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Stock pick of the week: Why are analysts betting on Mahanagar Gas

The expected improvement in volume growth due to the addition of 500 new CNG buses and 40 new CNG stations in the Mumbai Metropolitan Region has made it a top pick.

, ET Bureau|
Updated: Aug 19, 2019, 12.23 PM IST
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Better volume growth, due to addition of new CNG buses and stations, is another positive for Mahanagar Gas
Despite muted volumes, Mahanagar Gas was able to report better than expected numbers for the first quarter of 2019-20 due to margin surge. A high base— the Mumbai market is nearing saturation and conversion of vehicles to compressed natural gas (CNG) has slowed—is the main reason behind the 3% y-o-y volume growth.

The state transport corporation scrapping a few CNG buses was another reason for the sub-optimal volume growth in the first quarter. However, volume growth is expected to improve to 6-8% in the coming quarters because of the addition of around 500 new CNG buses and around 40 new CNG stations in 2019-20 in unexplored areas of Mumbai Metropolitan Region like Raigad district.

The positive surprise, however, came on the margin front. Mahanagar Gas reported its highest ever Ebitda margin in a first quarter, triggered by the fall in spot natural gas prices and reduction in operational expenses. Ebitda stands for earnings before interest, tax, depreciation and amortisation. The recent fall in oil prices brought down the gap between natural gas and alternative fuels and therefore, may warrant some price cuts for natural gas.

However, Mahanagar Gas is expected to make only small cuts because its major customers, CNG vehicle users (around 73% volume) and piped natural gas (PNG) domestic users (around 13% volume) are not very price sensitive. More importantly, running cost of CNG vehicle is still cheaper by around 25% than that of petrol and diesel vehicles and that explains why CNG vehicle sales are able to grow at a period of weakening auto sales.

Analysts are also getting attracted to the Mahanagar Gas counter now because the recent underperformance—it fell 21% fall during the last four months compared to 4% fall in Sensex and 8% fall in ET Oil & Gas Index— which has brought its valuations down to reasonable levels.

The expected 10% stake sale by BG group in the near future—its lock-in expired in June 2019—is the main trigger for this correction. Though this stake sale fear could act as a technical overhang on the counter in short term, this also improves margin of safety (in terms of valuation) for the counter. For example its PE and PB valuations are placed around 25% discount to its 3 year average.

Analysts’ views
  • Buy: 23
  • Hold: 3

Mahanagar-Gas


Selection Methodology
We pick up the stock that has shown maximum increase in “consensus analyst rating” during the past month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it.
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