Mahanagar Gas Ltd - a natural monopoly

(AKGupta) #162

Dear Shrey
I’m not saying population migration will be infinite. Just said it cannot be defined as a static number.

Plus any estimates have to be reasonable.

I’m sure you are presenting the optimistic case with these estimates for MGL right? I’d invite you to present a pessimistic case for the company as well. Then maybe the average of these 2 would be a more reasonable number at least for me.


(AKGupta) #163

Definitely it’ll be competitive but I can’t imagine the competition to be more intensive compared to that for MMR, the largest metropolitan region in the country! MGL got through that.

Agreed time will tell.

As to the 50% vs 32.5%, setting up a new company will have a massive investment expense attached to it. A company already operating in a peripheral territory, with cash corpus ready, will be able to leverage experience and scale to get things done more efficiently and quickly. Otherwise parent companies will have to break their head on administrative decisions related to the new entity. Why won’t they spend their resources in partnerships in new areas where they don’t have a presence at all?

Plus, it’ll be a huge positive for a publicly listed company to successfully bid for a new GA. Stock would definitely shoot up.Then 32.5 will start looking better than 50 in a privately held company with no valuation multiples, won’t it?

Again, all of this is just my opinion. Let’s see how things go!

(shreys) #164

Dear @AKGupta Ji,
I sure am optimistic on the future of natural gas consumption. It will definitely increase. Urbanisation, more often than not provides an impetus to natural gas.
But, my only worry was geographical restriction in business activities.
In my humble opinion, a company is supposed to expand its footprint over time.
If I’m not mistaken management hasn’t shared the City Gas Distribution projects they intend to bid for.
The projections I shared, in my limited understanding, I feel is the maximum revenue attainable.
I trust the management. But, their growth should accelerate. Probably residents are resistant to switching to piped gas. I don’t know.
These are the optimistic projections. As you rightly mentioned we should also consider the pessimistic scenario. I’ll compute it as soon as possible and share it for comments, suggestions and further deliberation.

(bharat.jain) #165

A very good article detailing the bidding process main points listed below here. Bangalore GAIL has started operations but have given only 5k connections instead of the expected 60k approx. Minister says that around 100 cities are up for auction so the scope is huge.

Lets follow the 9th round of bidding and its outcome is expected in july.

PNGRB has proposed to conduct future auctions by asking companies to quote the tariff they will charge for transportation of CNG and piped gas or piped natural gas (PNG) within the city, with lowest rate getting preference.

Companies having a networth of no less than Rs150 crore can bid for cities with population of 50 lakh and more while the same for cities with population of 20 lakh to 50 lakh has been proposed at Rs100 crore. The networth eligibility goes down with population, with a Rs5 crore networth firm being eligible to bid for cities that have less than 10 lakh population.

PNGRB proposed that any entity security CGD licence would have to “enter into a firm natural gas supply agreement” with a natural gas producer or marketer “in a transparent manner on the principle of ‘at an arm’s length’”. The authorised entity has to achieve financial closure within 270 days from date of grant of license.

Entities having experience of at least one year in operation and maintenance of a city gas distribution (CGD) network and having “adequate” number of technically qualified personnel would be eligible for bidding, it said

(bharat.jain) #166

One more document to understand the scope of the CGD. This is more in terms of govt efforts to increase the gas network. As LPG is becoming costlier people may have incentive to switch to new type of GAS.

The initial investment for consumer is in terms of Refundable 5k deposit and then it comes cheap on month on month basis.

(bharat.jain) #167

Adoption levels are poor even in Bangalore and Hyderabad but the government has a strong incentive to sell PNG as it is not subsidised. So it may not be so rosy for PNG companies.

