mahanagar gas limitedimages.moneycontrol.com/static-mcnews/2020/07/mahanagar... · 2020. 7. 6. ·...

Company details

Market cap: Rs. 10,581 cr

52-week high/low: Rs. 1,247/666

NSE volume: (No of shares)

9.8 lakh

BSE code: 539957

NSE code: MGL

Free float: (No of shares)

6.7 cr

Shareholding (%)

Promoters 32.5

FII 31.3

DII 17.0

Others 19.2

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Price performance

(%) 1m 3m 6m 12m

Absolute 4.5 24.6 2.1 29.3

Relative to Sensex

-1.5 4.8 13.5 39.1

Sharekhan Research, Bloomberg

Reco/View

Reco: Buy

CMP: Rs. 1,071

Price Target: Rs. 1,380

Valuation Rs cr

Particulars FY19 FY20 FY21E FY22E FY23E

Revenues 2,791 2,972 2,435 2,999 3,192

OPM (%) 31.7 35.4 37.1 40.4 40.3

Adjusted PAT 546 737 629 852 902

% YoY growth 14.3 34.9 -14.6 35.4 5.9

Adjusted EPS (Rs.) 55.3 74.6 63.7 86.3 91.3

P/E (x) 19.4 14.4 16.8 12.4 11.7

P/B (x) 4.4 3.6 3.2 2.8 2.5

EV/EBITDA (x) 11.6 9.8 11.3 8.1 7.4

RoNW (%) 24.3 27.5 20.2 24.3 22.8

RoCE (%) 34.3 34.3 25.3 30.7 28.9Source: Company; Sharekhan estimates

Price chart

Oil & Gas Sharekhan code: MGL Initiating Coverage

+ Positive = Neutral - Negative

Mahanagar Gas Limited’s (MGL), a dominant city gas distribution (CGD) player in and around Mumbai, is expected to benefit from weak domestic gas prices, (that are likely to fall further over H2FY2021E-H1FY2022E after a sharp 53% reduction since 2015 to $2.4/mmBtu), which would drive MGL’s margins given its strong pricing power in compressed natural gas (CNG) and domestic PNG business (86% of overall gas sales volumes of 3 mmscmd in FY2020). Notwithstanding near-term concerns of a fall in volumes amid COVID-19, MGL’s long-term volume growth outlook remains intact as structural gas demand drivers like low penetration for CNG (34%) and domestic PNG (38%) in its key geographical areas (GAs), weak gas prices and the government’s target to increase the share of gas in India’s energy mix to 15% by 2025 (from 6% currently) are well placed. Moreover, any regulatory push to make use of CNG mandatory as a fuel for public transportation (as seen in New Delhi) and development of Raigad GA (0.6 mmscmd volume potential or 20% of MGL’s FY2020 gas sales volume) would further add to the company’s volume growth prospects. MGL’s stock price has also lagged peers YTD in CY2020 (up 1%, IGL is up 5% and Gujarat Gas up 26%). MGL’s valuation is attractive at 12.4x FY2022E EPS [20% discount to its historical average one-year forward PE multiple of 15.6x and steep discount of 51% to that Indraprastha Gas Limited (IGL) on FY2022E PE basis] given a robust balance sheet (net cash and investments of Rs. 1,351 crore), FCF yield of 7% and dividend yield of 3%. Hence, we initiate coverage on MGL with a Buy rating and PT of Rs. 1,380 (valued at 16x FY2022E EPS).

Our Call

Valuation - Initiate stock idea coverage on MGL with a Buy rating and price target of Rs. 1,380: MGL’s long-term business fundamentals remain strong with robust margins (likely to increase by 10% over the next two years and reach Rs. 10.7/scm in FY2022E), potential volume recovery in FY2022E with a gradual relaxation of COVID-19 led lockdown norms (we model a 2.5% volume CAGR over FY2020-FY2022E and a 23% y-o-y volume growth in FY2022E) and strong RoE of ~24%. MGL’s stock price lagged peers in CY2020YTD (up 1%, IGL up 5% and GGAS up 26%) and its valuation is attractive at 12.4x FY2022E EPS (20% discount to its historical average one-year forward PE multiple of 15.6x and a steep discount of 51% to that of IGL on a FY2022E PE basis) given its robust balance sheet (net cash and investments of Rs. 1,351 crore), FCF yield of 7% and a dividend yield of 3%. Hence, we initiate coverage on MGL with Buy rating and PT of Rs. 1,380 (valued at 16x FY2022E EPS).

