Mahanagar Gas Ltd - a natural monopoly


(AKGupta) #203

Q4 results were average compared to expectations. HDFC was predicting 113 crore PAT. K R Choksey was estimating 131 crore. Last 3 quarters had 125 crore PAT.
As per me, MGMT has clarified focus will be on volume growth which perhaps reflects in topline growth which is 10% better YOY.
The stock is under a lot of pressure. I’m still clueless as to how a company that’s got this kind of fundamentals is trading at 16 trailing PE.
It’s earning 470 crores on capital of 2100 crores (~23% RoE which is above the cost of capital of usually 15%).
It’s debt free and funds it’s capex from internal accruals.
Pays hefty dividends.
Has considerable pricing power.

I think the immediate short term concerns are :

  1. Topline growth which was stagnant since 2015. For 2018 it’s around 10% (2200 crore vs 2000 crore net sales). MGL really needs a new city to grow the topline meaningfully as Mumbai is getting congested for new CNG stations etc. (What’s also noticeable is the doubling of listing price in poor topline growth years!)

  2. Operating margin pressure due to NG cost increase. Company hasn’t been able to pass on cost increase in full yet. OPM has come down to 30% in latest quarter against 35%+ in prior qtrs. (In my opinion, the bulls is crude will be short lived. Current crude at ~$75-$80 is way above the threshold where shall gas producers become profitable [approx $60 I read in the BP energy outlook report.] and OPEC is no longer such a king of oil to maintain it’s price. Plus, there is a huge supply glut in NG market which is sure to keep international prices low. So maybe NG prices themselves will come back down. Check out spot prices here: (https://www.eia.gov/dnav/ng/hist/rngwhhdM.htm)

Disclosure: invested and looking to add more. But will probably change my mind if they don’t get any new city come October.


(AKGupta) #204

In addition to above, Qtr volume growth is flat sequentially at 252 mmscm which reflects in flat top line as well. (It’s better by 7% YOY.)

Another negative is the decline in Operating profit per SCM from Rs 8 in Q3 to Rs. 7 in Q4. It has declined for all 4 qtrs from Rs. 8.7/SCM in Q1.

Given this, Operating Profit margin has come down to 30% (from 35% in Q3) and Net Profit margin has come down to 18% (from 21% in Q3).

Now that the NG cost has further increased from April onwards, I expect that to further dent the OP/scm metric.

Unless there is significant volume growth, NG cost increase could seriously impact bottom line as well. Next NG price revision is due Sept’19. Before that, MGL may hike its gas prices to recover its operating margin which could be one positive in the short term.

The only long term positive for this stock is if this company gets one or two new cities to expand operations and volume growth.

Others may pitch in!


(shreys) #205

Could someone share whether the management is willing to participate in auctions of geographical areas outside of Maharashtra or they want to restrict their activities to Maharashtra?


(biju john) #206

The concall transcript is there on their site, They have stated that they are aiming for 6% volume cagr for next five years. Not very ambitious folks. This also with a caveat that regulatory authorities like PNGRB shouldn’t come up with new rules.They have stated that they will be looking at applying for new geographical areas and would also like to partner with others for bids.
My take is unless they get new areas this is not going to be a very exciting growth stock,but the pipelines and infrastructure would assure you of dividends for a long time. Unless Raigad has got lot of townships coming and Government brings in regulation for use of CNG for vehicles/factories.


(shreys) #207

In the best case scenario, even if they’re able to secure distribution rights in some lucrative circles, it’ll be, at the very least, 4-5 years for any significant jump in earnings.


(subrotobaul) #208

Maharashtra is being quite aggressive on setting up EV charging infrastructure. (http://www.thehindu.com/news/cities/mumbai/ev-charging-stations-to-get-priority-in-maharashtra/article23662506.ece) . Industry is responding well too. (https://goo.gl/7nxPCQ). Of special interest to people like me who were hoping for a similar regulation support to CNG as in Delhi NCR.

Competition for the CNG vehicle business pie / future growth of Mahanagar ?

Disclosure: not invested.


#209

The management did state in the analyst call that they are bidding for 20 GAs which include areas in Bhopal, Chennai, etc. Check page 14-15 for more.


(sjain_13) #210

MGL seems to be a case of good business and bad management to me. I have contacted them through their website with an interest for new PNG connections for 250 flats in our society but no one has bothered to revert in almost a month. Well managed private players have a faster turn around time for new business. I am located in Andheri - so an area with pipelines in the vicinity and easy job for MGL.

Secondly, moneylife has recently re-tweeted a tweet from another customer where the pipeline was laid almost a year ago , the area is still dug up and connections have been given but supply not commenced even after a year.

Yet another perspective that I have is on electrical cooking. While creating a EV ecosystem is challenging owing to large investments required in buying new EV vehicles, creating EV charging infra; Switching from Gas based cooking to electrical applicances for cooking should be much easier. It seems like a low hanging fruit that companies have not tapped. If this gains traction, MGL business can be disrupted much earlier than onset of EV.

