Shares of Mahanagar Gas Limited (MGL) on Monday closed nearly 9% higher on the NSE, as well as hit a new 52-week high during trading hours. Investors are quite bullish on City Gas Distribution (CGD) company acquiring 100% stake in Unison Enviro Pvt. Ltd. (UEPL). The deal will help MGL expand to areas outside Mumbai, which is a major area of operations. This supports MGL’s long-term volume growth outlook.
Analysts at Kotak Institutional Equities said, “MGL’s volume growth has been weak (compared to Indraprastha Gas/Gujarat Gas) and the UEPL acquisition provides an opportunity for MGL to expand its operations outside Mumbai and address growth concerns.” Gotta help.” Of 531 cr at 5.9x FY22 EV/Sales may appear overwhelming. “But we note that CGDs are typically long-term projects, and sales/profitability typically improve with scale,” he said.
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UEPL is engaged in supply of natural gas to domestic, commercial and industrial sectors. The deal is MGL’s first inorganic acquisition in the CGD sector. The company said the purchase will help it expand to new markets in Maharashtra (Ratnagiri, Latur and Osmanabad) and Karnataka (Chitradurga and Davangere).
“Although these areas appear to be predominantly rural, we believe that each of these districts with large population and some industrial/commercial potential can support a reasonable amount of 0.2-0.25mmscmd over 3-4 years. This implies an additional volume of about 1mmscmd for MGL by FY28E,” said analysts at ICICI Securities.
MGL’s sales volume in the December quarter was 3.4 MMSCMD. The company’s volume growth has been sluggish in the last few quarters due to high gas prices. To be sure, it could be a long wait before the acquisition is reflected in the profit amounts. This is because MGL has to invest in infrastructure and ramp up execution. Note that while UEPL posted strong revenue growth in FY20-FY22, it reported a loss 24.9 crores in FY22.
Hence, till the time volume growth does not pick up, there appears limited scope for meaningful upside in MGL stock. “Currently, MGL is trading at a discount to its peers Indraprastha Gas and Gujarat Gas,” said Nitin Tiwari, executive vice-president, Yes Securities. For rerating, a visibility on continued volume growth is required and this acquisition could perhaps help reduce the discount.” According to Bloomberg data, shares of MGL trade at 9.5 times estimated earnings for FY24. Indraprastha and Shares of Gujarat Gas trade at 17.4 times and 25.7 times, respectively.
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