OMC’s have asked for an increase in trade margins- Mahanagar Gas

Update on the Indian Equity Market:
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Excerpts from an interview of Mr. Deepak Sawant, Deputy MD, Mahanagar Gas with CNBC-TV18 dated 17th November 2020:

● Margins have increased led by a drop in the purchase prices of gas. Domestic gas is around 75-80% of total sales.
● There is an improvement seen in the maintenance cost and other expenditures.
● On volumes and execution, he said the volume was 2.1 mmscmd in Q2FY21.
● In Q3 and Q4 the company will cross 3 mmscmd but on an overall FY21 basis we will be at ~2.5 mmscmd.
● Oil marketing companies have asked for a hike in dealer commission. The OMC’s have asked for double of earlier trade margins. The company has created a contingent liability every year as per the formula.
● The capex plan for FY21E is around Rs 550cr. The company is planning 1.5 times of FY21E capex in FY22 because of future opportunities.
● The volume growth in Q3 & Q4 will be 10% higher YoY.
● The company has reached 100% of the previous year’s volumes and CNG volumes still at 90% as of the date of the interview, so volume growth has come from other sectors.
● In the last 6 months, there were around 40,000 vehicles converted in the city of Mumbai to CNG which amounts to 10% of CNG volumes.

Consensus Estimate: (Source: market screener and Investing.com websites)
● The closing price of Mahanagar Gas was ₹ 906 as of 18-November-2020. It traded at 15x/ 12x/ 11x the consensus Earnings per share estimate of ₹ 59.4/78.6/84.8 for FY21E/ FY22E/ FY23E respectively.
● e consensus average target price for Mahanagar Gas is ₹ 1,119/- which implies a PE multiple of 13x on FY23E EPS of 84.8/-.

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