Mahanagar Gas:A Power Packed Gas Distributor with more than 100% returns.

 About Mahanagar Gas Ltd.

Mahanagar Gas Ltd., incorporated in the year 1995, is a Mid Cap company (having a market cap of Rs 10802.34 Crore) operating in Petroleum sector.

Mahanagar Gas Ltd. key Products/Revenue Segments include Gas Natural which contributed Rs 2222.75 Crore to Sales Value (99.27 % of Total Sales), Other Operating Revenue which contributed Rs 14.15 Crore to Sales Value (0.63 % of Total Sales) and Pipes & Fittings which contributed Rs 2.17 Crore to Sales Value (0.09 % of Total Sales)for the year ending 31-Mar-2017.

For the quarter ended 30-09-2017, the company has reported a Standalone sales of Rs 533.76 Crore, up .55 % from last quarter Sales of Rs 530.86 Crore and up 3.03 % from last year same quarter Sales of Rs 518.05 Crore Company has reported net profit after tax of Rs 124.79 Crore in latest quarter.

The company’s top management includes Mr.Akhil Mehrotra, Mr.Arun Balakrishnan, Mr.Jainendar Kumar Jain, Mr.Raj Kishore Tewari, Mr.Rajeev Mathur, Mr.Santosh Kumar, Mr.Sunil Porwal, Mr.V N Datt, Mrs.Radhika Haribhakti, Ms.Susmita Sengupta. Company has SRBC & Co LLP as its auditoRs As on 30-09-2017, the company has a total of 98,777,778 shares outstanding.

Setup in 1995, as part of an agreement between GAIL, Maharashtra Govt. and BG Asia Pacific Holdings (Royal Dutch Shell group), Mahanagar Gas Ltd. (MGL) is one of the largest operators of city gas distribution business.

It is the only authorized distributor of CNG and PNG in Mumbai, suburbs and Raigad, Maharashtra. CNG is used in motor vehicles whereas PNG is used for domestic household, commercial and industrial purposes.

At present, the company is supplying CNG to over 5.7 lakh natural gas vehicles. The entire public transport fleet, along with a large number of private vehicles are operating with MGL supplied CNG kits. MGL supplies PNG to around 16 lakh people in and around MMR, with domestic connections close to 10 lakh customers through 200 CNG stations and more than 2,000 dispensing points .

With a market cap of Rs. 10,800 cr, the annual sales is close to Rs. 2100 cr. , with a net profit of Rs. 450 cr. The operating profit margins are healthy, with a considerable jump in the recent years, owing to the pollution, supply and other environmental concerns.

The recent quarters saw a massive jump in the operating profit margins, due to better price realizations.

Over the last 18 months, most of the gas stocks have moved higher and given good returns. IGL tops the list with 172% returns, followed by MGL with 110% returns.

CNG and PNG are fast catching up, especially in the current scenario of pollution and environmental issues. However, at the same time, CNG might face competition from the electric vehicle thrust that is happening in the country. Also, CNG accounts for 74% of the revenues which might be subdued going into 2030, when the electric cars are expected to occupy the top seat.

With exclusivity in Mumbai, MGL has good business outlook going forward to the next 25 years. The H1 2017 EPS was close to Rs. 25.5 and with the same outlook and the company trading at a P.E. of 24, a price target of Rs. 1200 looks appropriate by Mar 2018.

KR Choksey Institutional Research has given a target of Rs. 1400 while CD Equiresearch has given a target of Rs. 1360 by 2019 .

KR Choksey Institutional Research:

Result highlights

Mahanagar Gas Ltd. (MGL) reported revenues of INR 5,880 mln up 2.9% YoY and 0.9% QoQ. This was primarily driven by 14.3% yoy

increase in revenues from PNG segment. The net profit of INR 1,248 mln up by 22.1% YoY but remained flat at 0.4% QoQ. The sales

volumes for CNG came in at 183.52 mln SCM, an increase of 7.02% QoQ while the PNG sales volumes came in at 65.18 mln SCM up

5.02% QoQ. EBITDA margins were 22.6% as compared to 22.9% in Q2FY17. The company has targeted to set up 20 gas stations in the

country out of which 4 are completed while 9 are in the offing. This expansion will further boost the companies’ volume growth.

Revenues supported by volumes: Total volumes rose 5.33% to 2.7 million metric standard

cubic meter per day (mmscmd) due to encouraging conversion rate of compressed natural

gas vehicles.

Strong operational performance YoY: The EBITDA increased by 24% YoY, however, it

showed marginally weak performance QoQ due to higher operating expenses, resulting in

a lower EBITDA margin of 34.1% as against 34.9% QoQ.

Future Growth: The company has targeted to set up 20 CNG stations in FY18 out of which 4

were set up in Q1FY18, 9 are in the offing while the rest will be completed by the end of the

financial year. The company has also set up 3-4 stations in Karjat and 1 in Uran. We believe

that with GOI thrust towards greener fuel, MGL stands at advantageous position and may

see higher volume growth going forward.

Infrastructure exclusivity: MGL has infrastructure exclusivity till 2020 in Mumbai, till 2030 in

Thane and till 2040 in Raigad. However we believe that due to heavy capex sector no other

competitor will be able to challenge MGL’s position and it will virtually maintain its

dominance. Currently MGL operates 203 CNG stations and serves 0.54 Mn CNG customers

and 0.94 Mn PNG customers.

Valuation & Recommendation:

We believe that with more thrust towards greener fuel, MGL will benefit from it. To fuel

further growth MGL needs to add more CNG stations and connect more housing clusters

with direct gas lines. At a CMP of INR 1094, the stock is trading at 29.7x of its FY19E earnings

and at 29.3x of its FY20E earnings. We recommend a BUY rating with a target price of INR

1400 (upside up to 30%).

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