BGL has been awarded the contract to supply piped gas in Hyderabad, Vijayawada and Kakinada. The company started its operations of PNG in Vijayawada and Kaki-nada in 2012 with a bang. However, it was not able to make much headway. The consumers are also not coming forward to take PNG with a fear of losing their subsidy on LPG. The BGL created the necessary infrastructure for providing piped natural gas for households in the port town. It has been in the market for the past two years, but, not as many takers as expected. It is said that certain apprehensions in the public were responsible for the slow pace of progress made by the company. Many consumers are apprehensive that PNG would be much costlier than LPG, as there is no subsidy on PNG

old article: 2015

Poor record in bangalore also:

(bharat.jain) #168

To summarise some of it.
Market size is huge.
Govt will have an incentive to sell PNG as it is not subsidised
In the bidding process govt may want to control as govt certainly want to control the people sentiment and gas prices can affect govt perception a lot.
It will be highly regulated market and as adoption increases more regulation.
Current adoption are poor in bigger cities. May be due to initial deposit and also due to the fact that people loose subsidy.
May be a good proposition in cities with lots of apartment complexes as consumer doesnt have choice as apartment association can take a call.
Commercial uses of PNG looks an attractive proposition but needs to delve more in there as how industries look at PNG and pricing and contracts.
After the 9th round of bidding lot of money will go in capex for around 3-4 before yielding gr8 results.

(shreys) #169

I performed some calculations on adoption of natural gas in the mega regions of Shanghai and Beijing.
Mumbai and Beijing/ Shanghai bear a lot of similarities in their population and gross domestic product.

I tried to comprehend trend of natural gas access in Shanghai and Beijing over the years. And we can possibly extrapolate the trend.

In the year 2000, Shanghai had a population of 1.4 crores and Beijing had a population 1.2 crores.
19.25% of the population had access to natural gas in Beijing and around 2% of the population had access to natural gas in Shanghai.

In 2012, Shanghai had a population of 2.3 crores and Beijing had a population of around 2 crores.

55% of the population in Shanghai had access to natural gas while 66% of the population of Beijing had access to natural gas in 2012.

On the provincial level natural gas access hovers around 25% and on the national level natural gas access is 15.7%.

Jaingsu, the province, with a 44000 kilometres natural gas pipeline network, the largest in China in 2012, had an adoption of less than 30%.

Let’s restrict our comparison to Beijing and Shanghai.
Beijing- 66%

Let’s consider the average of these regions.
Average- 60.5%
Mumbai Metropolitan Region population - 3 crores
Considering 60.5% people switch to natural gas=1.81 crores
Per capita expenditure on gas- Rs 70/ month
Total= Rs 1520 crores
But, let’s also keep in mind that it took 13 years in Beijing for access to natural gas to increase from 19.25% to 66%.

Despite the growth in China’s economy over the years natural gas access continues to be low in most parts of the country.
And, in my humble opinion, the same will occur in India.
The transition to natural gas will be a process that’ll take years to fructify.
And, in my limited understanding, it’ll be a largely urban phenomenon.

(AKGupta) #170

Good work!

(I still feel you present an optimistic case in a pessimistic manner but never mind :smile: )

Let’s see if Mr. Modi gets elected for a second term and does away with LPG subsidy burden. It all depends on how they plan to take natural gas portion of energy basket from 6% to 15%. Maybe it’s not meant to be between India and Natural Gas.

I’m bullish for now though. Let’s see how things unfold.

Anyway, it shouldn’t be a big loss to investors if we look at the margin of safety MGL is offering at current valuations…even if this theme doesn’t play out as imagined.

Stock was weak today too despite a better market.

(shreys) #171

Dear @AKGupta Ji,
In my opinion, an alternate method of evaluating the company’s current valuation could be assessment of the company’s pipeline infrastructure.

On doing some reading I came across an American company called Atmos Energy.
It’s one of the largest natural gas distribution companies in the US. Very similar to Mahanagar Gas.

Atmos Energy is valued at 9.56 Billion$.
If we adjust it for purchasing power at 1$= Rs 15, the equivalent will be Rs. 14340 crores.
Atmos owns 8800 kilometres of pipelines.
Per kilometre= Rs. 1.63 crores

In an ICICI report I read that Mahanagar Gas owns around 5000 kilometres of pipelines.
Total= Rs. 1.63 crore/ kilometre × 5000= Rs. 8147 crores

It’s possible the market adjudges its fair value to be somewhere in that range.

