It is because of cost of material advantage for MGL(47%) over IGL(59%) and GGL(78%). Not sure why cost of materials is varying too much in a commodity product. May be because a company has to pay a cut for transportation and MGL is benefitting as it is close to seashore? Not sure.
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Conference call highlights
FY20 capex at Rs4.1bn. They also expect similar capex numbers for next year,
subject to approvals from state authorities.
Out of 256 CNG stations, 220 are currently operational. MGL will add another
15 CNG stations in FY21E.
Volume loss in March 20 end was ~25-30 mscm. April and May volumes were
at 25% and 42% of last year volumes.
Domestic PNG is operating at full capacity while the industrial volumes are
currently at 70%. Commercial volume growth will be gradual.
Management expects margins to sustain given rising prices of competing fuels.
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Hi All,
I have started reading about this sector though dont have much idea regarding MGL. I have read a lot of things in details regarding adani gas limited and wanted to know why is agl getting premium valuations in this sector wrt MGL? I know growth can be one parameter due to smaller size but agl has been recently listed, has higher d/e but still trades at 10 p/bv wrt MGL which is trading at very decent valuations. What is the reason? Pls. throw some light
i believe, the reason behind it can be allotment of new GA’s where MGL is not getting any new areas whereas IGL have bidded and got new GA’s, so the potential to increase their revenue in coming years would be high.
i have not tracked AGL ever, if they have added new GA’s maybe thats the reason for higher valuation
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Thank you so much Chirag. As i deep dive to understand this sector more due to steady growth and longevity of the sector, there are few more queries from my side and would be great if you could help me understand:
- As the regulator is looking to end monopolies, wont it be good for aggresive players? They will get to enter cities like Mumbai, Delhi which can help increase the revenue pretty fast.
- I love this sector due to the steady growth it provides and high OPM for companies. But do u think there can be pricing control on the end consumer side? This appears to be the biggest mental block to me right now with regards to investing in this sector.
Looking forward to answers from the group. Thank you in advance 
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Only the marketing monopoly is under threat. The infra monopoly still remains as MGL owns the infra
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hi All
Adding to the concall highlights already mentioned -
Mahanagar Gas (MGL) Q4 Concall Summary
Date: 15th June 2020
- Mahanagar Gas reported a revenue de growth of 8% for Q4 on account of volumes decline of 10% in gas sold. This decline was on account of stoppage of CNG as vehicular traffic came to a standstill due to Covid 19. The company sells CNG (Compressed Natural Gas for vehicles ) and PNG (Piped NG for Industrial and household consumers). Almost 71% of all gas sold by MGL is CNG.
- However, for the year, sales increased by 6.5%, led by value growth in by 9%. For FY20, EBITDA margins also saw a improvement from 32% to 34.5%, on account of declining gas prices, which the company did not pass on to the customers. This, along with decline in tax rates to 25%, led to an earnings growth of 45%.
- April 2020 sales were 25% of previous April, while May 2020 was 42% of previous May, despite bulk of the revenues coming from CNG which was totally shut. As of now, CNG is back at 40% s public transport in Bombay is starting again.
- In its area of Mumbai and Raigad, almost 320,000 autorickshaws, 66,000 taxis and 22,500 buses are MGL’s customers, which constitute 70% as a public transport group.
- The company is targeting 415 crores of capex in FY21, with 60crores allocated to PNG network expansion.
- On its gas pricing to industrial customers, the company maintains that the same depends on prices of alternate fuels like furnace oil and since the same has come down, the company might consider reducing gas prices. Despite being a utility, it has to be noted that the company has free pricing with only the prices paid to GAIL for transmission being regulated.
- The company’s market exclusivity, which ended in May 2020, is currently under litigation under Delhi HC and thus far no other players are expected to enter Bombay to compete with MGL.
- As of now, CNG and Domestic (household) PNG is sourced from domestic gas, while for industrial and commercial, imported LNG is sourced.
- MGL has allowed the industrial gas customers to suspend compulsory offtake charges contracts considering the lockdown.
- A lot of company’s CNG stations are housed inside petrol stations managed by OMCs or their franchisees. Further, many stations are located inside bus depots. In a place like Mumbai, which probably highest real prices in india, the company has taken a conscious call to not own any land. Generally, it develops a standalone station on land received from municipality or in partnership with a private landowner. Average cost per station is around around 2 crores.
