Mahanagar Gas: A Promising Buy with 43% Upside Potential

A small-cap company engaged in the business of city gas distribution has received a Buy recommendation from Motilal Oswal Financial Services. The company, Mahanagar Gas, is currently supplying natural gas in the city of Mumbai and has a market cap of over Rs 10,500 Cr. The broker has set a target price of Rs 1,535, which represents a potential 43% upside from the current market price.

The brokerage notes that Mahanagar Gas Ltd (MAHGL) has seen a 21% stock correction over six months due to higher Henry Hub gas prices, rupee depreciation, and tariff hikes impacting margins. However, normalization in Henry Hub prices, a stable crude outlook, and expected rupee stability post the India-US trade deal are expected to ease input costs, improve margins, and limit downside risk.

Henry Hub gas prices, which spiked due to severe US winter conditions, have corrected sharply and are expected to average at lower levels in the future. Since around 34% of MAHGL’s gas sourcing is Henry Hub-linked, this normalization is expected to significantly improve blended gas costs and operating margins.

In a zero-APM gas allocation scenario, MAHGL may require a modest Rs 4/kg CNG price hike to protect margins. Given that CNG remains substantially cheaper than petrol and diesel in Mumbai, such hikes are unlikely to hurt demand or vehicle registrations, supporting EBITDA stability over FY26-28.

Aggressive CNG station rollout and rising vehicle penetration continue to drive volume growth for Mahanagar Gas. The company plans to add around 50 standalone CNG stations in FY26 and targets 250 new stations by FY30, supporting an estimated 10% volume CAGR over FY26-28.

Currently, MAHGL is trading at about 10.4 times its expected FY27 earnings, which is well below its FY26E's 11.5x and usual historical valuation. With ROE and ROCE near 15% and negligible debt, revenues are projected to rise from Rs 8,060 Cr in FY26E to Rs 9,870 Cr by FY28E, while PAT is expected to grow from Rs 910 Cr to Rs 1,100 Cr for the same period.

In the latest quarter, the company saw a YoY revenue growth of 15%, increasing from Rs 1,786 Cr in Q2FY25 to Rs 2,049 Cr in Q2FY26, while QoQ revenue decreased by 1% from Rs 2,081 Cr in Q1FY26. Net profits fell YoY by 32%, from Rs 287 Cr in Q2FY25 to Rs 193 Cr in Q2FY26, and QoQ by 40% from Rs 320 Cr in Q1FY26. The company has a 3-year sales CAGR of 25%, while the TTM is at 19%. The 3-year profit CAGR is at 18%, while the TTM number is at a negative 14%. The company also has a ROCE of 23% and a ROE of 18%.

Mahanagar Gas Ltd is an Indian natural gas distribution company incorporated in 1995. It supplies CNG and piped natural gas across Mumbai and adjoining areas. The company operates across 45,700 sq km, serving around 48 lakh urban households. It has 491 CNG stations, 717 km of steel pipelines, and 7,465 km of PE pipelines, and supports 12,50,000 CNG vehicles, 30,70,000 PNG connections, and more than 5,600 industrial commercial customers overall.

With these rationales highlighted, Motilal Oswal maintains a BUY rating on MAHGL, with a target price of Rs 1,535, creating a potential upside of 43% for the stock.