Mahanagar Gas Ltd - a natural monopoly

(Susindar) #183

In my opinion, this stock should be viewed much like Maruti Suzuki investment for Suzuki. GAIL has created a subsidiary for its local Mumbai investment. Therefore, any investment thesis on this stock should be based on local Mumbai LNG market rather than the LNG potential of India. GAIL is more likely to invest in other Indian market through a number of other subsidiaries. This provides Gail with a number of benefits.

Being the largest shareholder and effectively controlling the board, any investment decision of Mahanagar will have to be approved by GAIL and it is highly unlikely that Mahanagar is going to win any market that GAIL competes directly. It may get away with some markets which will be less lucrative markets overlooked by GAIL itself. In the same light, Gail is unlikely to compete mahanagar in the Mumbai market which could make it almost monopoly. But any other player can.

Also as minority shareholders, we cannot invest based on cash flows as we do not control the cash flow decisions of the company. One possible way the cash flows could be utilized is multiple small investments in a number of New markets bid by GAIL. While this will help GAIL, it will have very minimal benefit for minority shareholders of Mahanagar.

So it will be a much better investment thesis to invest directly in GAIL which does not suit me due to its size.

It is only my opinion and I could be wrong.


Issue of competition with GAIL was asked in one of the con-calls and it seems they do compete directly with GAIL for bids. Quoting verbatim:

" On your first question, we work at arms length with GAIL. As far as biddings are
concerned, we take our own call and there have been several instances where different
GAIL companies or associates have bid separately for the same GA, so even going forward
our approach would be whatever appeals to us based on our own internal parameters, we
shall bid for those GAs."


(Susindar) #185

This is what any subsidiary of GAIL (Bangalore, Hyderabad etc) would say as they cannot obviously say they parrot to whatever GAIL orders. We have to take the management talk with a pinch of salt.

Consider this from GAILs perspective. It would not want to compete itself by upbidding the projects among various subsidiaries. Also it would make the most sense if one of its subsidiaries with highest percentage shareholding wins the bid. Mahanagar is only 32.5% holding. At the least GAIL representatives in the board will be privy to bidding information of Mahanagar which gives an advantage to GAIL.

It all remains to be seen how it plays out. But there is a definite possibility that mahanagar will remain a local Mumbai player considering the name itself means Maharashtra.


Yes, there is a possibility that they will remain a local player and that seems to be the key risk to future growth. Three reasons:

  1. Management has indicated that they will exercise caution while bidding for new Geographical Areas (GAs).
  2. The competitive intensity in this area also seems to be increasing with new players like Torrent entering.
  3. The other GAIL company they compete with is Gail Gas Ltd. (100% GAIL subsidiary) which has won contract for Bengaluru, apart from some areas in Haryana. It is likely that this company will be favored by GAIL for bids as you have said.

See list of all GAs and awardees:

For now it seems like a low-growth, stable and high quality cash flow investment.

List of GAs considered for latest round of bidding:

From the list, Chennai will be a lucrative market but apart from it, others seem to be remote areas with limited potential. Other players have indicated that they will bid aggressively for Chennai.


Is there anyone who can shed light on competitiveness of MGL for certain GAs in the list? Is there any advantage that MGL has (lowest cost operator, established infra etc.) when it bids for adjacent districts like Satara and Sangli?

(Kumar Saurabh) #188

Good document to understand policy changes n tentative impact on RFPs n overall bidding

Gas Utilities-T-1-April 2018.pdf (322.4 KB)

(sjain_13) #189

Is this possible with British Gas/Shell on board and holding significant equity? But yes, GAIL may exert some influence.

(Susindar) #190

Gail and shell used to have equal equity. But with the sale of part stake, shell has shown its intent that this is a non-strategic investment. Also this stake is a drop in the bucket for shell and hence it is unlikely to show much interest. I am only predicting the most likely outcome based on common sense which may or may not happen.

(Balusu Aditya) #191

All of this being said why is the stock hitting new lows constantly? now it is at 862. Any explanations anyone has?

(AKGupta) #192

Just a few thoughts on the above Mumbai local player theory.

Mr. Pradhan, the energy minister has indicated 700-1000 crores investment will be required per GA.
GAIL is already investing heavily in pipeline construction and is lagging behind targets. Do you think that on top of this it’d want to invest in 100% of a new entity, not just money but also manpower etc., then wait for profits till capex cycle is done, all the while trying to complete its present highly ambitious targets of laying pipelines all across the country?

Imagine yourself as the CEO of GAIL and then think about the local Mumbai player theory.

Why would GAIL and others list MGL in the first place? They could’ve been a local player by opening a 100% subsidiary like GAIL Gas cited above. Why would they bring in Shell, operate the company for 15+ years, then take it to the market when they could’ve captured the market all for themselves 100% by having a Private Ltd subsidiary?

