Rapid Electrification Will Erode Conventional Gas Dominance

Key Takeaways

• Structural declines in transportation revenues and margin pressures loom due to electrification, regulatory shifts, and weakening natural gas demand.
  
• Asset expansion risks outpacing demand, reducing capital returns amid price competition, margin compression, and rising input cost volatility.
  
• Ongoing expansion, policy support, and strategic pricing give the company strong prospects for volume growth, margin resilience, and improved profitability across key business segments.

Catalysts

Operates as a natural gas distribution company in India.

• The rapid acceleration of electric vehicle adoption and the impending electrification of urban transport threaten to erode Mahanagar Gas's CNG volumes, as evidenced by a decline in new CNG vehicle additions and persistent reduction in large fleet contracts such as BEST, meaning core transportation segment revenues are at risk of structural decline.
  
• Aggressive long-term policy direction and investor preference for deep decarbonization and renewables-including government support for green hydrogen and direct electrification-could weaken natural gas's position as a transition fuel, leading to adverse regulatory changes that would weigh on both revenue growth and margin sustainability.
  
• Despite significant capital expenditure plans in network buildout and CBG/LNG ventures, there is a risk that demand for piped natural gas and CNG will underwhelm due to substitution by alternative clean energy sources, resulting in a mismatch between asset expansion and declining asset utilization, putting downward pressure on return on capital and free cash flows.
  
• Ongoing and forthcoming regulatory reforms like potential implementation of open access for city gas distribution will eliminate the company's de-facto local monopoly, introducing price pressures and eroding pricing power, which will likely compress operating margins and make it more difficult to maintain historical profitability levels.
  
• Escalating input price risks from volatility in domestic gas allocation and global LNG/HPHT prices-while government policies increasingly restrict the ability to fully pass on costs to end-users-pose a long-term threat of net margin compression and subdued earnings growth, even as top-line figures stagnate or decline.

Mahanagar Gas Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Mahanagar Gas compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Mahanagar Gas's revenue will grow by 1.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 13.9% today to 12.6% in 3 years time.
• The bearish analysts expect earnings to reach ₹10.1 billion (and earnings per share of ₹102.32) by about July 2028, down from ₹10.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 16.1x on those 2028 earnings, up from 13.7x today. This future PE is lower than the current PE for the IN Gas Utilities industry at 17.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.55%, as per the Simply Wall St company report.

Mahanagar Gas Future Earnings Per Share Growth

Risks

• Mahanagar Gas continues to demonstrate strong volume growth across all key segments, including CNG and PNG, with management maintaining high single-digit to nearly double-digit volume growth guidance for the coming years, which directly supports revenue expansion.
  
• The company's sustained infrastructure expansion, including the addition of new CNG stations, trunk pipelines, and ongoing growth in newer geographies like UEPL and GA-3, is expected to drive incremental customer acquisition and long-term top-line growth.
  
• Favorable government policies, such as continued 100% domestic gas allocation for priority sectors like residential PNG and increasing replacement of APM with New Well Gas for CGD, are expected to ensure energy security and margin stability, supporting earnings resilience.
  
• The planned amalgamation of UEPL is set to deliver tax benefits and faster recognition of depreciation, resulting in improved net profit and better cash flows for the consolidated entity.
  
• Management highlighted levers to maintain or even improve margins, such as the ability to raise CNG prices when required, benefit from lower Brent and LNG prices, and the structural advantage of having CNG prices lower than peers, suggesting a buffer to protect EBITDA and net margins even in the face of cost fluctuations.

Valuation

• The assumed bearish price target for Mahanagar Gas is ₹1169.97, which represents two standard deviations below the consensus price target of ₹1560.21. This valuation is based on what can be assumed as the expectations of Mahanagar Gas's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹1960.0, and the most bearish reporting a price target of just ₹1100.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹80.2 billion, earnings will come to ₹10.1 billion, and it would be trading on a PE ratio of 16.1x, assuming you use a discount rate of 12.5%.
  
• Given the current share price of ₹1483.4, the bearish analyst price target of ₹1169.97 is 26.8% lower.
  
• 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.