Mahanagar Gas Ltd - a natural monopoly

(santoshj) #264

MGL holds infrastructure exclusivity in Mumbai, Thane and Raigad.
Currently 9th bidding round is under progress where company has applied for 3 geographical areas (out of 86).

  1. Chennai and Tiruvallur districts in Tamil Nadu,
  2. Medchal Rangareddy and Vikarabad districts in Telengana
  3. Srikakulam, Vishakhapatnam and Vizianagarm districts in Andhra Pradesh.

out of this, result came on Friday for first 2 areas. company lost in both.

Chennai and Tiruvallur went to Torrent gas
Medchal Rangareddy and Vikarabad districts to Megha engineering

(Hardik) #265

AGM 2018 notes:


  1. Penetration:
    Currently 30% penetration in all 4 segments in Mumbai and Navi Mumbai. Lot of potential exists in current area. There is a constraint on number of connections company can do Y-o-Y considering right resources, contractors. Huge potential exists in existing area and hence expects consistent growth for many years to come.

  2. Competition:
    Infrastructure exclusivity for 25 years which expires in 2020. These are rolled over in every 10 years block. Some companies have got roll over so there is no competition perceived as far as laying of pipeline is concerned (Monopoly).
    Marketing exclusivity for Mumbai and Navi Mumbai areas are over. This means that anybody can come and ask open access and start supplying in these areas. So far no new player has asked for open access. There are many new areas to cover in India and therefore company does not expect any competition in these areas for atleast next 5-6 years. Also, regulator has not set up any tariffs for open access. It will take time to establish tariffs if anybody was to come and ask for it. The regulations are still to be framed but company expects 12-14% post-tax returns in case of open access.

  3. New Bids / GA’s:
    Had bid for 3 areas and did not win any. Company’s bids were conservative as they did not want to loose their good money over bad money. Will continue to look for new opportunities with good return. Potential in current GA’s (GA1, GA2 and GA3) is more than 10-20 GA’s which come for bid. So even without winning the new bids, company has huge potential with current GA’s.
    Management said that companies that are bidding and winning is not sustainable. MGL will never bid those numbers as anybody will only loose money with those numbers.

  4. CAPEX:
    Approx. CAPEX will be Rs.400 Cr. every year. 70% of this will be in GA1 and GA2. Although the network is already laid, to connect the household, Polyethylene pipeline and GI fittings are required.
    10% of CAPEX is spent each year on renewing the networks i.e. replacing compressors, valves etc.

  5. Imported Gas and pricing policy:
    In India, broadly 50% of Gas is imported. MGL gets 80-85% of gas from domestic sources for domestic and commercial CNG segment. For commercial and Industrial, MGL buys on spot basis from the market which is imported and which is around 15% of the company’s requirement.
    For Pricing policy of each segment, company tracks pricing for alternate fuel e.g. for domestic segment, pricing is close to subsidised LPG prices (+/-5%). CNG pricing is at huge discount to Petrol / Diesel.

  6. Inorganic growth:
    MGL expects that lot of companies which are bidding in very aggressive way may come up for M&A opportunity because they may not be able to meet their targets.

  7. Hurdle in expansion of CNG stations / queuing problem:
    There is healthy conversion of around 7000 autos / 4 wheelers every month. Company plans to add 20-25 stations each year for next 4-5 years. The long queues happen because demand from taxis and autos come at a particular time i.e. shift change. Company has talked to Unions but they are reluctant to change that. So the peak load queues will remain as infrastructure is built on average load.
    Also, there are peak hours restrictions imposed by traffic police where a CNG station cannot be operated during peak hours so that the queue does not spill over and affect ongoing traffic.
    Getting land is another hurdle and company is tying up with OMC’s. For private vehicle owners, company has started an app where they can find where there is no queue.
    Long term solution is to add more stations therefore company is regularly approaching government for prime plots and coming out with advertisements every quarter asking land owners to open and operate a CNG station on long term basis (10-15 years). Another technical solution company is trying is to come up with small footprint CNG stations. Company is on the verge of finalizing the first contract for such CNG station. There are lots of approvals involved for safety from a Central govt. organisation. Once there is a breakthrough there will be a positive impact.
    Initiated e-token system on pilot basis at Tardeo where there will be no queuing. People can book a slot every 15 mins through an app (MGL e-token CNG). Also, this can be done through SMS for people who cannot use app.

