Mahanagar Gas Ltd - a natural monopoly


(Amit Bhalotia) #101

(AKGupta) #102

Have you guys come across any reason too why BG is selling? This article doesn’t say anything about that. At the time of IPO too BG sold 12.5% at mcap of 4800 crore. It has since doubled at the current price.


(Marathondreams) #103

It would be very difficult to know why someone is selling. It could be due to the fact that foreign entity needs money for investing in some other field or change of strategy etc.
As a long term investor, we need to focus on whether anything changed for the company just because one foreign promoter is selling its holding. I think tailwinds for this business continues. So I would like to use this opportunity to buy into this excellent monopolistic growth story

Disclosure - investing from Jan 18, added more today


(Balusu Aditya) #104

What is your current avg price of acquisiton?

Disclosure: Just bought few stocks at 911. Planning to buy few more if it dips.


(atul1082) #105

The stock has a 52 wk low of 875.Therefore acquisition price with a dip of around 4% with no negative for the company is good.The company is debt free with almost 30%ebita margin and 20%net margin with annual growth of business of around 10% and no growth of 15%. Dividend yield 2%i too purchased with an average price of 910.50.


(atul1082) #106

Read NP GROWTH OF 15% around


(AKGupta) #107


The article says stake sale is for simplification of BG corporate structure to improve returns, nothing against MGL as such.
I was going through the numbers and money control shows MGL is trading at 19 times TTM earnings. Can’t help but wonder why it trails in comparison to IGL (33x) and Gujarat Gas (44x).
It’s true that MGL doesn’t have the benefit of mandatory CNG for public transport like IGL has. Nor does it have advantage of higher Revenue from PNG vs CNG like Gujarat Gas has.
But still recent announcements of mandatory CNG for Ola, Uber, albeit without a time frame, and progress on Raigarh should give a lift to this stock. Plus, upcoming auction rounds too should bode well.
The reason could be that these triggers don’t come with a definite time frame so the market is discounting this stock compared to others.


(atul1082) #108

If u compare MGL and igl on growth, ebite, Pat, eps, p/e, u may notice MGL performance is better than igl


([email protected]) #109

One basic question related to MGL, from where does it source the gas from.


(atul1082) #110

I am not sure, but probably from GAIL


(AKGupta) #111


Stake sale had nothing to do with MGL’s business performance. It’s a part of Shell’s $30B divestment program over 2016-18 to reduce D/E ratio. Can read more about it here: https://www.ft.com/content/ca98a0d2-d40c-11e7-a303-9060cb1e5f44
Posting an extract from the Nov’17 article since it’s behind paywall :

"A $30bn divestment programme launched after the BG deal to cut debt was “almost delivered,” a year ahead of schedule, Shell said, with $25bn of disposals completed or agreed and a further $5bn in “advanced progress”.

This put its debt to capitalisation ratio, which was 25.4 per cent at the end of the third quarter, “within sight” of its 20 per cent target."

The scrip should rebound pretty quickly IMO.


(Kanwal Sudan) #112

Some interesting links with respect to latest round of bidding -

Full ICRA report comparing old and new rules for bidding -
https://www.icraresearch.in/Research/DownloadSpecialCommentReport/1859

More details about the bid requirements can be found here - http://www.pngrb.gov.in/cgd-network-bid-2018.html

  1. Bids for 174 districts have been invited compared to 100 districts allotted cumulatively so far. So the potential is huge.

  2. A number of districts in Maharashtra are up for grabs. Since this is MGL’s traditional battleground, will be something to look forward to.

  3. I also find comments of Chairman, PNGRB quite interesting - he said for earlier rounds many bids were received and awarded but not completed because of economic unviability. With the rules tweaked now and penalties in place, the focus is more on ability to meet infrastructure demands rather than bidding on tariffs and performance guarantees. MGL should be able to leverage its know how and local expertise to bet big at least in Maharashtra, if not other areas.

Views invited from @bheeshma and other members. :slight_smile:


(jajushobhit) #113

Mr. Dinesh Kumar Sarraf, PNGRB Chairperson, in the interview below has said that the bidding process is likely to be completetd by October 2018.


