (14.75x FY20E EPS) for sequential targets of Rs 1,097 (18.5x FY20E EPS) and Rs 1,188 (20.0x FY20E EPS). At the CMP of Rs 973, the stock trades at 16.4x FY20E EPS.

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For more information please write in to editor@indianotes.com


Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor IndiaNotes.com accept any liability whatsoever arising from the use of any of the above contents.

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