Until Monday, Mahanagar Gas Ltd’s (MGL’s) shares had fallen about 25% from their highs in end-March. One of the key reasons was the overhang of a potential stake sale by Shell India, which owned a 10% stake in the Mumbai-based city gas distributor
While Shell India has eventually sold its entire stake, and that too at a slight discount to prevailing prices, the news had a rather dramatic effect on MGL’s shares. With the stake sale out of the way, the shares rose as much as 8% on Tuesday to 848.60.
Shell sold 9.88 million shares at a price of 780 per share, according to data from the stock exchanges.
“We do not foresee the exit of Shell to have any negative fundamental impact on MGL since they have been in the business for more than 20 years and it is more process-driven from hereon," analysts at Jefferies India Pvt. Ltd said in a note to clients.
The sharp underperformance of MGL shares since April also meant that valuations were relatively low at 12.6 times estimated FY20 earnings. This gave further impetus to the relief on Tuesday.
“Now that the technical overhang has lifted, MGL’s valuations could well be rerated and investors’ focus can shift to fundamentals," says Nitin Tiwari, vice-president at Antique Stock Broking Ltd.
He adds: “MGL’s strong Ebitda margin did not warrant a big discount on valuations compared to its peers such as Indraprastha Gas and Gujarat Gas. Even though MGL’s volume growth has been relatively slower than peers, on the profitability front, it has done far better than its peers." Ebitda stands for earnings before interest, tax, depreciation and amortization.
MGL’s volume growth of 3.3% in the recently concluded June quarter was lower than Street expectations. On the other hand, its Ebitda performance was robust. “MGL reported strong results in 1QFY20 driven by Ebitda margins at 10.1 per standard cubic meter (SCM) leading to a 9% beat on our street-high Ebitda estimate," said the analysts at Jefferies India in a report on 8 August.
To be sure, whether Ebitda margins sustain in the coming quarters remains to be seen. For now, MGL investors are celebrating the fact that key event risk is out of the way.
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