Key risk

Lower-than-expected gas sales volume in case of delayed recovery due to COVID-19 led slowdown. Any change in domestic gas allocation policy, weak Indian rupee, and adverse regulatory changes could affect margins and valuations.

3R MATRIX + = -

Right Sector (RS) ü

Right Quality (RQ) ü

Right Valuation (RV) ü

Summary

� Initiate coverage on MGL with a Buy rating and PT of Rs. 1,380 given attractive valuation of 12.4x FY22E EPS.

� Long-term volume growth intact on low gas penetration, regulatory push for use of green fuels, volume ramp-up at Raigad; volume/PAT CAGR to clock 2.5%/8% CAGR over FY20-FY22E.

� MGL’s balance sheet is robust with nil-debt; FCF and dividend yield of 7% and 3%, respectively.

� Weak gas prices to drive margins, given MGL’s pricing power; we model EBITDA margin of Rs. 9.8/Rs. 10.7 per scm for FY21E/FY22E.

Powered by the Sharekhan 3R Research Philosophy

Mahanagar Gas LimitedGaining the Green Edge

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Powered by the Sharekhan3R Research Philosophy

July 03, 2020 | 3

Executive Summary

3R Research Positioning Summary

n Right Sector: Favourable regulatory push, priority allocation of low-priced domestic gas and weak spot LNG prices would drive strong gas demand in India.

n Right Quality: Strong pricing power in CNG/domestic PNG (86% of volumes) and low gas penetration in Mumbai.

n Right Valuation: CGD entities deserve higher valuation multiples in the gas value chain given strong volume visibility and high margins, given an unregulated business model.

Valuation and return potential

� Valuation attractive at 12.4x FY22E EPS, which is at a 20% discount to historical PE multiple and 51% to IGL.

� We value MGL at 16x (in line with average historical PE multiple) and arrive at PT of Rs. 1,380.

� We expect 7%/8% EBITDA/PAT CAGR over FY20-FY22E led by a growth in margins and volumes.

Earnings and Balance sheet highlights

� Consistent earnings growth track-record: MGL’s EBITDA/PAT clocked a 16%/24% CAGR over FY18-FY20 led by margin expansion and volume growth.

� Industry-leading margins: With proactive pricing and a high share of CNG in volumes, MGL’s EBITDA margin of Rs. 9.7/scm is highest in CGD space (versus IGL & Gujarat Gas).

� Robust balance sheet and FCF: Nil debt on books and free cash flow (FCF) of Rs. 559 crore in FY2020.

� Strong return ratios: Superior RoE of 28% and RoCE of 34% in FY2020.

Catalysts

Long-term triggers� National Green Tribunal (NGT) focus to cut

vehicular and industrial pollution

� Government aim to increase share of gas in energy mix to 15% by 2025

Medium Term Triggers� Margin expansion amid cut in domestic

gas prices

Key Risks:

� Delayed volume recovery given COVID-19 pandemic

� Adverse regulatory changes

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July 03, 2020 | 4

Table of Contents PagesRight Sector - why we like city gas distribution

� CGD growing at double digit led by structural demand drivers; 60% share with PSUs 5

� Regulatory push and low gas price are key demand drivers 6

� Margin tailwinds from low gas prices 9

� City gas distribution (CGD) Dashboard 12

Right Quality - why we like MGL

� Low CNG/PNG penetration keeps long-term volume growth outlook intact 13

� CNG volume opportunity of 0.35 mmscmd annually (16% y-o-y growth) 15

� Domestic PNG has ample scope of growth given low penetration of 38% in MMR 16

� Consistent margin expansion – weak gas price and pricing power to improve margin 17

