Financial Highlights:

Q4FY24 Result Highlights
Mahanagar Gas Ltd. (MGL) delivered Q4 earnings lower than expectations. Consolidated Revenue stood flat in Q4FY24 at Rs.1613 crores. Gross margin declined 7% QoQ toRs.17.7/scm, miss due to realizations coming lower. Consolidated EBITDA also stood flat at Rs.395 crled by a 12% YoY rise in volumes, which offset an 11% decline EBITDA/scm to INR11.5. In Q4.The company completed the acquisition of Unison Enviro (UEPL). Consolidated Marginsstood flat at 24% in Q4FY24 and EBITDA/scm came in line with estimates at Rs. 11.5 /scm in Q4FY24 due to jump in opex which was weaker-than-expected margin primarily due to jump in opex to INR 6.44/scm in Q3FY24. MGL’s overall sales volume in 4QFY24 was at 344 mmscm (up 1.8% QoQ and up 13.3% YoY), due to higher domestic and industrial/commercial PNG volume; though CNG volume was tad lower than expected. CNG volume grew 11% YoY and was flat QoQ, coming in at 243 mmscm. PNG was up 17% YoY and 6% QoQ, with PNG -Industry / Commercial up 23% YoY and 7% QoQ and Domestic PNG increasing 12% YoY and 5% QoQ.

Total volumes were at 3.8mmscmd (+12% YoY) Ø CNG volumes were at 2.7mmscmd (+11% YoY) Ø PNG total volumes stood at 1.1mmscmd (+16% YoY).

Unit opex rose 10% each YoY and QoQ to Rs 6.4/scm (5% higher). Depreciation and amortization expense was at 37% YoY, whereas other income was up 31% YoY. PAT decreased from Q4FY23 Rs. 269 crores to Rs. 252 crores in Q4FY24 which was a decline of ~6%.

Key Conference Call Takeaways

Mahanagar Gas FY24 Milestones and Q4 Highlights
In Fiscal Year 2024, Mahanagar Gas (MGL) added 36 new CNG stations, the highest ever, and upgraded 45 stations. They also added 320,125 Domestic PNG customers, exceeding 330,000 when including UEPL (Unison Enviro), the highest achieved so far. In Q4FY24 alone, MGL added 28 CNG stations and 117,279 DPNG customers, bringing the total to 347 and 2.49 million cumulative, respectively. The quarter also saw the addition of 226km of pipelines, totalling 6,966km, and an increase in Industrial and commercial PNG customers by 108, reaching 4,769. These achievements highlight MGL's continued growth and commitment to expanding its infrastructure and customer base. As of March 2024, MGL's operations in Raigad included 80,041 DPNG connections, 47 CNG stations, and 416km of pipelines. Approximately 30km of pipelines were added in Q4, indicating continued infrastructure development in the region.

Operating Highlights
In Q4FY24, MGL experienced higher operating expenses primarily due to a Rs 250 million investment in a CNG marketing scheme for retrofitment and advertising. Additionally, increased variable expenses tied to volumes and higher maintenance and CSR costs were booked in Q4. The incremental Opex was around Rs 0.2-0.25 per standard cubic meter.

MGL's cash surplus for the period could have exceeded Rs 20 billion but was lower at Rs 14 billion due to various investments and expenditures.

CNG Vehicle Additions and CNG Sales and Gas Allocation in Q4FY24

• Over 20,000 CNG vehicles added, including 13,000 private cars, 5,400 autos, and 1,400 small commercial vehicles.
• Servicing 300 MSRTC buses with plans to add another 100 buses in the next 1-2 quarters.
• The daily CNG sales in kilogram terms amounted to 1.94 million in Q4.
• Industrial and commercial volumes were at 1.418 and 0.142 million metric standard cubic meters per day (mmscmd) respectively.
• APM gas allocation stood at 74% in Q4, with the HP-HT availability resulting inUSD7.3/mmbtu of priority segment gas cost.

LNG Contracts and Operations in Q4FY24

• LNG contracts include 0.75mmscmd Henry-Hub linked, 0.1mmscmd Brent-linked, and 0.49mmscmd HP-HT.
• Using spot LNG to lower costs and exploring more spot and term gas options.
• ONGC faced disruptions but has normalized.
• Savroli LNG station operates on a cost-plus fixed margin basis, selling about 4tpd with a capacity of 10-15tpd, expecting increased sales in the coming quarters.
• Plans to add 4 more LNG stations by FY25-end.

Investments
These investments include Rs 5.6 billion in the acquisition of UEPL, Rs 500 million in 3 electric vehicles (EVs) for manufacturing 3-wheel cargo and passenger EVs and distribution of LMC, investment in an LNG JV with Baidyanath LNG for a 51% stake, and Rs 1 billion in equity for the CBG plant in a phased manner. The company also repaid UEPL's external borrowings of Rs 200 cr(provided as unsecured loans) and plans to fund the subsidiary for the next 2-3 years through an infusion of Rs 150-200 cr.

UEPL Acquisition and Performance

• Completed the acquisition of Unison Enviro (UEPL) and consolidated it into its accounts from 1st February 2024.
• UEPL achieved volumes of 0.14 mmscmd in Q4FY24, with FY24 EBITDA reaching Rs 600 million.
• Currently, only 4-5 UEPL stations are operational, with the majority being daughter booster stations, totalling 56 CNG stations.
• UEPL's volume potential is estimated at approximately 1.2 mmscmd in 7-8 years, with a focus on expanding the CNG base in Ratnagiri and PNG expansion overall.

