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Mahanagar Gas – Stock of the Month (May 2017)

Date: 1 May 2017

Price: Rs. 1032.30

Mahanagar Gas Limited (“Mahanagar Gas” or the “Company”) is one of India’s leading Natural Gas Distribution Companies. Established on 8th May, 1995, MGL is a joint venture between GAIL (India) Ltd and BGAPH (a subsidiary of Royal Dutch Shell Plc)

Mahanagar Gas distributes Compressed Natural Gas (CNG) for use in motor vehicles and Piped Natural Gas (PNG) for domestic household use as well as for commercial and industrial use. As at December 31, 2016, the Company was supplying CNG to more than 5.28 lakhs vehicles through its network of 197 CNG stations and provided PNG connection to approximately 8.6 lakhs domestic households, over 2,600 commercial and 55 industrial consumers in Mumbai and its Adjoining Areas.

INVESTMENT RATIONALE

Strong Financial and Operational Position

Mahanagar Gas has shown consistent growth over the last five years (i.e. 2011-12 to 2015-16). It’s net revenue from operations over this period grew at an impressive CAGR of 14.4 %. For 9 months period ended FY 2017, PAT increased by 29.79 % to Rs. 293.97 Cr. from Rs. 226.50 Cr. Mahanagar Gas has reserves in excess of Rs. 1,438.63 Cr and operates with negligible debt on its books backed by consistent dividend payouts.

Mahanagar Gas REVENUE

For 9 months period ended FY 2017, the total natural gas sold by the Company was 2.55 Million Metric Standard Cubic Meter per Day (MMSCMD). Of this, 74% was CNG followed by PNG which was 26%. Of this, PNG supply to domestic household contributed 12%, commercial contributed 6% and industrial 8%.

The total no. of domestic PNG connections of the Company increased from 0.56 million in FY 2012 to 0.92 million in 9 Months ended FY 2017; recording a CAGR of 10.4%. During the same period, the commercial connections increased from 1,502 to 3,200 and industrial connections increased from 38 to 62.

Attractive End Market – Mumbai

The Company is the sole authorized distributor of CNG and PNG in Mumbai, its Adjoining Areas and the Raigad district in the state of Maharashtra. The number of CNG operated motor vehicles has grown steadily at a CAGR of 12.42% from March 31, 2009 to June 30, 2016 in Mumbai and its Adjoining Areas.

There is significant growth potential in Mumbai and its Adjoining Areas due to the (i) anticipated growth in the number of CNG operated vehicles considering the current cost effectiveness of CNG as a fuel, (ii) potential growth in the number of households in the Company’s areas of operation and (iii) commencement of gas supply to consumers in the Raigad district.

The Company plans to convert 0.06 million vehicles into CNG every year. In order to further increase its CNG sales, the Company plans to set up 20 stations in FY 2018.

Automobile Manufacturing Companies Supporting the Use of CNG

Many automobile manufacturing companies are coming up with dual fuel vehicles (CNG+Petrol) thus supporting the consumption of CNG. However, this trend is mainly visible in metros like Delhi and Mumbai. For instance, Maruti Suzuki has taken the lead in CNG and has installed a separate manufacturing line for its CNG car models at its Manesar plant. Maruti offers 6 models with CNG variant. These include Alto 800, Alto K10, Celerio, Wagon R, EEco and Ertiga. Other car manufacturing companies who offer CNG variants include Tata motors and Hyundai.

Falling Natural Gas Prices to Improve Margins

The natural gas prices in India have declined over the past 2-3 years. The decline in prices is in line with international commodity rates. For April –September 2017, prices have declined to U.S. $2.48 per unit.

Mahanagar Gas

With the falling natural gas prices, Mahanagar Gas is likely as this will help the company to reduce its natural gas cost and improve margins going forward.

Expansion Plans

Mahanagar Gas is fast spreading its City Gas Distribution (CGD) network beyond its existing areas of operations i.e. Mumbai, Thane, Mira Bhayander and Navi Mumbai. The Company is planning to  spread its network in its authorized areas of Kalyan, Dombivali, Ambernath, Badlapur, Ulhasnagar, Bhiwandi Panvel, Taloja and Kharghar. In the next five years, Mahanagar Gas has plans to increase its customer base to about 10 lakh households, operate about 330 CNG stations, and expand the steel pipeline network to around 600 kms, and the PE pipeline network to over 5500 kms.

INVESTMENT CONCERNS

Removal/Reduction of Gas Allocation on Priority Basis

A majority of Mahanagar Gas’ natural gas supply requirements are met by the allocation of domestic natural gas from Ministry of Petroleum and Natural Gas (MoPNG) at a price determined in accordance with the New Domestic Natural Gas Pricing Guidelines 2014. The Company sources domestic natural gas currently at US$3.4-5.7 per MBTU (Million British Thermal Units), which is significantly lower than the current market price of imported natural gas. Any increase in the cost price of natural gas or any reduction in allocation amount of domestic natural gas may have an adverse effect on our business, results of operations and cash flows.

Increase in Cost Effectiveness of the Alternate Fuels

The natural gas sold by Mahanagar Gas is benchmarked to prices of other fuels available to customers such as petrol, diesel and other liquid fuels, which are again benchmarked to crude oil prices. Any change in prices of crude or alternative fuels that make natural gas less cost effective for customers, would affect the firm cash flows.

Conflict with Third Party that Owns and Operates CNG Filling Stations

Majority of CNG filling stations at which Mahanagr Gas sells CNG, are owned and operated by third party i.e. 175 of the 188 CNG filling stations as on March 31, 2016, of which a significant portion is owned by OMCs i.e. IOCL, BOCL and HPCL. The majority of the contribution to the Company’s revenue is thus from independent third party OMCs, whose agreement has been renewed till March 31, 2018 for supply of CNG to stations owned and operated by them. Any conflict with these OMCs could adversely impact its operations and cash flows.