� Cash-rich balance sheet; robust FCF generation and consistent dividend payouts 19

Financials in charts 21

Right Valuation

� Outlook 22

� Valuation 22

� One-year forward P/E band 22

� One-year forward P/BV band 23

� One-year forward EV/EBITDA band 23

� Peer comparison 23

Key financials

� Income Statement 24

� Balance Sheet 24

� Cash Flow Statement 25

� Key Ratios 25

MGL snapshot

� Company background 26

� Investment thesis 26

� Key risks 26

� Key management personnel 26

� Top 10 shareholders 26

3R Philosophy definitions 27

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July 03, 2020 | 5

Why we like CGD sector – Regulatory push and low gas price to drive gas demand in India

The city-gas distribution (CGD) sector has seen a strong rise in volumes since 2015 (at a CAGR of 16% over FY2015-FY2020) led by priority in domestic gas allocation (for CNG and domestic PNG), regulatory push to reduce vehicular and industrial pollution in various states (for e.g. Gujarat and Delhi NCR) and a sustained fall in domestic gas prices (53% decline in APM gas price since 2015 and a 60% drop in spot LNG prices in last one year). Moreover, the government’s thrust to increase share of gas in India’s overall energy mix to 15% by 2025 (from 6% currently) would require building of massive CNG infrastructure in the country through aggressive auction of new CGD areas. We highlight here that PNGRB has successfully auctioned 132 new GAs in 9th and 10th CGD bidding rounds and the same would provide massive volume growth opportunities to CGD players over the next 7-8 years as more cities would get connected with CGD infrastructure. We thus expect India’s gas demand to recover from COVID-19 led slowdown and grow strongly in the next couple of years given structural demand growth drivers (regulatory push and low gas prices). Margins also expected to remain robust with an upward bias, as domestic gas and LNG prices are expected to stay low.

CGD growing at double digit led by structural demand drivers; 60% share with PSUs

The CGD sector’s share in India’s gas consumption is estimated at ~20% with gas volume of 31-32mmscmd in

FY2020. Of the total volumes, ~ 45% of demand comes from CNG, 7% from domestic PNG and the remaining

from 48% from Industrial/Commercial PNG segments. The Indian CGD sector saw volumes grow by 16%

over FY2015-FY2020 given regulatory push to curb pollution and largely dominated by three PSU players

(IGL, MGL and Gujarat Gas) with a ~60% share in gas volume of CGD sector. IGL’skey operational areas are

Delhi and NCR with a total volume of 6.4 mmscmd, MGL mainly operates in Mumbai & Thane with volume

of 3 mmscmd and Gujarat Gas have operations in Gujarat with volume of 9.4mmscmd in FY2020. PNGRB

has awarded new 132 GAs in the 9th and 10th rounds of CGD auctions, compared to only 50 GAs in the

first 8 rounds and with minimum work program commitment of 8,181 CNG stations (4.6x growth), 42.3 million

PNG connections (8x growth) over a period of next 8 years provides strong sustained high volume growth

opportunity for the CGD sector.

