Brokerage firm Prabhudas Lilladher maintains an 'Accumulate' rating on Mahanagar Gas, with a price target of Rs 1,187. While volumes are growing, profit margins have faced pressure from rising gas costs, making the company's upcoming expansion plans a key factor to watch.
Prabhudas Lilladher has maintained its 'Accumulate' rating on Mahanagar Gas, setting a target price of Rs 1,187 per share. The brokerage's stance comes as the company balances steady demand growth with challenges related to rising operational costs and margin pressure. For investors, this reflects a cautious optimism that acknowledges both the firm's infrastructure expansion and the current headwinds in the gas distribution sector.
Operational Performance and Profitability
Mahanagar Gas reported revenue of Rs 2,537.08 crore for the second quarter of the 2027 fiscal year, marking a 23.8% increase compared to the same period last year. Despite the growth in sales, the company's bottom line has been affected by higher gas costs. Net profit fell by 29.13% to Rs 137.04 crore during the quarter. This decline highlights how the company's profit margins, which contracted to approximately 12.01%, have been squeezed by the rising expense of gas procurement.
The volume growth story remains a central pillar of the company's performance. Mahanagar Gas recorded a 6.5% year-on-year increase in total volumes, reaching 4.89 million metric standard cubic meters per day (mmscmd). This growth was primarily driven by the CNG and domestic PNG segments, which grew by 9.1% and 9.8% respectively. However, these gains were partly offset by a 7.5% decline in industrial and commercial PNG volumes, signaling some softness in demand from these segments, likely due to pricing and supply constraints.
Capex Strategy and Future Outlook
Management has reaffirmed its capital spending guidance for the 2027 fiscal year, with an estimated investment of Rs 15 billion to Rs 18 billion. This significant spending is targeted at strengthening PNG infrastructure and extending the company's reach. While this investment is crucial for long-term growth, it also brings potential for pressure on cash flow. Currently, the company maintains a healthy balance sheet with no debt and holds around Rs 1,000 crore in cash, which provides some financial stability to support these expansion plans.
Investors should keep a close watch on how these high capital investments impact the company’s ability to generate free cash flow in the coming years. The long-term outlook will heavily depend on whether the company can sustain volume growth and improve margins, which are currently being impacted by elevated gas costs and reliance on spot LNG markets. Geopolitical factors affecting global gas availability remain an external risk that could further influence costs.
The next important monitorables for shareholders include the trend in EBITDA margins, the pace of industrial and commercial volume recovery, and the execution of the planned infrastructure projects. Management's commentary on navigating gas price volatility will also be essential for understanding the company's ability to protect profitability in the near term.