Mahanagar Gas Ltd (MGL) delivered a largely in-line operational performance in the December quarter, reinforcing Axis Securities’ conviction in the company’s medium-term growth trajectory. Despite volatile global gas prices and a marginal miss at the profit-after-tax level, the brokerage has maintained its BUY recommendation with an unchanged target price of Rs 1,540, implying a potential upside of about 31 percent from current market levels. The investment thesis continues to rest on resilient margins, disciplined gas sourcing, double-digit volume growth guidance, and aggressive network expansion across key geographical areas.

Q3FY26 Performance Shows Operational Stability Amid Cost Volatility

MGL’s consolidated net sales for the quarter stood at Rs 2,060 Cr, marking a 12 percent year-on-year increase, though marginally below consensus expectations. EBITDA came in at Rs 352 Cr, broadly in line with estimates, supported by steady volumes and synchronized movement in realizations and gas costs.

EBITDA per scm improved sequentially to Rs 8.3, reflecting a 4 percent quarter-on-quarter increase, even as global Henry Hub gas prices remained elevated. EBITDA margins expanded sequentially to 17.1 percent, aided by cost optimization and the full-quarter impact of earlier price hikes.

Profitability at the bottom line was softer. Reported PAT declined 9 percent year-on-year to Rs 201 Cr, missing estimates due to lower other income and a higher effective tax rate.

Gas Sourcing Strategy Emerges as the Key Margin Stabilizer

MGL’s ability to protect margins during a volatile pricing cycle underscores the sophistication of its gas sourcing strategy. During Q3FY26, the company replaced higher-cost Henry Hub-linked gas with a mix of HPHT, spot gas, and Brent-linked contracts where feasible.

Lower Brent-linked prices delivered an estimated 20-cent saving, more than offsetting the 1.4-cent rise in Henry Hub costs. The company also benefited from the full impact of its September 2025 price hike, which added approximately 30 paisa per scm to EBITDA.

To further reduce exposure to Henry Hub volatility, MGL has signed new Brent-linked bilateral contracts, including one that commenced in January 2026 and another scheduled from April 2026. Management continues to emphasize portfolio flexibility, including the strategic use of 60 percent take-or-pay flexibility to defer high-cost gas drawdowns.

Volume Growth Remains Firm Across Segments

Total gas sales volumes reached 4.62 mmscmd, representing 7 percent year-on-year growth and modest sequential improvement.

CNG volumes rose to 3.28 mmscmd, up 6 percent YoY, supported by fleet additions and infrastructure expansion outside core Mumbai. Domestic PNG volumes increased 9 percent YoY to 0.6 mmscmd, reflecting steady household connections, while industrial and commercial PNG volumes grew 12 percent YoY to 0.74 mmscmd, despite a slight sequential dip.

Management has reiterated 10 percent volume growth guidance for FY26, with expectations of sustained double-digit growth extending into FY27.

Geographical Mix Highlights Structural Growth Drivers

Growth dynamics vary significantly across MGL’s operating areas. GA1 (Mumbai) continues to face structural constraints due to land scarcity and a shrinking BEST bus fleet transitioning to electric vehicles.

In contrast, GA2 (Thane) is growing at 10–12 percent annually, outpacing the company average, while GA3 (Raigad) continues to scale steadily. The Unison Enviro (UEPL) acquisition is also contributing meaningfully, with volumes rising to 0.283 mmscmd during the quarter.

To address capacity challenges in South Mumbai, MGL is developing a large-format “mega-station” with 60 filling points, expected to be operational by mid-2026.

Pricing Actions and Regulatory Tailwinds Support Outlook

In response to elevated Henry Hub prices, MGL implemented a 50 paisa per kg CNG price hike effective February 1, 2026. While no further hikes were announced, management expects improving Brent-linked realizations to support margins in the coming quarters.

Unified zonal tariffs introduced in January marginally increased transportation costs, but logistics optimization has ensured that most volumes remain within the lowest-cost zone. Additionally, potential regulatory action on polluting vehicles could act as a long-term catalyst for CNG demand.

Capex Cycle Positions MGL for Multi-Year Growth

MGL continues to invest aggressively in network expansion. Capex stood at Rs 760 Cr in 9MFY26, with full-year FY26 guidance maintained at Rs 1,100–1,200 Cr. FY27 capex is also projected at around Rs 1,200 Cr, with significant allocations toward GA2, GA3, and newly acquired UEPL territories.

This elevated capex cycle is expected to drive higher volumes and earnings visibility, even as near-term free cash flows remain healthy.

Financial Snapshot Reflects Balance Sheet Strength

MGL remains net-cash positive, with improving return ratios and stable dividend payouts enhancing shareholder returns.

Valuation Anchored by DCF With Attractive Upside

Axis Securities values MGL using a discounted cash flow methodology, assuming a WACC of 11.5 percent, a 15-year explicit forecast, and a terminal growth rate of 3 percent. Net cash and investments are added at a conservative discount.

The resulting target price of Rs 1,540 per share remains unchanged, despite minor downward revisions to EBITDA and PAT estimates for FY26–FY28.

Risks to the Investment Thesis

Key downside risks include slower-than-expected CNG vehicle adoption, faster EV penetration, reduced allocation of low-cost domestic gas, and sustained volatility in global gas prices.

Final View: Defensive Growth With Margin Discipline

Mahanagar Gas Ltd stands out as a structurally strong city gas distributor navigating a complex energy landscape with discipline and foresight. While near-term earnings remain sensitive to gas price movements, the company’s sourcing flexibility, expanding footprint, and robust balance sheet support long-term value creation.