Emkay Global has maintained a BUY recommendation on Mahanagar Gas Ltd (MGL), projecting a target price of Rs 1,700, representing a potential upside of 20.6% from the current levels. Despite a minor earnings miss in Q4FY25 driven by elevated operating expenses, the company continues to post healthy volume growth, particularly in the CNG and Industrial/Commercial PNG segments. MGL has reiterated its EBITDA per scm and volume growth guidance for FY26, while advancing its capex, expansion into LNG, and digital infrastructure projects. The report underlines MGL’s robust fundamentals, prudent capital deployment, and long-term structural tailwinds, all of which reinforce the investment case.

Steady Operational Performance Amid Cost Pressures

MGL’s Q4FY25 EBITDA and PAT fell short of estimates by 5% and 6%, respectively, largely due to a 5% rise in unit opex. EBITDA per scm came in at Rs 8.3, flat sequentially. The company posted double-digit volume growth of 11% YoY, driven by a 10% increase in CNG volumes and a 22% rise in Industrial/Commercial PNG.
The management maintained guidance for 10% volume growth and EBITDA/scm in the range of Rs 9–11 for FY26. Notably, the FY25 capex stood at Rs 13 billion, including Rs 1.5 billion for subsidiary UEPL.

Q4 Highlights: Some Margin Compression, Volume Momentum Intact

In Q4FY25, MGL reported:

• Revenue: Rs 18,015 million, up 2% QoQ and 15% YoY
• EBITDA: Rs 3,150 million, flat QoQ and down 20% YoY
• Adjusted PAT: Rs 2,051 million
• Volume: 4.2 mmscmd, up 2% QoQ
• EBITDA/scm: Rs 8.3, unchanged QoQ

Operational costs rose due to promotional expenses (Rs 110 million), CSR (Rs 100 million), and maintenance (Rs 150–170 million), driving opex up 12% YoY. Despite cost pressures, margins were supported by higher volumes and a 3% uptick in net realizations.

Volume Drivers and Network Expansion

MGL ended FY25 with:

• 385 CNG stations, including 40 new additions
• 2.83 million DPNG connections, up by 343,000 YoY
• 1.11 million CNG vehicles in GAs, up 29% YoY
• Total pipeline network: 7,459 km

A strong vehicle conversion trend added 98,789 CNG vehicles during the year, supported by strategic pricing, infrastructure growth, and promotional schemes.

Industrial & Commercial PNG Sees Strong Adoption

I/C PNG volumes rose 20% YoY in Q4FY25, with new large-scale industrial clients driving demand. MGL is offering guaranteed discounts against alternate fuels, aiming for 0.9–1 mmscmd in I/C PNG volumes in the next few years.
The company also sees major opportunity in solid fuel replacement markets, with a demand potential of 1–1.1 mmscmd, particularly if environmental regulation tightens.

Gas Sourcing Strategy Ensures Stability

MGL sources gas from diverse avenues:

• APM: ~2 mmscmd (full allocation for DPNG)
• NWG: 0.1 mmscmd (offsetting CNG shortfall)
• Term contracts: ~1.4 mmscmd (split between HH, Brent-linked)
• IGX/Spot: ~0.35 mmscmd

While APM allocation to CNG fell, the gap has been bridged by higher NWG volumes. The company remains agile in portfolio rebalancing between Henry Hub and Brent-linked contracts based on relative profitability.

Financials and Valuation: Earnings Recovery Ahead

FY25 revenue was Rs 68.6 billion, up 10% YoY, with volume growth of 12%. However, EBITDA dropped by 22% due to cost inflation. The final dividend declared was Rs 18/share (Rs 30 total).
Here is a snapshot of the forecast:

The company remains debt-free, with a net cash position and RoIC of 24.4% in FY25.

Capital Deployment and Growth Strategy

Capex guidance for FY26 stands at Rs 13 billion, with allocations toward:

• Rs 5 billion for PNG
• Rs 3 billion for CNG
• Rs 2 billion for pipelines

Subsidiary UEPL continues its ramp-up, adding 15 CNG stations and 4,997 DPNG connections in Q4FY25 alone.

MGL is also advancing in LNG distribution, with operational stations and several in pipeline—Nagpur (Q1FY26), JNPT (Q3FY26), and Amravati. Partnerships with OEMs like Volvo and Eicher will help expand vehicle use cases.

Strategic Bets: EV & Battery Play Through 3EV and IBC

MGL has a 32% stake in 3EV, which produced 850 vehicles in FY25 and is scaling production. In addition, IBC, a related battery venture, is building a 1GW battery plant to tap India’s EV transition.
These non-core investments reflect MGL’s strategy to stay relevant across evolving mobility landscapes.

Conclusion: Why Emkay Reiterates Its BUY Call

Emkay retains a BUY rating with a **DCF-based target price of Rs 1,700**, citing:
1. Robust volume growth, particularly in CNG and I/C PNG
2. Efficient gas sourcing strategy and stable margins
3. Prudent capital allocation with focus on expansion and diversification
4. Healthy balance sheet and cash flow generation

While cost inflation and regulatory uncertainty may weigh on short-term performance, MGL’s medium-term fundamentals and execution remain compelling.

Recommendation: BUY | Target: Rs 1,700 | Upside: 20.6%