Stock Fundamentals

Mahanagar Gas : Step on the gas

Anand Kalyanaraman | Updated on January 20, 2018 Published on June 19, 2016

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IPO rating

Good demand prospects and assured supply for a chunk of its business lend strength



There is little not to like the initial public offer of city gas distributor Mahanagar Gas that opens on Tuesday. The company has near-monopoly in the supply of compressed natural gas (CNG) and piped natural gas (PNG) in Mumbai and surrounding areas.

There is good growth potential, and government policy support assures cheap domestic gas supply for the chunk of its business. Volume and revenue growth have been healthy over the years, and the balance sheet is robust with negligible debt and tidy cash reserves.

A dampener though is the almost flat profit growth over the past few years, but this is expected to get better with revival in pricing power. The offer is priced attractively.

At ₹421, the upper end of the price band, the stock quotes at about 13.5 times the trailing 12-month earnings. This is much lower than the nearly 19 times that Delhi-based Indraprastha Gas, with a similar customer mix, trades at. A healthy dividend yield is an added positive. Investors with a long-term perspective can subscribe to the issue, bidding at cut-off.

Big opportunity

Many factors work in favour of Mahanagar Gas, the country’s third-largest city gas distributor after Gujarat Gas and Indraprastha Gas. For starters, the huge market of Mumbai, where the company has a wide network and infrastructure exclusivity for city gas distribution (CGD) until 2020, is still significantly under-penetrated. So are the areas in Thane and Raigad where the infrastructure exclusivity is up to 2030 and 2040.

These periods can be extended by 10 years. Even after this, Mahanagar Gas may continue as the CGD provider, given the formidable entry barriers to the business.

As on March 2016, Mahanagar Gas supplied PNG to about nine lakh connections and catered to about five lakh CNG vehicles — growing its customer base at an annual average of about 11 per cent and 19 per cent respectively, during 2012-16.

A large number of vehicle owners are expected to convert to CNG given the fuel’s price competitiveness vis-à-vis diesel and petrol; this should increase if crude oil price goes up. Unlike Delhi, there are currently no statutory diktats in Mumbai and surrounding areas for certain vehicle categories to run on CNG.

Despite this, favourable economics should translate into healthy volumes for Mahanagar Gas. Ditto for households choosing PNG connections over costlier LPG cylinders; this should increase as the subsidy on the latter gets phased out.

Besides households, the company supplies PNG to commercial and industrial establishments. Mahanagar Gas also plans to tap into new opportunities when bidding takes place in other geographical areas in Maharashtra and other States.

Supply advantage

The sales volume mix — nearly 75 per cent from CNG and 11 per cent from PNG to households — reduces the gas sourcing cost.

These segments in the CGD business have been given top priority by the government since 2014 in allocation of domestic gas which is much cheaper than imported gas.

The company’s dependence on imported gas has reduced and is limited to supplies to commercial and industrial customers. Its areas of operations being close to key domestic and imported gas supply sources on the West coast benefits Mahanagar Gas by keeping transportation cost low. Assured domestic gas supply for the CNG and domestic PNG business will also help in bidding for new areas in the future.

Financials

CNG and domestic PNG segments contribute a chunk of the revenue of Mahanagar Gas. Volume growth of about 5 per cent, coupled with price increases, has translated into the company’s revenue growing by an average 12 per cent annually from 2012 to about ₹2,080 crore in 2016. But profit has been nearly flat over this period.

The primary reason for this was the price cut taken by the company in PNG supplies to commercial and industrial customers, when the crude oil rout was underway. This was done to compete against the falling prices of alternative liquid fuels, such as furnace oil.

Also, with conversions of cars to CNG showing signs of slowing during this period, the company went easy on pricing the fuel. Ergo: operating and net profit margins slipped sharply.

Even so, Mahanagar Gas’ profitability is better than those of peers. Also, pricing power now seems to be reviving; the operating profit margin in 2016 at 24.7 per cent was better than the 23.4 per cent in 2015. Net profit grew about 3 per cent year-on-year to ₹309 crore in 2016. Crude oil price stabilising should work to the benefit of Mahanagar Gas by improving margins. The company has negligible debt and cash reserves of ₹560 crore as of March 2016.

This, along with strong cash flow from operations, should help fund its expansion plans. Mahanagar Gas is a regular dividend payer and its dividend yield, based on 2015 payout, is more than 4 per cent. The IPO comprises an offer-for-sale of 12.5 per cent stake each by promoters GAIL (India) and BG Asia Pacific Holdings; it will not raise funds for the company.



Published on June 19, 2016
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