(Bheeshma Sanghani) #114

Hi @kanwalpreet18

This is good news for MGL because it has historically not been able to find reinvestment opportunities like IGL. This is the main reason why its growth has been muted as reflected in its earnings multiple wrt to IGL despite having good return ratios and margins. The recent changes at the PNGRB helm are also a welcome change as I think the PNGRB did not have a chairman for a long time. Lets see how this pans out going ahead.

Best
Bheeshma


(AKGupta) #115

Came across this research report on MGL from an HDFC analyst. (I mention analyst because IMO only mentioning HDFC, the institution which has created huge wealth for itself and investors, lends a halo effect to whatever comes out from it. In the end, it’s just an opinion and can be challenged and could turn out wrong too.)
Mahanagar Gas - 3QFY18 - HDFC sec-201802122229211911563.pdf (366.8 KB)

Key highlights as follows:

  1. Volume growth will come from industrial customers in and around Thane district. Industrial customers are price sensitive so the report expects pressures on margin. Plus, it says, potential customers in these areas are slow to switch to gas. (Don’t know the basis for this.)

    My opinion: MGL’s Q3FY18 margin was at 35% and was as high as 38% in Q1 and Q2. This is very high to begin with and even if this comes under pressure, volume growth should be sufficient to offset that. Plus, it’s a very healthy trade-off if MGL compromises somewhat on the margins to boost volumes because of the convenience offered by PNG and the difficulty in switching back to LPG if prices rise. Also, Raigad is progressing quite fast which this report didn’t factor in:

  2. For FY18, FY19 and FY20, the report predicts Adj PAT of 470, 440 and 450 crores.
    My opinion : I don’t believe in this forecast. MGL has already done PAT of 373 cr till Q3. Why would it make less in Q4?
    It’s very difficult to predict PAT for MGL when gas prices are outside anyone’s control. From what I have seen from MGL’s numbers, the company has been able to pass on the increase in prices to customers. There is nothing to suggest at present that will change. See for eg. gas prices for Apr-Sept’18 period were increased by ~11 bucks / mmbtu.
    Gas price - Apr 18 to Sept 18.pdf (492.8 KB)
    And MGL increased CNG, PNG prices effective April 1 citing increased cost:
    https://www.hindustantimes.com/mumbai-news/cng-piped-cooking-gas-rates-hiked-in-mumbai-from-today/story-fSfHhQEKmV1liD48rUzVVK.html

    Similar story happened in Oct’17 as well: https://www.hindustantimes.com/mumbai-news/13-lakh-mumbaiites-to-pay-more-for-png-cng-from-today/story-NvwCuitTEgw1vZHKvqYNhK.html

Wonder if this report has factored in or can put a number on this ability (to pass on cost increase to customers) for as long as it’s there.

I have done some rough calculations to find out the impact of this increase in gas cost on MGL’s expenses: (I have assumed CNG and domestic PNG volumes for Q1 and Q2 FY19 to remain the average of past 3 quarters, i.e. 180 mmscm and 30 mmscm respectively. To make this calculation conservative, I have taken the cost increase on volumes for 2 quarters and selling price increase on volume of one quarter)

So for 2 quarters, volumes will be 420 mmscm = 16.67 mmbtu (at a conversion rate of 39,683 mmbtu / mmscm. Source : MoPNG which says 25.2 scm = 1 mmbtu)

Now the prices have grown by $0.17 i.e Rs. 11. So this translates to an impact of roughly 18.5 crores on gas cost.

On the price increase in CNG (by Rs. 1.23/kg) and domestic PNG (by Rs. 1.17/scm): The impact of this on revenues will be as follows:
CNG Price increase / kg = Rs. 1.23
CNG volume (average of Q1-Q3 FY18) = 180 mmscm
CNG volume (converted to kgs) = 126.4mm (mgmt claimed doing 1.41mm kgd in Q3 concall)
Price increase impact on revenue = Rs. 1.23 * 126.4mm = ~16 crores

Domestic PNG price increase / scm = 1.17 (1.17mm / mmscm)
Domestic PNG volume (average of Q1-Q3 FY18) = 30 mmscm
Price increase impact on revenue = 30 * 1.17 = ~35 crores