- MGL does not have realizations fluctuations as IGL since IGL initially reduced their prices significantly, while increasing them now.
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Union Oil Minister Dharmendra Pradhan on Friday said India will gradually end government control on gas pricing and will instead gradually make gas prices linked to market forces.
Looks like recently launched IGX (Indian Gas Exchange) will have a good role to play in the future. Is this a positive thing for gas distribution companies like MGL, IGL etc?
hey akshat,
-
till the time infra rights doesnt get over i dont think this issue will be there.
secondly, even after infra rights get over, i feel that individual pay very less amount for gas bills (people wont change from 1 gas company to other until and unless you sell gas at very low rates) + i dont know how competitive it can get in CNG, but if company has cng stations at such place where rush is always there, it wont be an issue (we generally make stations where more rush would be there) -
MGL has always kept stable pricing compared to IGL, i feel that its pass on kind of thing, if RM prices goes down company reduces price to some extent.
Market exclusivity was up to May 2020, but even if any other company bids for Mumbai, they have to make use of existing gas pipelines and infrastructure, so wheeling charges will need to be paid, which ever way MGL should benefit
Has anyone attended their concall ? Can provide some update or a link to it, as it’s not yet updated on mahanagar’s site
Being a utility company, the business commands a fair value of 15-to-16 times earnings. MGL, a company with almost NIL debt, a business with near 20% net margins, strong free cash flows, high ROE and auto-recovery capability with restoration of normal situation. The company current trades at around 9-10 times FY22 earnings, without impact of any incremental capex. Two risk to the business model - aggressive fight with new entrant with expiry of exclusivity in May2020 (but tough to build new infrastructure at fast pace) and inability to secure new city contracts.
Disclosure: Invested at much lower levels. will add more at lower levels
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Hello All,
IMO, CNG segment for both IGL & MGL especially in MMR & CGT regions will face significant competitions from OMC’s courtesy the common carrier norms.
OMCs emerge as most interested parties in the CNG segment: Considering the network, the OMCs would especially be interested in direct sales of CNG in metro areas if they find it a large enough opportunity with reasonable margin. However, many of the incumbent CGD operators have already signed medium to long-term agreements with the OMCs for co-locating their CNG stations at attractive dealer commissions (INR ~4/kg). Further, spreads for OMCs will be largely determined by the determination of transmission margins. A trade-off of spreads post network tariffs vs current dealer commission together with scale of operations (~20% of capacities will determine the OMCs interest.
On the timelines, I believe the overall implementation should start in a gradual manner H2FY22 onwards. However, with limited growth avenues from new GAs (0 round 9 & 10 GAs) for MGL and expected CNG volume growth pressure from new competition in MMR - It will be interesting to understand the next leg of growth.
Cheers,
Vineet
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How will OMC’s lay down the vast network of CNG gas pipeline owned by MGL? They can at best get a percentage of that network from MGL at a price?
I have no idea of CNG network sharing economics but MGL has monopoly without a doubt.
Part of the new common carrier norms where CGD players have to reserve upto 20% of their network capacity for outside competition.
What is your thought on fair value for a company like this ?
Performing a reverse DCF on MGL’s stock price:
EV = MCap+ Debt - Cash
= 9078-1200=7878crs
Assuming a required return of 13% pa and an Avg FCF of 350crs pa for perpetuity and growth rate g
7878= 350/(0.13 - g)
g= 8.5%
The question is given the regulatory environment, fairly saturated market and the upcoming PNGRB regulations, could MGL grow revenues at a rate of 8.5% annually every year? The market believes it can. I doubt it. It is a great business with a regulated moat and a saturated captive market, however the growth rate and valuations are expecting too much from the stock.
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Is it revenue or FCF that need to grow at 8.5% ? I think it is FCF.
The rough idea is that if capex is not much in the coming years due to saturated market, then even if revenue donot grow at 8.5%, FCF should grow.
I assumed that margins, WC AND Capex would remain similar. So rev growth would equal FCF growth. Anyway, a major part of Capex is maintenance. Growth Capex may go down but maintenance won’t. 8.5% is expecting too much from a company who revenue potential is completely regulated.