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IPO New Issue Details

 
Friday, June 17, 2016 Click here for Rating Reckoner
Mahanagar Gas
Steady growth
CM RATING48/100
Promoted by Gail (India) and BG Asia Pacific Holdings Pte, (each holding 45% stake), Mahanagar Gas (MGL) is one of the largest City Gas Distributors (CGD) in India and is the sole authorized distributor of CNG (compressed natural gas) and PNG (piped natural gas); to market of Mumbai, its adjoining areas and the Raigad district of Maharashtra.

MGL distributes natural gas through an extensive City Gas Distribution (CGD) network of pipelines, for which they have the exclusive authorization to lay, build, expand and operate the CGD network in accordance with the Petroleum and Natural Gas Regulatory Board. The infrastructure exclusivity for distribution is valid until 2020 for Mumbai, until 2030 for the adjoining areas and until 2040 for the Raigad district.

MGL distributes CNG for use in motor vehicles and PNG for domestic household use as well as for commercial and industrial use. The company sale gases to Priority Sector (domestic CNG/PNG customers) which accounted for 84.14%, 85.03% and 85.58% of their total sales volume in the fiscal ended March 2014 (FY 2014), FY 2015 and FY 2016, respectively.

As on March 31, 2016, MGL had a supply network of over 4,646 km of pipelines including around 4,231 km of polyethylene pipeline and 415 km of steel pipeline. In FY 2016, MGL supplied CNG to over 0.47 million vehicles through network of 188 CNG filling stations and provided PNG connection to approximately 0.86 million domestic households, over 2,866 commercial and 60 industrial consumers in Mumbai and its adjoining areas. For FY16, MGL had gas sales volumes of 2.4 mmscmd and supplied CNG and PNG to 1.3m customers. For FY16, CNG and PNG businesses accounted for 74.21% and 25.79%, respectively, of the total volume of Natural gas sold and 71.05% and 28.95%, respectively, of total gas sales revenue.

The volume of supplied natural gas increased from 1.95 mmscmd for FY 2012 to 2.43 mmscmd for FY 2016, at a CAGR of 5.67%. The number of CNG operated motor vehicles has grown steadily at a CAGR of 13.75% from March 31, 2009 to March 31, 2016 in Mumbai and its adjoining areas given the current cost effectiveness of CNG as a fuel. MGL plans to set up 83 CNG stations and lay 675km steel pipeline network (4,200km currently) over the next five years.

MGL intend to increase penetration in Mumbai and its adjoining areas by reaching out to new customers for CNG, domestic PNG, commercial PNG and industrial PNG use. The company intends to add over 675 km of steel pipeline and PE pipeline and 80 CNG filling stations during the next five years in their areas of operations. In order to diversify their portfolio of CNG filling stations, they intend to set up a higher number of CNG filling stations owned and operated by them and by pro-actively identifying land for setting up such CNG filling stations. MGL seek to enter into new markets by participating in the bidding process for new CGD areas as well as through inorganic growth.

The Ministry of Petroleum and Natural Gas (MoPNG), in February 2014, increased allocation of natural gas to GAIL, for supplying to CGD entities, for sale to the Priority Sector. The MoPNG Guidelines were further revised in August 2014, authorizing GAIL to supply natural gas 10% over and above the 100% requirement of each CGD entity for supply to the Priority Sector. The price of domestic natural gas allocated by the MoPNG is determined as per the Pricing Guidelines, known as Administered Price Mechanism (APM), which is currently around US $ 3.06/MMBTU (million British Thermal Units). Thus, currently there is a cost effective availability of domestic natural gas to MGL.

For their priority sector natural gas supply, MGL purchase natural gas from domestic sources in accordance with the allocation policy of the MoPNG and the Pricing Guidelines. For commercial and industrial PNG customers, MGL source RLNG from various sources, both on a term and spot basis and enter into medium term contracts using a formula based pricing model and source any additionally required RLNG with spot purchases to seek to take advantage of decreases in the cost of natural gas. The company has entered into spot framework agreements and letters of intent with several suppliers such as GAIL, HLPL, GSPCL, BPCL, IOCL and PLL and BGIES for the procurement of RLNG.

The Offer and the Objects

The issue comprises offer for sale of 2.47 crore of equity shares of Rs 10 each which comprises of selling shareholders, namely, Gail and British Gas, each offering 1.234 crore of equity shares.

The minimum bid lot is 35 equity shares and in multiples of 35 equity shares thereafter. The issue is made through a book building process and will open on 21 June and will close on 23 June, with anchor investor bidding date of 20 June 2016.

The object of the issue is to achieve the benefits of listing the equity shares on stock exchanges, enhance the visibility and brand image among existing and potential customers and provide liquidity to the existing shareholders.

Strengths

Strong track record of more than 20 years and promoter's expertise and experience in business and operations

CGD has been identified as a key sector to reduce carbon footprint and government of India has ensured 100% allocation of domestic gas towards consumption of CNG and domestic PNG.

