CGD Expansion And UEPL Merger Will Improve CNG Adoption And Operational Efficiencies

Key Takeaways

• Expansion of CGD infrastructure and a court order phasing out petrol/diesel vehicles are likely to boost CNG adoption and revenue growth.
  
• Merging with UEPL and diversifying into EV battery manufacturing could enhance sales, operational efficiency, and margins.
  
• Foreign exchange risks, competition from EVs, and reliance on allocations may pressure Mahanagar Gas's costs, earnings, and net margins.

Catalysts

Operates as a natural gas distribution company in India.

• The ongoing expansion of CGD (City Gas Distribution) infrastructure, including the addition of new households, CNG stations, and industrial/commercial clients, is likely to boost future revenue growth.
  
• The merger with Unison Enviro Private Limited (UEPL) is expected to enhance consolidated sales volumes and improve operational efficiencies, positively impacting earnings.
  
• The Mumbai High Court order advocating for the phase-out of petrol and diesel vehicles will likely drive higher CNG adoption, supporting revenue growth from the transportation sector.
  
• Increased volume growth in under-penetrated segments like commercial vehicles and potential policy initiatives favoring CNG could contribute significantly to revenue and earnings.
  
• Diversification into new energy-related businesses, such as EV battery manufacturing, could provide additional revenue streams and improve overall margins.

Mahanagar Gas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Mahanagar Gas's revenue will grow by 6.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.1% today to 12.9% in 3 years time.
• Analysts expect earnings to reach ₹10.7 billion (and earnings per share of ₹115.56) by about January 2028, up from ₹10.5 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹15.0 billion in earnings, and the most bearish expecting ₹8.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.4x on those 2028 earnings, up from 13.0x today. This future PE is greater than the current PE for the IN Gas Utilities industry at 16.4x.
• Analysts expect the number of shares outstanding to decline by 2.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.15%, as per the Simply Wall St company report.

Mahanagar Gas Future Earnings Per Share Growth

Risks

• Mahanagar Gas is facing potential foreign exchange risks due to the depreciation of the Indian rupee, which can increase the cost of imported gas and impact the company's net margins.
  
• Increasing competition from electric vehicles (EVs) could reduce the long-term demand for CNG, posing a risk to future revenue growth.
  
• The company's reliance on allocations of APM gas, which are subject to reduction, may lead to higher costs for alternative gas sources, negatively affecting earnings.
  
• Future changes in the government's allocation of gas to priority sectors like city gas could see Mahanagar Gas receiving less APM gas, potentially increasing costs and pressuring net margins.
  
• Fluctuations in global LNG prices and their impact on Henry Hub and Brent-linked contracts can lead to unpredictability in sourcing costs, potentially impacting net profit margins.

Valuation

• The analysts have a consensus price target of ₹1508.69 for Mahanagar Gas based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹2000.0, and the most bearish reporting a price target of just ₹1030.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹82.6 billion, earnings will come to ₹10.7 billion, and it would be trading on a PE ratio of 18.4x, assuming you use a discount rate of 12.2%.
  
• Given the current share price of ₹1379.85, the analyst's price target of ₹1508.69 is 8.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.