ET Intelligence Group: The stock of city gas distributor Mahanagar Gas (MGL) has underperformed peers in 2020 so far due to a slower recovery in gas offtake in its key market of Mumbai and suburbs. However, the trend is likely to change considering its gas volume has reached the pre-pandemic level. MGL also reported better operating profitability in the September quarter. On Wednesday, the stock gained 4% in a volatile market.MGL’s gas volume increased by 86% sequentially to 2.1 million standard cubic metres per day (mmscmd) in the September quarter. The recovery in the volume of compressed natural gas (CNG), which is largely used for commercial vehicles and piped natural gas (PNG) for cooking, reflected an all-round improvement in the business scenario.The daily gas consumption has reached the pre-COVID level of around 3 mmscmd led by domestic piped lines and industrial customers in the early November. The CNG volume, which constitutes 60-75% of the total volume reached to 90-95% of the pre-Covid level. While the number of city buses in operation is higher than the pre-COVID level, three-wheelers and taxis are running at 70-80% capacity. Mumbai’s local bus operator BEST has added 500 buses in the first half of FY21. It plans to add 500-800 more buses in the remaining part of the year, which should help in sustaining the volume recovery.Though MGL’s overall gas volume is expected to decline by 20-25% for FY21, it is likely to shoot up by 35-37% in FY22 aided by new domestic connections, increasing retail footprint and expanding presence in the industrial town of Raigad.The company’s operating margin before depreciation (EBITDA margin) per scm rose to a record Rs 11.6 in the September quarter due to lower gas prices. The domestic gas prices further fell by 25% effective from October 1. This should be able to sustain the margin in the second half of FY21. The base EBITDA margin per scm has increased to Rs 10-10.5 for the long-term compared with Rs 9-9.5 previously.At Wednesday’s closing price of Rs 905.6 on the BSE, the stock was traded at 10 times FY22 earnings. A sustainable recovery in gas volume and margin improvement in the coming quarters is expected to offset the effects of any regulatory actions such as open access to pipeline infrastructure and new gas price regime.