CGD accounts for 20% of India’s gas consumption

Source: PPAC India; Sharekhan Research

Indian CGD sector has grown at 16% CAGR over FY15-20


Fertilisers29%

CGD20%Power

18%

Refinery14%

Petrochemical6%

Others13%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

FY15 FY16 FY17 FY18 FY19 FY20

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India CGD gas volume

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July 03, 2020 | 6

Regulatory push and low gas price are key demand drivers

City gas distribution sector has seen continued strong growth since 2014 when government granted top priority to CGD sector for allocation of cheap domestic gas. Post that there has been regulatory push to cut vehicular and industrial pollution in various states (for example Gujarat and Delhi). The National Green Tribunal (NGT) has banned – 1) new diesel vehicles above 2000 cc in Delhi, 2) use of polluting fuels in the National Capital Region (NCR) and 3) usage of coal gasifiers in Morbi (Gujarat). Notwithstanding the impact of COVID-19, India’s gas demand is poised to grow strongly in the long term, supported by the government’s aim to increase the share of gas in India’s energy mix to ~15% by 2025 (from 6% currently), regulatory push to curb pollution and sustained weak gas prices (Asian LNG price of $2-3/mmBtu and domestic gas prices of $2.4/mmBtu). Moreover, aggressive auctioning of CGD areas in recent bidding rounds would boost demand growth in the next 7-8 years as more cities would get connected to CGD infrastructure. We thus expect India’s gas demand to recover from COVID-19 levels and grow strongly over next couple of years. Moreover, supply issues are also expected to get resolved with recent commissioning of new LNG terminal (5 mtpa each at Mundra and Ennore) and likely ramp-up of domestic gas production could boost gas output by 35-40 mmscmd from FY2023E-FY2024E.

COVID-2019 impact: India’s gas consumption slumped to 25% of pre-COVID-19 level in April 2020 and 38-40% in May 2020 amid the nationwide lockdown (excluding essential commodities) to contain the spread of COVID-19. Although CNG and domestic PNG are essential products, absence of vehicles on roads and shutdown of manufacturing plants would impact gas demand for H1FY2021E. India’s gas demand is set to decline by 10-15% in FY2021 amid weak demand in Q1FY2021E but we expect volumes to recover in H2FY2021E

with a gradual relaxation of lockdown norms and supported by structural demand growth drivers.

India CGD Volume mix

Source: Industry sources, Sharekhan Research

FY20 Volume break-up of key CGD players

mmscm MGL IGL GGAS AGL

CNG 784 1,738 543 292

Domestic PNG 148 141 208 52

I/C PNG 148 478 2,703 239

Total Volume 1,080 2,357 3,454 583

Source: IGL, MGL, Gujarat Gas, Adani Gas (AGL)

Massive volume opportunity with ramp-up in CGD infra

Source: PNGRB; Sharekhan Research

Strong volume growth across players in CGD space

Source: IGL, MGL, Gujarat Gas, Sharekhan Research

-10%

0%

10%

20%

30%

40%

50%

FY17 FY18 FY19 FY20

IGL MGL Gujarat Gas Adani Gas

CNG, 45%

Domestic PNG, 7%

Industrial/Commercial

PNG, 48%

0

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40,000

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FY2020 FY22 FY24 FY30

CNG stations (numbers) PNG connections ('000)Linear (CNG stations (numbers)) Linear (PNG connections ('000))

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July 03, 2020 | 7

CGD auctions in 9th and 10th biding rounds – offered 132 new GAs with 70% population coverage

The Petroleum & Natural Gas Regulatory Board (PNGRB) has awarded new 132 geographical areas (GAs)

in the 9th and 10th rounds of CGD auctions, compared to only 50 GAs in the first 8 rounds. Post Round 10 is

~70% of India’s population and ~50% of the country’s area has been covered. The recent (9th and 10th bidding

rounds) have a minimum work program commitment, which would increase the CNG stations by 8,181 – 4.6x

the pre-bidding outlets (1,797) across the country and 42.3 million PNG connections – 8x the pre bidding

connections (~5.3 million), apart from the commitment to lay 0.17 million inch km of steel pipeline over the

next 8 years.

Moreover, the PNGRB is planning to come up with the 11th bidding round for 44 new GAs, which is likely

to further expand CGD infrastructure in India and boost volume growth opportunities for CGD companies.

However, the auction for 11th bidding round could get delayed due to COVID-19-led lockdown.