And as I said in a previous post, can a private company receive a multiples based valuation like MGL does? Any benefit they get by having a 100% subsidiary and it’s incremental cash flows will be, to an extent, offset by the incremental decline in market value of MGL. Just look at how MGL has lost ~$770mn from its 52 week high. 32.5% of it is $250mn which is how much GAIL has already lost. If the GAs around MMR go to a non-MGL entity, value will further decline causing further loss. Yes if it gets a 100% subsidiary, it’s own market value will increase to offset some loss. Plus look at the project pipeline GAIL already has which is lagging behind in execution.

GAIL is after all a govt entity and govt is looking to accelerate the pace of natural gas consumption in the Indian energy mix, not just a commercial consideration in this case. Why would it want to burden GAIL with more CGD projects when it’s pipeline targets are yet to be achieved? Read this to understand what I’m saying :

Compare this with the alternative. MGL has doubled in market value in the last 2 years since listing and can repeat history if it successfully bid for GAs around MMR. Which means an immediate gain of 250mn or more and then free cash flows, after some years of capex:
without investing more,
without operating/managing a new entity as it’ll be the headache of MGL and it’s current cash flows to arrange CapEx funds, to manage operations.
GAIL will get 32.5% of the incremental cash flows once capex cycle is complete.

This IMO is value additive.

Now decide between these 2 alternatives imagining yourself as the CEO of GAIL.

On the bidding part, MGL has considered bidding for 20 GAs, same as IGL. Don’t think this is conservative in anyway.

Bottomline, it’ll be value accretive for GAIL to allocate resources to GAs where it doesn’t have any presence and it’ll be value dilutive to compete with its own subsidiary in the long term.

I only believe in the what MGL currently has -
huge free cash flows enough to meet capex needs
potential still in MMR region (Raigarh),
sound gas supply economics vis a vis crude etc.,
govt push meaning tailwinds,
talk of Mumbai adopting Delhi model to curb pollution
Good mgmt and
plans to bid for more regions

All of above is just my opinion.


Some other factors that should be taken into account for MGL for next few years

  1. Natural Gas being brought under GST ambit.
  2. Likely uptick in PNG Industrial Segment
  3. Introduction and adoption Two wheeler kits for CNG
  4. Dollar Strengthening (Neg)
  5. Adoption of L-CNG by commercial Vehicles (I see Public transport going the electric way)

(AKGupta) #194

In addition to above, we are forgetting that adoption might not turn out to be very lucrative, volume growth might be sluggish, pipeline work might be delayed year after year as is the general trend (and which govt is trying to change).

In such a scenario, a 32.5% entity like MGL offers risk minimisation compared to a 100% entity for which all losses, penalties for delays and poor financials are GAIL’s even after incurring heavy capex.

I think this is the main reason - conducting a thorough project feasibility study, estimating demand, helping out in execution, framing strategy sitting at the board - that GAIL looks for experienced partners like Shell apart from the financial muscle such partners bring.

This rationale too doesn’t agree with the 100% Pvt subsidiary.

(Susindar) #195

We will get a much clearer outlook of Gail’s intentions if Mahanagar can win another lucrative market and if GAIL doesn’t compete there directly other than through Mahanagar. Until then we have to give due consideration to both possibilities and project earnings growth accordingly.

Advantage for GAIL to have separate subsidiaries for each market is that it still gets to be the controlling entity and therefore directly paricipate in management decisions rather than through a step down subsidiary and 100% of listing gains on possible listing of such subsidiaries in the stock market.

(AKGupta) #196

I myself am in wait and watch mode. Everyday gas utilities (IGL, MGL) are witnessing a sharp decline on increasing volumes. Let’s see how the Q4 results play out plus the mgmt guidance as to what is causing the sharp falls.
I’m still willing to give these utilities the benefit of the doubt till October’18 when the licences are announced. If they don’t bag anything out of 20 odd bids, then clearly we’re in the long term losers market. I’m hoping I’m wrong on this! :slight_smile:

(SMondal15) #197

My personal view is that 9th round bidding is not attractive when consider all 80 GA.please find the details region attached.So IGL MGL and Gujarat Gas has the most prized region within its bag.Both IGL and MGL mgt said in the past bidding will selective,adjucent to existing GA and based on potential volume it can generate.I think market is worried about margin.Gas price hike APM and spot LNG may temporarily dent the margin but gradually they can pass on the gas cost.attaching the 9th round bidding area details.Summary10042018.pdf (192.6 KB)

(AKGupta) #198

This is good for natural gas consumption if carried out.

(Balusu Aditya) #199

Results are out. Numbers look good. But looks like it did not reach the market’s expectation and the stock tanked.

(Chemist) #200

20180514_Mahanagar-Gas-Limited_827_CompanyUpdate.pdf (2.0 MB)

(Chemist) #201

(Chemist) #202

Mobile CNG filling station can dispense CNG equivalent to one CNG filling station.As per the latest conference call mobile CNG filling stations can be reality in this financial year. Will this help in reducing the queues in front of CNG filling stations and in turn result in volume growth