Mahanagar Gas: Potential in the pipeline

The stock of Mumbai-based city gas distributor Mahanagar Gas shot up about 8 per cent on August 20 after its foreign promoter BG Asia Pacific Holdings Pte Ltd (a subsidiary of Shell) sold its remaining 10 per cent stake in the company. Over the past year, the foreign promoter has been reducing its holdings in tranches and has now fully exited the stock. The impending sale of the remaining stake was an overhang, and with this now done with, the stock got a breather. But despite this gain, the stock is still down about 16 per cent since mid-April.

The ongoing discussions about the shift to electric vehicles in the future, the severe slowdown in the auto industry, and proposals that could increase competition for city gas distribution (CGD) players have also taken a toll on the stock. It didn’t help that in the recent June quarter, volume growth for Mahanagar Gas was a tepid 3 per cent or so.

But the stock’s fall presents a good buying opportunity for investors with a long-term perspective and a high appetite for risk. At ₹847, the stock trades at about 14 times its trailing 12-month earnings, lower than the average of nearly 20 times it traded at in the past three years, and much lower than the 28 times that its Delhi-based CGD peer Indraprastha Gas trades at. Also, the business prospects of Mahanagar Gas seem good. For one, the troubles in the auto sector don’t seem to have affected vehicles that run on compressed natural gas (CNG) much.

Increase in CNG sales

In its conference call after the June 2019 quarter results, the company’s management said that despite overall automobile sales slowing down, the number of vehicles adopting CNG is steady at 5,000-6,000 a month. The management also said that, as per data disclosed to them by Maruti Suzuki, there was an impressive increase year-on-year in CNG vehicles sales.

On the threat from electric vehicles in the long run, the suppliers of relatively clean fuels such as natural gas will be better placed to weather the disruption. The Centre, while it is keen on promoting electric vehicles, has also laid out an ambitious roadmap for significantly increasing the share of natural gas in the country’s energy mix. The ambitious roll-out of CGD networks across the country, envisaged by the ninth and tenth round of auctions over the past year or so, suggests that CGDs should be able to hold their own in the long run. While proposals to allow new distributors access to the existing pipeline networks of incumbent players have been mooted, it may not materially impact the business of entrenched companies such as Mahanagar Gas that have the first-mover advantage and can compete effectively on pricing.

Volumes to pick up

After a good show last year, the company’s volume growth in the June 2019 quarter took a knock. The company attributes this to a high base effect due to strong double-digit growth in the year-ago period, and dip in CNG volumes sold to state transport undertakings which scrapped some old buses. CNG supplies to vehicles is the company’s mainstay. This, along with supply of piped natural gas (PNG) to households, accounts for about 85 per cent of the company’s volumes and revenue; the source for this is cheaper domestic gas. Supplies to industrial and commercial customers (with costlier imported gas) make up the rest of the volumes. Volumes are expected to pick up in the coming quarters with a tender for 500 CNG buses placed by the state-run BEST bus transport company in Mumbai. The company has retained its guidance of about 6 per cent volume growth in FY 2020.

That Mahanagar Gas did not win any new geographical areas in the recent round of CGD auctions is a dampener. Also, there are some constraints to growth in the Mumbai metropolitan region due to challenges in land availability to set up CNG stations. Still, there is good potential in the key geography that remains under-penetrated. Besides, the Raigad region offers strong scope for growth.

In the June 2019 quarter, despite low volume growth, Mahanagar Gas grew its revenue about 22 per cent Y-o-Y to ₹757 crore, and its profit about 32 per cent Y-o-Y to ₹170 crore. This was thanks to higher price realisations and lower cost of imported gas. The benefit of lower cost of imported gas is expected to continue for more quarters. With its products still largely retaining their competitive pricing edge over fuels such as petrol and diesel, Mahanagar Gas may not have to cut prices much, even if it has to make some adjustments.

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