  8. EBITDA Margins:
    FY2018 was excellent for the company as all 5-6 Margin dependent factors were in favor of the company. Rising crude price will lead to higher price for liquid fuels in industrial / commercial markets. So realisations may improve however, company buys RLNG on spot basis, prices of which will be higher. Also, exchange rate is adverse and all the bought gas is in $ denominated. These may have adverse impact on the margins.
    Company does not give any guidance but expect to maintain historic margins.

Few common questions:

  1. Stake sale by BG and why GAIL has not participated in buying. Management left these to be best answered by the promoters.
  2. Non utilisation of CSR budget.

(jajushobhit) #266

While some us may be disappointing that the company has not won any bids in the recent auctions of city gas distribution, it might be a blessing in disguise. If you observe the results the experienced incumbents (like IGL and MGL) have been conservative, while the newbies (like Adani Gas and Torrent) have bid aggressively. Though entering new geographies can accelerate growth, it comes at the cost of capital. If a company can grow at 10-15% for the next 5-10 years, without any significant capex, it may be more ROE accretive. I would believe that being in the business for far longer, these entities would have a better sense of the price that can be paid. Views are biased.
Disc: Invested in MGL

(AKGupta) #267

Anybody assessed the impact of tariff hikes on CGD companies? Good, bad, ugly?

(HR) #268

MGL owns it’s distribution pipeline. So, nothing on the output side. If it uses Gail’s pipeline for procuring, it will be impacted to that extent.

(Pratik Chandak) #269

How the increase in NG prices by Gail will impact MGL? Can anyone provide details please?

(harshb232) #270

You are absolutely correct. I am closely associated with gas sector and I can tell you that it is goinig to be damn difficult to develop CGD network in some of the GA’s. Also for many GA’s even main trunk pipeline are not available and this CGD entities would have to lay the spur lines at there own cost which is going to be damn costly. Along with this I have come across many companies who have bidded just for the sake of bidding without considering the business case for it.

(Raman Sharma) #271

Detailed analysis by Dr Vijay Mallik -

Mahanagar Gas Ltd: Fundamental Analysis - Dr Vijay Malik

(kelkar) #272

Disruption in CGD business due to e vehicle…
In all CGDs, 70+ % revenue come from CNG business , Out of that 20+% contributed by public transport… Also Metro connectivity is in progress which will further reduce down consumption of CNG in Taxi, Auto, Ola, etc.

Commercial or industrial consumptions can recover these losses???


(AKGupta) #273

In my opinion, we’re quite far from EV posing a realistic threat to CNG as much as EV+CNG posing a disruptive threat to petrol, diesel and LPG.

Recently govt announced 10K CNG Stations will be added over the next few years so clearly the policy thrust is still there.

On top of it, I read Maruti chairman saying CNG is better and more cost efficient compared with EV for now because the infra & technology both exist on a scale for automakers to profitably sell CNG vehicles. Hyundai launched its Santro in CNG fitted version as well.

There was a lot of interest in the CGD licenses also.

On top of it, LNG terminals, which import liquid gas and convert it to gas are coming up in droves. Petronet LNG has successfully tested LNG to be used as an auto fuel.

So all of this sectoral activity is not to waste in the near term & there are definitely opportunities prevalent.

The goal remains the same: a quarter of India’s energy needs being met by Natural Gas. Mumbai & Delhi being the most densely populated areas not just in India but the world themselves present fantastic opportunity for CGDs.

