Company background: Mahanagar Gas Ltd (MGL) is the third largest city gas
distribution (CGD) company in India with a history of 20+ years of natural gas
distribution in Mumbai and adjoining areas. MGL is promoted by GAIL and
British Gas. As of FY2016-end, MGL served 0.47mn vehicles through its 4,646km
of pipeline and 188 compressed natural gas (CNG) filling stations. It supplies
piped natural gas (PNG) to 0.86mn domestic households, 2,800 commercial
consumers and 60 industrial consumers.
MGL is the sole CGD operator for Mumbai, Thane, Navi Mumbai, and Raigad
districts. Mumbai and adjoining areas are currently under penetrated (CNG is served to
0.47mn of targeted 2.15mn motor vehicles; PNG is served to ~0.9mn of targeted
2.71mn households). MGL enjoys a monopolistic position in its markets owing to
(1) entry barriers for new players in the form of regulatory restrictions,
(2) parentage support which assures a majority of its gas requirement from GAIL,
and (3) huge pipeline infrastructure which continues to grow. We expect MGL to
report 7-8% volume growth over the next few quarters.
86% of MGL’s volumes are accounted by its CNG and domestic PNG business,
which have a stable outlook. Considering the government’s long-term plans to
phase out LPG subsidy amongst affluent classes, CNG/domestic PNG penetration
in Mumbai at ~22/28% levels, coupled with assured 86% of gas supplies on
cheaper rates on APM and PMT prices (currently APM price is at $3.06/mmbtu),
there exists scope for economies of scale to come into play.
Valuation: On considering (1) almost similar growth potential as that of the
industry peer Indraprastha Gas (IGL), (2) 22%+ RoE levels as reported in the last
6 years, (3) debt free status, (4) yearly cash flow generating potential of Rs200cr+,
(5) strong dividend payout ratio (Management has guided for 35% dividend payout;
translates to ~4% dividend yield), the issue at 12.9x PE FY2016 (vs peers
trading at over 18.0x) is attractively priced. We recommend SUBSCIRBE to
Mahanagar Gas IPO.

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