Now of course, the above calculation does not take into account some things :

  1. Gas volume increases, if they are met by PMT gas (which is double the cost of APM gas at around $6/mmbtu) will further increase gas cost estimate from 18.5 crores. (Though CGD is a priority sector and govt allocates 110% of demand from CGD companies admittedly with a lag of 2 quarters. So impact of purchasing higher priced gas from PMT will be there for 1 quarter. Plus, MGL had 78:22 ratio of APM to PMT gas till Q3)
  2. Any surcharge / transmission / marketing cost MGL has to pay to GAIL over and above the base price of gas.
  3. Industrial / Commercial LNG is purchased on spot basis and its cost will increase too. If the Industrial customers are as price sensitive as this report suggests, maybe MGL will not be able to completely pass on the price increase to them. I have not taken that impact in this model since it makes up for less than 15% of total revenues.

But these factors will more likely affect the scale of positive impact of (sale price hike - cost price hike) rather than the direction of it. Also to offset that somewhat I have already taken impact of cost price hike on 2 quarters volumes and impact of sale price hike on one quarter volume only.

Note: I have taken these conversion metrics from official sources but I am not a technical person to verify their accuracy. If anyone from fellow boarders has technical knowledge of this, please share.
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Disclosure : Invested


(rkothuri) #116

This is what authorities say:

  • Transport expert and member of the Railway Passengers Committee Anil Tiwari said that more than seven lakh vehicles run on CNG in MMR, but there are not enough CNG dispensing points.
  • MGL’s compression capacity should be increased to 50-lakh kg per day, he said. The way, the CNG vehicles are increasing each year, the MGL should add 10-15 lakh kg CNG each year at least for next four years. Only then would the problem of queues get tackled, according to him.

MGL is trying different ways to solve this problem:

  • “To ensure availability of CNG across its network area, MGL has an infrastructure of 223 CNG stations with 1,290 dispensing points spread across MMR. The present infrastructure has the capacity to dispense more than 30 lakh kgs of CNG per day, which can fuel over 11 lakh vehicles in its operational area.”
  • MGL has also launched MGL Connect App, which will assist our consumers to know the nearest CNG station in MMR, for better fuelling experience
  • The time for filling required is more for gas not because of quality of the equipment but because of the properties of the gas. To fill 5kg gas, it will take five minutes at present. But we are working on how to reduce the timing. A research is going on how to reduce the timing. Besides, we are working on out to reduce the queue. For which, the number of dispensers are being increased in many stations wherever space is available.

Also, they have been working on arranging mobile dispensers.

  • Getting land to set up new gas stations in the heavily populated Mumbai region is one of the main challenges for Mahanagar Gas. Due to lack of enough gas stations, queues outside gas filling stations have been getting even longer. To solve this problem, Mahanagar Gas is exploring newer options such as mobile gas dispensing stations. The company is looking to fix dispensers on its gas transport trailers, so they it can fill gas directly into vehicles, once parked at a safe place—a parking lot, taxi stand, etc. This move will help Mahanagar Gas reach new locations, where stations construction has been stuck due to land acquisitions or pipe connectivity issues. Since this new method requires regulatory approvals, it may take a few quarters before it materializes.

Overall I feel like they have to work on improving the turn around time of filling to accommodate increase in demand.

Disclosure: Recently taken a tracking position (bought 9 shares at 912) after the price fall during the shell stake sale.


(AKGupta) #117

There must be something more going on with the company. Is anyone aware of it? Stock is down another 2% today. Very close to 52 week low.


(Kushal Masand) #118

IGL follows a unique model to increase its capacity utilization. It gives rebate to fill CNG at non-peak hours i.e discount during late nights, and hence allowing them to better utilize the infrastructure.

Not sure, if MGL follows similar model or not.


(Balusu Aditya) #119

yea. I was also a bit shocked to see it hit ~890s. Is any one aware of why or what is causing this rout?


(ThinkLong) #120

Could you due to further sell-off by Shell as their original plan is to reduce stake upto 12.5% & sofar they have sold only 8.5%, not sure though…