We recommend ?BUY? on MAHANAGAR GAS LTD for a target of INR 995 – valuing the company at P/E 20x of FY19E Earning.
Investment Rationale:
- Mahanagar Gas Limited (MGL) is one of the largest city gas distribution (CGD) companies in India.
- The Company has an experience of over two decades in successful development and operation of CGD business.
- MGL is the sole authorised distributor of CNG and PNG in Mumbai, Thane urban and adjoining municipalities and the Raigad district.
- Despite financing its growth from its internal cash flows from operations and high dividend pay-outs, MGL continues to be a debt free company.
- Strong Financial position provides with the financial flexibility to expand their network in the existing and new markets.
- Over the years, it has developed strong in-house project management capabilities, complemented by robust operation and maintenance processes.
- Efficient operator and services levels of MGL provide significant natural guard against third party entry in our Geographical Area.
- The Company undertakes various initiatives towards continuous improvement in Safety.
Valuation and View:
Mahanagar Gas is one of the largest City Gas Distribution (CGD) companies in India having over 20 years of experience in supplying natural gas in Mumbai and is presently the sole authorised distributor of CNG and PNG. We value the business at 20x FY19E EPS and recommend a BUY rating on the stock with a target price of INR 995 per share.
Risk & Concerns
- Credit Risk: Credit risk refers to the risk that the counterparty will default on its contractual obligations resulting in financial loss to the Company. The credit risk arises from trade receivables, security deposits, cash and cash equivalents and deposits with banks.
- Foreign Exchange Risk: Company is exposed to foreign exchange risk arising from direct transactions in foreign currency and also indirectly through transactions denominated in foreign currency though settled in functional currency (INR), primarily with respect to the US Dollar (USD). Foreign exchange risk arises from future commercial transactions and recognised assets and liabilities denominated in a currency that is not the company?s functional currency (INR).
- Liquidity Risk: Liquidity risk is the risk that the Company will find it difficult in meeting its obligations associated with its financial liabilities in time.
Company Background
Mahanagar Gas Limited (MGL) is one of the largest City Gas Distribution (CGD) companies in India having over 20 years of experience in supplying natural gas in Mumbai and is presently the sole authorised distributor of Compressed Natural Gas (CNG) and Piped Natural Gas (PNG) in Mumbai, Thane urban and adjoining municipalities, and the Raigad district in the state of Maharashtra, India. It is promoted by GAIL (India) Limited (GAIL) and BG Asia Pacific Holdings Pte. Limited (BGAPH), each of them holding 32.5% of its equity shares. The Government of Maharashtra also holds 10% stake in the Company.
MGL distributes CNG for use in vehicles and PNG for domestic household use, as well as commercial and industrial use. As at March 31, 2017, it supplied CNG to over 5,45,505 vehicles through network of 203 CNG filling stations. It also provided PNG connections to over 9,48,892 domestic households, over 3,218 commercial and 62 industrial consumers in Mumbai and its adjoining areas.
MGL distributes natural gas through an extensive CGD network of pipelines. As of March 31, 2017, it had a supply network of over 4,838 kms of pipelines, including approximately 4,417 kms of polyethylene (medium and low pressure) pipelines and 421 kms of steel pipelines.
Industry Overview
India is among the top five energy consumers in the world, and has been witnessing consistent growth in demand for energy. Out of the total energy basket, natural gas is the cleanest source of energy and has environment friendly characteristics, which are making it more popular as compared to other fuels. Globally, natural gas accounts for 24% of primary energy consumption, however, in India, it has a relatively small share of over 6% of the total energy basket.
In India, natural gas consumption grew at a CAGR of 3.1% over the previous seven years, reaching 46.6 Billion Cubic Metre (BCM) in FY 2015-16 from 37.6 BCM in FY 2008-09. As per World Energy Outlook 2015 report, the consumption is expected to grow at a CAGR of 4.6% over a period of 2013-40, higher than growth in Coal and Oil consumption over the same period. The demand growth for natural gas in India is likely to be driven by the development of transmission and distribution infrastructure, the savings from the usage of natural gas, the rising awareness of the environment friendly characteristics of natural gas as a fuel, and the overall favorable economics of supplying gas at reasonable prices to end consumers. The demand for natural gas in India is majorly driven by the Power, Fertiliser, Petrochem/Refineries and City Gas Distribution (CGD) sectors.