I have a small tracking position but finding it difficult to build larger positions due to above reasons and the threat from EV after couple of years. Look forward to receiving some studied views on above


(biju john) #211

I would say most of the utilities work that way. When i applied for a gas connection for my house i Gujarat, had to go to Gujarat Gas office,fill a form and pay the cheque in advance. The pipeline was just in front of my house, I was still told there is a waiting period of 3-6 months and offered to refund the deposit, I would say there is a strong trend for people to go for PNG for convenience sake. Iam sure lot of people in Mumbai are also waiting for it.
Regarding electrical cooking, if we were to buy a electrical cooker/induction one, it would be of around 2000 watts and if we use it for an hour we consume 2 units and at 5 rupees a unit it is 10 rupees for an hour. In my case for a family of 4, the bimonthly gas bill comes to about 600rs, I feel it would not be economical to go for electrical cooking in the present scenario.


(AKGupta) #212

GST council will consider including Natural Gas in GST framework in it’s next meeting.

All gas stocks have rallied today.

If it’s brought under GST, CNG, PNG should become even more competitive compared to petrol, diesel. Resulting in more volume growth. Yet to look at exact benefit for CGDs numerically.


#213

MGL price hike

Accordingly, now inclusive of all taxes of CNG and Domestic PNG in and around Mumbai will be Rs 46.17/Kg and Rs. 27.25/SCM (Slab 1) and Rs 32.85/SCM (Slab 2) respectively, in place of earlier Rs 44.22/Kg and Rs. 2 .87/SCM (Slab 1) and Rs 32.47/SCM (Slab 2) respectively.

MGL in the notification also highlighted the impact of such hike in various vehicle segments. It stated that, this increase would have a marginal impact of Rs. 0.06/KM and Rs. 0.07/KM on the per KM running costs of Auto rickshaws and Taxies respectively.

MGL said, “Even after the above revision, MGL’s CNG still continues to be a very attractive proposition and offers savings of about 61% and 37% as compared to petrol and diesel respectively at current price levels in Mumbai.”


(AKGupta) #214

An interesting piece on CGDs I came across today in ET: https://m.economictimes.com/markets/stocks/news/igl-passing-on-oil-surge-a-positive-for-city-gas-players/articleshow/64378401.cms

Brief:

  1. IGL, MGL raising prices shows their pricing power as “CNG is 48 per cent and 62 per cent cheaper than diesel and petrol, respectively. Piped natural gas (PNG) is 11 per cent and 33 per cent cheaper than subsidised and non-subsidised LPG cylinder.”

  2. “Every one-rupee slide against the dollar requires an increase of Rs 0.28-0.30 in the gas price to offset the impact on profitability.” IGL’s latest CNG price hike was Re1.4/kg while MGL hiked it by 1.51/kg. This is on the back of price hikes in April as well.

  3. “Stocks of IGL and MGL have lost nearly 12 per cent and 18 per cent, respectively, so far since the beginning of 2018 largely due to concerns over the possible reduction in profitability amid weakening rupee and rising intake of expensive domestic gas from Panna Mukta Tapti (PMT) field.”


(Vego) #215

Piped gas distribution to reach 45 %of India population on completion of various distribution projects - PNGRB sources.ET 26-Jun-18


(Balusu Aditya) #216

Reliance might be quite tough to outbid given how they are operating nowadays. Any idea how many areas are conflicting between MGL and RIL?


(sjsandesh) #217

Investor Presentation:


(suhagpatel) #218

None of the online reports mentioned about MGL participation in CGD licence for the round concluded yesterday. All of them have Adani, IGL, GAIL and others. Can someone with a knowledge of the matter clarify if MGL participated or not.

Regards,
Suhag


(Vego) #219

Infra exclusivity is only upto 2020, and RIL BP in the fray for city bidding, why did BG sell part of its holding and bring down share prices is the first question
Secondly the new Bidder can use existing pipe line network for a price, looks like RIL laying the ground work for takeover, either way .
Leaves small investors at the mercy of winds


(Vego) #220

Exactly, will know soon what is the plan cooking in RIL


(DrArvind) #221

Before a month, I had an interesting chat with an executive officer at Guj Gas co, Surat. He also mention that MGL is not participating in the auction for the new territory. I asked him why? He replied, that due to dispute between promoters Gail, BG Group and Maharastra Government they are not interesting to expand its business. He also mentioned that recently GGCL has acquired adjoining Puna city distribution, as technically MGL was better placed than GGCL but due to promoter dispute they didn’t applied for Puna city.


(suhagpatel) #222

Maharastra Natural Gas Limited is the company supplying piped gas if you are talking about Pune. Its not GGCL.

Regards,
Suhag