I may be totally wrong. But, I feel that there’s consistency in how different markets value companies. There may be slight differences. But, by and large valuations accorded are probably similar.

(phreak) #172

Comparing valuations based on pipeline lengths across countries doesn’t take into account the population size and population density. A single line to an apartment could serve hundreds of households and there could be many such dense housing spaces here than in the US. In a commercial outlet, the number of customers served would be much higher as well in a country with more people so going only by pipeline length for comparative valuation could be incorrect.

(shreys) #173

Sure, it doesn’t take into consideration the population. But, the per capita gas consumption in the US is much higher. Hence, the revenue generated is similar despite a very different customer base.
A pipeline in India may serve many more households than a pipeline in the US. But, a household in the US consumes a lot more gas than a household in India. Hence, the per kilometre revenue will likely be similar.

(phreak) #174

Is the proportion of increase in per capita consumption of gas in US exactly the same the proportion of increase in population size/density to claim that these two factors will nullify each other? I think the valuation numbers being around the same is mere coincidence and nothing more than that. There are far more variables and trying to read anything into that calculation of value per km being same is just force-fitting a correlation that simply doesn’t exist.

(shreys) #175

Dear @phreakv6,
Frankly, I don’t know if the increased per capita consumption in the US counterbalances the low population density.
I do realise that these enterprises are incredibly complex. And, it’s difficult to understand the essence of businesses and ascertain a fair valuation.
Our job is to evaluate the various valuations that could be accorded based on different parameters. And, that was precisely the intention of sharing the valuation of the American company. In my limited understanding, no valuation metric is perfect. Employing a blend of the various valuation systems should get us somewhere close to the fair value. Finally, it’s the market that’ll decide what it deems appropriate.

I definitely wasn’t trying to establish a pattern, relation between MGL and Atmos. The intention was to compare two companies in the same business operating in different geographies.
My genuine apologies if I wasn’t able to put my pint across clearly.
But, I do feel that if businesses and earnings are similar, valuations assigned will be, by and large similar. As always, I could be completely wrong. In that case it’ll be a learning for me.

(bharat.jain) #176

US uses most of the gas for purpose of heating their home. so the comparison may not be of equals.

(shreys) #177

@bharat.jain Ji,
Almost 90% of the total household gas consumption in the US is on heating.
Less than 10% of the total household natural gas consumption in the US is on cooking or related activities.
Overall, natural gas consumption on heating is around 15% of the total gas consumption.
The biggest natural gas consumer is the power generation sector followed by industries.
Residential consumption is much smaller.
Even for Mahanagar Gas domestic gas consumption contributed just around 11.3% to the top line.
In my humble opinion, end use of natural gas isn’t relevant for the distribution companies.

(rkothuri) #178

Though nothing new, plan is to bid for 20 cities.

(AKGupta) #179

I still think it’s the oil price effect which is impacting downstream companies. Natural gas too is a by product of crude and maybe the market believes cost might increase for downstream companies going forward.

To this, my only counter point is the ability of this company to pass on cost hikes to customers plus the increase in competitiveness of NG vs Petrol, diesel.

Maybe the market thinks recent price hikes will not result in volume growth for MGL which was already a concern.

Overall potential of how big MGL can be in terms of revenue potential would’ve been calculated by the market ample times since MGL got listed 2 years back. Why then would its mcap rise to ~13K+ crore in the first place? Any such calculation is likely to be rationalising in favor of a lower mcap, not a full fledged, convincing justification.

Maybe we should also look at any legal cases pending against the company. I’ve not come across anything yet.

(ajit19cs) #180

Gujrat became the first state to get the extented version of gas subsidy

(bharat.jain) #181

They are giving subsidy on initial connect. I think it’s a trick to decrease adoption from LPG and sooner it will happen everywhere