Accounting and Financial Reporting

• Amortized the license acquisition (value as intangible) of UEPL in its consolidated financials as a non-cash charge.
• Provisional accounting was done for consolidation, and the final report from the valuer is expected this year, with FY25 financials reflecting the actual numbers, including accounting differences.

Mahanagar Gas FY25 Guidance and Growth Strategy:
Future Plans and Initiatives

• Signed MOU with MCGM-BMC to set up a CBG plant in Mumbai, awaiting land with board approval received, expected to take 1.5 years for commissioning.
• The plant would have a capacity of 30 tons of CBG per day (70mscmd) or 1,000 tons of waste per day, with a cumulative capex of Rs. 550-600 cr, in two phases of 500tpd each.

Volume Growth Guidance

• Revised volume growth guidance to 6-7% YoY, up from the earlier 5-6% per annum target.
• Ambitious internal targets set for even higher growth.
• CNG volumes expected to drive growth, given its over 70% share in the overall mix.
• Industrial piped natural gas (IPNG) volumes projected to grow at lower double digits for the next 4-8 quarters.

Factors Driving CNG Volume Growth

• Per-capita usage increase among a large customer base.
• Scheme-based new additions may offset weaker Q3 to Q4 performance. Higher volumes maybe since from Q4 to Q1.

IPNG Growth Drivers

• Strategic pricing intervention offering a 10% discount to Fuel Oil (FO) for large new customers resulted in an incremental volume of 0.1 mmscmd.
• 0.1 mmscmd of IPNG contracts in the pipeline, expected to be connected post-October/November 2024.

Domestic Piped Natural Gas (DPNG) Expansion

• Plans to add 0.3 million new connections in DPNG in FY25.

Margin Guidance and Cost Management

• Margin guidance of Rs.9-11/scm considered comfortable, expecting volume increases to reduce unit costs.
• Anticipated rise in weighted average gas costs factored into the margin range.
• IPNG gross margins are lower, but operating expenses are also lower, resulting in a reasonable EBITDA/scm.
• I/C gross margin ranged from 25 to 30/scm in FY24, with a low of Rs12/scm.
• Commercial segment margin linked to commercial LPG prices, while industrial segment margin linked to alternate fuels like FO.

Capital Expenditure (Capex) and Expansion Plans

• FY24 capex stood at Rs.775cr, with a target of Rs.900-1000 cr in standalone and Rs.150-200cr for UEPL in FY25 (>Rs.1000cr in total, reflecting aggressive plans for UEPL).
• Plans to add over 50 CNG stations in FY25 and around 40-50 in FY26, with the majority expected to be commissioned in the fourth quarters of these fiscal years.

Mahanagar Gas CNG Marketing Scheme and Partnerships:
CNG Marketing Scheme Details

• Scheme involved partnerships with Maruti, Hyundai, Tata, Ashok, and retrofitters.
• Concluded for passenger vehicles (PVs) in December 2023 (offering Rs20,000 worth of gas coupons) and for commercial vehicles (CVs) in March 2024.
• Aimed to leverage scarcity and intermittence to expedite consumer behaviour.

Impact and Future of the Scheme

• PV scheme ended due to scarcity and intermittence, but discussions suggest it could be restarted in the future.
• CV scheme expected to continue as they have higher prospects and B2B customers are value-oriented, with OEMs also supporting the initiative.
• Boosted truck traffic at MGL's outlets, with 67 in Q3 and 97 in Q4.

Sales Impact and Marketing Expenses

• Good percentage-based growth in 1-ton+ CVs and PVs due to the marketing scheme.
• Impact on overall CNG sales not yet significant, as 13-15,000 vehicles were added in the small category in Q3-Q4FY24.
• Rs 20,000 expenditure recorded under marketing expenses, but actual impact on MGL is lower, as other parties are also involved in the value chain.

OMCs' Trade Margins and Negotiations

• OMCs' trade margins vary based on city types, with metro cities at Rs 5.4/kg, A&B class cities at Rs4.60/kg, and C class cities at Rs3.7/kg.
• Past margin adjustments expected to be resolved soon, with provisions made for the current year.
• Negotiations with OMCs ongoing and expected to conclude in a few months; provisions have been made with no perceived risk.
• Ministry of Petroleum and Natural Gas (MOPNG) issued guidelines for dispute resolution in this regard.

Outlook & valuation

Mahanagar Gas Limited (MGL) reported tepid earnings in Q4FY24 primarily led by lower realization. The company's focus on expanding its CNG and PNG networks, along with strategic partnerships with OEMs bodes well for future volume growth. The planned addition of LNG stations and the establishment of a CBG plant also demonstrate MGL's commitment to sustainable energy solutions. The company's focus on expanding its network and customer base, coupled with its ability to adapt to market conditions, could lead to sustainable growth in the long term. While near-term challenges such as margin pressures and higher operating expenses persist, the improved run-rate of vehicle conversions, moderate LNG costs, Unison volume ramp-up post completion of acquisition and diversification efforts into LNG retail augur well for long-term prospects. We expect the company to record steady volume growth of 6-8% driven by multiple initiatives implemented by the company, such as partnering with OEMs to drive conversions of commercial CNG vehicles and providing guaranteed price discounts to new I/C-PNG customers. At CMP of Rs.1,288 the stock is trading at P/E of 11x FY26E. We recommend a HOLD rating on the stock.