Mahanagar Gas: Strength in the pipeline

The stock of Mumbai-based city gas distributor, Mahanagar Gas has slipped about 8 per cent over the past month. This has been due to a dip in the company’s volumes and profit in the December 2016 quarter compared with the September 2016 quarter. But the blip was primarily due to impact of the demonetisation move on volumes of compressed natural gas (CNG). With cash availability improving, volume growth should revive.

Investors with a long-term perspective can buy the stock. At ₹852, it trades at 22 times trailing 12-month earnings, a tad higher than its average of about 21 times since its listing last June. But this seems justified, given the company’s strong growth prospects. Delhi-based Indraprastha Gas trades at about 26 times earnings. While Mahanagar Gas is smaller than Indraprastha Gas, there is scope to narrow the valuation gap. Healthy demand prospects, benign costs and expansion should drive profit.

On a sequential basis, the December quarter profit of Mahanagar Gas fell 3.2 per cent. But compared with the same quarter a year ago, profit grew a robust 30 per cent to ₹99 crore. This is a continuation of the robust profit growth in the September quarter (41 per cent y-o-y) and in the June quarter (19 per cent y-o-y). Steady volume increase and cost benefits due to cheap gas supplies drove the good show.

In the nine months ended December 2016, total volumes were up about 6 per cent y-o-y — volumes of both CNG supplied to vehicles and piped natural gas (PNG) supplied to households and commercial/industrial establishments rose 5-6 per cent. Passing on a portion of the cost benefit to customers meant a dip in revenue but operating margin and profit grew strongly.

Volume growth has been driven by steady conversion of vehicles to CNG and more households opting for PNG. Compared to alternative fuels such as petrol, diesel and liquefied petroleum gas, CNG and PNG offer significant cost benefits to consumers.

Mahanagar Gas expects volume growth to continue in the range of 5 -7 per cent. The company supplies CNG to about 5.28 lakh vehicles. On an average, about 6,000 vehicles including private cars and three-wheelers convert to CNG each month in and around Mumbai. The numbers could rise sharply if taxis in Mumbai are mandated to run on CNG. Mahanagar Gas is also running a pilot programme in Mumbai with CNG-run scooters. The initiative, if successful, could open up a significant new market for the company.

There is also significant potential to expand the company’s domestic PNG network (currently about 9.2 lakh households). The company estimates a market size of about 30 lakh households.

Companies supplying CNG to vehicles and PNG to households have been given top priority in domestic gas allocation. Mahanagar Gas gets nearly 85 per cent of its revenue from these businesses. The price of domestic gas has come down sharply over the past few years thanks to the formula-based pricing mandated by the government. Domestic gas prices are expected to stay benign. The cost of imported gas used to supply PNG to commercial and industrial customers, has also come down due to weakness in international prices. With customs duty on liquefied natural gas (LNG) cut from 5 per cent to 2.5 per cent, imported gas should get more price-competitive.

Over the next five years, Mahanagar Gas plans to add 83 CNG stations (currently 197 stations) and about 675 kilometres of pipelines (currently 4,762 kilometres). It plans capital expenditure exceeding Rs 200 crore each over the next two years. With negligible debt and strong cash position, the company is well positioned to fund the expansion.

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