Against current market potential of 6.7m vehicles and 5m households, MGL has customer base of only 0.4m vehicles and 0.8m household, thereby, offering immense growth potential. Mumbai constitute approximately 60% of CNG demand. Mumbai provides additional opportunities to capture the demand for natural gas from domestic customers and the commercial sector owing to its increasing population and growth of commercial establishments. As of 31 March 2016, 57 of the 188 CNG filling stations and 0.27 million of the 0.86 million domestic PNG customers were in the adjoining areas. The adjoining areas of Mumbai provide significant opportunities for the expansion of the CNG and PNG networks.

CNG remains the most affordable fuel for transportation in the Mumbai region. CNG is 30% and 58% cheaper to diesel and petrol, respectively, and remains the mainstay of MGL's growth driver. Any potential judicial intervention to promote CNG, given rising green house gases, will offer upside potential to growth, going forward.

For the industrial and commercial PNG consumers, MGL source Regasified Liquefied Natural Gas (RLNG) from a number of sources, both on term and spot basis. The price at which they sell natural gas to their customers is not regulated and MGL is able to pass on an increase in the cost of natural gas to their customers.

The existence of significant additional opportunities for the expansion, phasing out of LPG subsidies over a period of time and the convenience of using PNG will help MGL in increasing the penetration of PNG in the domestic market. The recent cut in domestic gas prices along with increase in liquid fuel prices, in line with rising crude prices, will support volume growth, going forward.

Weaknesses

The company operates in a highly regulated environment

There was a volume growth of around 2% in FY 2016, which was affected by lower prices of competing fuels. Due to advance technology or prices of crude oil going down there can be shift in demand due to alternate fuels becoming cheaper.

MGL is supplied gas through GAIL so if there is any change in allocation or pricing criteria, thereby; reducing the volume allocated to company, the cost price of natural gas will increase affecting the business.

MGL is purchasing Natural gas in US dollars and selling the same in Indian rupees. Due to high volatility in exchange rates, there may be increase in the cost of business operations which may impact margins.

EBITDA has been impacted in past years due to sharp volatility in prices of competing fuels. The industrial business becomes uncompetitive in an event of continuous fall in alternative fuel prices

The company has received debit notes/invoices from GAIL demanding payment of a total of Rs 108.50 crore as tariff charges including VAT with respect to the use of the Uran-Trombay pipeline from the period between November 2008 and April, 2016. Further there is an excise duty of more than Rs 160 crore which is at different stages of arbitration level. No provision has been made by MGL of these liabilities and the same are shown under contingent liabilities.

Valuation

For FY 2016, the standalone net sales was lower by 1% to Rs 2065.30 crore, operating profit (OP) was up by 5% to Rs 512.90 crore and PAT was up by 2% to Rs 308.50 crore. The EPS for FY 2016 works out to Rs 31.20. At higher price of Rs 421, on an equity share capital of the company of Rs 98.78 crore of face value of Rs 10 each.

At higher price band of Rs 421, MGL is being offered at a P/E of 13.5 times its FY 2016 earnings. Nearest comparable player Indraprastha Gas (IGL) is currently trading at around 20 times its FY 2016 earnings. MGL reported an EBITDA/scm of Rs 5.8 in FY16 compared with Rs 5.3 for IGL. IGL reported CAGR of 9.9% in net sales and 8% in PAT growth from FY 2012 to FY 2016. However, MGL reported CAGR of 12.3% in net sales and almost flat PAT from FY 2012 to FY 2016.

Mahanagar Gas: Issue highlights
For Offer for Sale Offer size (in Rs crore)
- On lower price band938.60
- On upper price band1039.87
Offer size (in no. of shares )2.47 crore
Price band (Rs)*380-421
Post issue capital (Rs crore)98.78
Post-issue promoter & Group shareholding (%)75.0
Issue open date21/6/2016
Issue closed date23/6/2016
ListingBSE,NSE
Rating 48/100

Mahanagar Gas: Financials
1203(12)1303(12)1403(12)1503(12)1603(12)
Net Sales1296.701497.701868.602077.802065.30
OPM (%)38.5%32.2%26.1%23.6%24.8%
OP498.70482.70488.20489.70512.90
Other in. 19.4031.9034.5040.7042.70
PBDIT518.10514.60522.70530.40555.60
Interest0.301.100.201.203.00
PBDT517.80513.50522.50529.20552.60
Dep.63.8071.1080.7079.9084.10
PBT 454.00442.40441.80449.30468.50
EO 0.000.000.000.000.00
PBT after EO454.00442.40441.80449.30468.50
Tax (including Deferred Tax)146.20143.80144.50148.30160.00
PAT307.80298.60297.30301.00308.50
EPS*31.230.230.130.531.2
*EPS is on post issue equity capital of Rs 98.78 crore of face value of Rs 10 each
EPS is calculated after excluding EO and relevant tax
Figures in crore
Source: Capitaline Database

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