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 : https://economictimes.indiatimes.com/industry/energy/oil-gas/pngrb-cancels-gails-license-to-build-surat-paradip-natural-gas-pipeline/articleshow/63298705.cms
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.