On October 3, shares of Mahanagar Gas Ltd recorded a 5 percent increase following the upgrade of the stock by brokerage firm Jefferies India. The upgrade, from ‘neutral’ to ‘buy,’ is attributed to the company’s strong earnings visibility.
Jefferies India has also raised its target price for the stock to Rs 1,320 per share, reflecting a 31 percent upside from the current market price. As of 10:30 am, the stock was trading at Rs 1,080 on the BSE, representing a 5 percent gain from the previous close.
Mahanagar Gas recently entered into partnerships with car manufacturers to offer free fuel cards worth Rs 20,000 to car buyers. Additionally, they provide varying amounts of free fuel (Rs 0.2 million/Rs 0.35 million/Rs 0.5 million) to small, medium, and large commercial vehicle buyers. These initiatives are aimed at promoting the adoption of compressed natural gas (CNG) among light commercial vehicle (LCV) fleet operators, and the company is optimistic about its growth prospects. Furthermore, 500 diesel buses operated by the Maharashtra State Road Transport Corporation (MSRTC) in Mahanagar Gas’s gas distribution areas are being retrofitted with CNG kits. These measures are expected to drive volume growth to 7-8 percent.
The company has also secured 0.2 million metric standard cubic meters per day (mmscmd) of high-pressure high-temperature gas, with the potential for more due to its city gas distribution (CGD) projects’ high allocation priority. With additional volumes expected from Reliance Industries Limited (RIL) and Oil and Natural Gas Corporation (ONGC) in FY24-25, Jefferies predicts strong profit margins for Mahanagar Gas, along with reduced reliance on liquefied natural gas (LNG).
According to Jefferies India, “Mahanagar Gas’s recent original equipment manufacturer (OEM) partnerships should aid volume growth while lower high-pressure high-temperature gas costs and the highest priority in allocation provide strong margin visibility over 2HFY24-FY25. We raise FY24/25 earnings estimates by 6 percent/27 percent on higher volume and margin estimates. Risk-reward is favorable with valuations at 10x forward price-to-earnings, 1 standard deviation below the last five-year average, and a healthy dividend yield of 4 percent.”
In a bullish scenario, Jefferies expects a price target of Rs 1,400 per share, representing a 39 percent increase from the current market price. Mahanagar Gas is actively expanding its CNG stations and experiencing significant growth in CNG volumes due to a substantial increase in vehicles. Margin expansion is surpassing Jefferies’ expectations.
Jefferies highlighted that strong margin execution is driving earnings per share (EPS) growth despite infrastructure limitations in Mumbai. Margin expansion is anticipated to be a key driver for Mahanagar Gas, which offers attractive valuations compared to its peers and a promising cash flow profile. The report also underscores Mahanagar Gas’s favorable standing among CGD (city gas distribution) stocks in terms of valuation.