I see IGL being very proactive & innovative in capitalising on these opportunities. For eg. to kind of co-opt its upcoming disruptive challenge, IGL is creating space for EV charging infra within its stations. It is buying stake in unlisted CGDs to expand its area of monopoly. Then it started dealer owned & operated model recently to speed up setting up of new CNG stations. Discounts on first PNG bill/EMI Conversion of upfront charges are all aimed at boosting enrolment. Now it’s planning to set up mini CNG Stations in residential colonies to minimise long queues.

I think MGL is not very actively promoting its business as much as IGL. I’m willing to give the Mgmt some more bandwidth to execute as it says the Mumbai market is highly underpenetrated & there is room to grow f I like the economics of the business . Maybe it can try cloning strategies from IGL or look for whatever else works.

In the overall energy mix, there can’t be a single source which takes prevalence over all others. India’s future energy mix will have Natural gas, electric/reneweable, nuclear, thermal & other non-renewable dirty fuels as well. Only thing is these dirty fuels will be replaced slowly but surely with cleaner ones & we know CNG falls in the bucket of cleaner fuels out there.

Disclosure: invested in a lot of names above and views are biased.

(kelkar) #274

Most probable GAs for 10 th Bidding round

(Bheeshma Sanghani, PhD) #277

Some good numbers on CNG vehicles

Mgl came up good top line growth (30%) for Q2 yesterday. However margins contracted due to elevated gas costs. Ebitda growth however was decent at 11%. The gross margins are still very good at 49% for q2.

The results reflect the growing trend of vehicles switching to natural gas due to cost considerations combined with govt initiatives on pollution control.

The main moving variable is the volatility in the raw material cost , however they seem to be doing well holding the unit growth and unit prices to mitigate that impact.

Attached is a chart showing price for imports of LNG in kgs ( source : ).



(suhagpatel) #278

What is your take on Rs. 105cr guarantee with PNRGB for the MWP for Raigarh district. They have been issued notice to justify the delay and MGL said they are confident on making progress by March 2020.


(Bheeshma Sanghani, PhD) #279

Work delays are part and parcel of this business. There are multiple local body permissions that need to be taken to lay pipelines and its a slow painful process. My take would be that notices from the govt to the govt is just procedural stuff. However , good to see PNGRB taking an active role.

(Hardik) #280

Press Release.pdf (95.6 KB)

Press release for 10th CGD round provides good details on present and potential area and population covered. Implementation of the projects under 9th CGD Bidding Round are expected to result in investment of Rs. 70,000 Crore. That’s huge. As per MGL management, some of the bids were very aggressive and they were happy to lose at that price.

Profitable execution and timely delivery will be challenging for these new bids. Consolidation may happen 5-7 years down the line.

(AKGupta) #281

Adani has clearly been the most aggressive in the last bidding round.

I think the Adani gameplay is to downsell most of the GAs it has won or develop them in partnership (with France’s Total?)

Its stock is up 45% from listing price & at 12K cr mcap, I would give it a pass. Its full year revenue is 1400cr (IGL makes this in a quarter and MGL in a little over 2 quarters!) with 70 CNG stations (vs 450 for IGL and 200+ for MGL).

It’s a positive for Adani Gas that it now has 17 GAs exclusively for itself (vs 3 for MGL and 6-7 for IGL) and some in partnership also. So the revenue growth potential is perhaps maximum for Adani.

But IMO market is underestimating the time+difficulty it’ll take to develop these GAs & the revenue potential from these. As I was reading earlier GAIL is finding it difficult to make West Bengal govt use its newly laid pipeline for thermal power plants (

IGL is also facing similar problems with Pune market where even after the pipeline is laid and ready to load, people are not signing up!

Growth in this business is slow but sure kind of thing. And I’m happy being with businesses which are conservative rather than aggressive in this space.

That said I do hope MGL continues to bid conservatively in the upcoming round of bidding.

(sougataG) #282

With so much pipe laying activity to be undertaken, which pipe companies can benefit from this opportunity? Suggestions would be welcome from seniors.

(ramanhp) #283

(kelkar) #284

Jain irrigation… Very less competitors in PE pipes

(chintri) #285

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