Subscribe to Mahanagar IPO: Centrum

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Mahanagar Gas Ltd (MGL) is one of the largest city gas distribution (CGD)

companies in India with over 20 years of experience in supplying natural gas

(NG) in Mumbai. MGL is presently the sole authorised distributor of

compressed natural gas (CNG) and piped natural gas (PNG) in Mumbai, its

adjoining areas and Raigad district in Maharashtra. Going ahead, there is

significant growth potential for MGL in the region due to (a) anticipated

growth in the number of CNG operated vehicles considering the current cost

effectiveness of CNG as a fuel, (b) potential growth in the number of

households in the areas of operation and (c) commencement of gas supply

to consumers in the Raigad district. Over FY11-16, while MGL’s revenue

increased at 14.4% CAGR, its net profit has largely remained flat ~Rs300

crore. The company has a healthy balance sheet with cash and equivalents

of ₹560 crore, RoE of 21% and ROCE ~30% in FY16.
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Recommendation: At the higher price band of ₹421, the issue is valued at 7.0x

EV/EBITDA and 13.5x P/E on FY16 basis. Indraprastha Gas Ltd with similar

financials and business model is trading at 19x P/E and 10x EV/EBITDA FY16

basis. In comparison, MGL’s offer price is at a discount and appears attractive.

Hence, investors can Subscribe to the issue for listing gains. Post listing price

performance would be dependant on MGL’s growth in profits. Also, MGL’s

future volume growth could come from its ability to expand its operations to

newer geographies.

Objects of the issue: The IPO is entirely an offer for sale of 2.47 crore shares

(25% stake) by the promoters GAIL and BG Asia Pacific Holdings PTE Ltd (1.23

crore shares each). The entire IPO consists of an offer for sale and the

company will not receive any funds raised from the issue.

Presence in one of the most populous cities and adjoining areas: MGL has

established its presence in Mumbai and adjoining areas for supply for CNG

and PNG. Additionally, in the 4th round of bidding, the company has been

allotted rights to operate in Raigadh district. Over FY09-16, the number of

CNG increased at 13.8% CAGR to 0.47 million in Mumbai and adjoining areas.

Going ahead, with the rising population in the region and the increasing use of

CNG vehicles, is expected to considerably boost sales volumes for MGL.

Clear visibility for supply of cost-effective domestic natural gas: MGL sources

its entire requirement for natural gas domestically through the government’s

gas allocations. In Feb’14, MoPNG increased allocation of NG to GAIL, for

supplying to CGD entities, for sale to Priority Sector. This is expected to meet

the full requirement of all CGD entities. Further, in Aug’14, MoPNG authorized

GAIL to supply NG 10% over and above 100% requirement of each CGD entity

for supply to Priority Sector.

Healthy Financials: Over FY11-16, MGL’s revenue has witnessed a 14.4%

CAGR to ₹2,079. The EBITDA and net profit grew by 6.3% and 6.5%, during the

period. In FY16, while the revenue remained largely flat, the EBITDA margin

expanded by 130 bps YoY to 24.7% on the back of lower raw material prices.

Risk factors: 1) an increase in cost of NG or decline in gas allocation could

affect operations, 2) currency risk –cost of NG is in USD while selling price is in

INR, 3) any adverse judgement by Delhi High Court for marketing exclusivity in

Mumbai region could increase competition and affect business;