India gas consumption to grow strongly over FY2022E-FY2023E

mmscmd FY19 FY20 FY21E FY22E FY23E

Fertilisers 41.2 44.0 40.5 44.6 46.8

CGD 32.7 31.2 28.7 34.4 37.2

Power 25.3 27.5 25.3 27.9 29.3

Refinery 19.3 21.3 19.6 21.6 22.7

Petrochemical 9.3 9.7 9.0 9.9 10.4

Others 20.2 19.3 17.8 19.6 20.5

Total 147.9 153.2 140.9 155.0 162.8


CGD Authorizations Geographical Areas (GAs) % Population of India % Area of India

Standalone Cumulative Standalone Cumulative Standalone Cumulative

Pre-PNGRB 30 30 9.3 9.3 3.0 3.0

Round 1 (Oct '08) 6 36 0.3 9.6 0.0 3.0

Round 2 (Feb '09) 3 39 0.2 9.8 0.0 3.0

Round 3 (Jul '10) 6 45 0.8 10.6 1.2 4.2

Round 4 (Sept '13) 9 54 2.3 12.9 1.3 5.5

Round 5 (Jan '15) 8 62 2.0 14.9 1.8 7.3

FY2020 Gas consumption mix (in mmscmd)


India Gas demand trend


Fertilisers44.0

CGD31.2

Power27.5

Refinery21.3

Petrochemical9.7

Others19.3

0.020.040.060.080.0

100.0120.0140.0160.0180.0

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CGD: coverage of population of India and its area...

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CGD Authorizations Geographical Areas (GAs) % Population of India % Area of India

Standalone Cumulative Standalone Cumulative Standalone Cumulative

Round 6 (Oct '15) 17 79 2.1 17.0 2.0 9.4

Round 7 (Jun '16) 1 80 0.4 17.4 0.5 9.8

Round 8 (Nov '16) 6 86 0.9 18.3 0.6 10.4

Sec. 42 (Mar '18) 6 92 1.6 19.9 0.6 11.0

Round 9 (Apr '18) 86 178 26.4 46.2 23.8 34.8

Round 10 (Nov '18) 50 228 24.2 70.5 17.9 52.7

Source: PNGRB

9th & 10th CGD Bidding Rounds – A Great Success

Particulars 9th Round 10th Round Total

Geographical Areas offered 86 50 136

Bid received 406 225 631

Entities 38 25 63

Coverage

State/Union Territories 22 14 36

Districts 174 124 298

Area (%) 24 18 42

Population (%) 26 24 51

Minimum Work Program

PNG Domestic Connections 221 lakh 202 lakh 423 lakh

CNG Stations 4,603 3,578 8,181

Steel Pipeline (Inch-KM) 1.16 lakh 0.58 lakh 1.74 lakh

Source: PNGRB

LNG Terminals in India

LNG terminal Company/promoter Status Capacity (mtpa)

Dahej Petronet LNG Limited Operational 17.5

Hazira Hazira LNG Private Limited Operational 5

Dabhol Ratnagiri Konkan LNG Private Limited Operational 5

Kochi Petronet LNG Limited Operational 5

Ennore Indian Oil Corporation Limited Operational 5

Mundra GSPC LNG Limited Operational 5

Total existing capacity 42.5

Jaigarh FSRU Western Concessions Private Limited Under Construction 4

Dhamra Adani Group & Total Group Under Construction 5

Chhara HPCL Shapoorji Energy Private Limited Under Construction 5

Total upcoming capacity 14

Source: PNGRB

...CGD: coverage of population of India and its area

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July 03, 2020 | 9

PNGRB concept paper to fix CGD tariff to enable third-party access

In July 2019, the PNGRB had issued a concept paper for stakeholder’s comment on determination of

transportation rate for CGD network and CNG to enable third party access in the existing geographical areas

(GAs) where marketing exclusivity has expired and thus GAs fall under the category of common carrier. The

paper had listed out two options for determination of transportation rate:

� Cost-of-service method, which ensures normative post-tax return on equity of 14%

� Online bidding process for common carrier capacity based on reserve price determined by PNGRB or a

CGD entity

Availability of APM gas key entry barrier in existing GA

We see entry barriers for new entrants in the existing GAs as there is no clarity on supply of cheap domestic gas

to third-party distributors for selling CNG and domestic PNG. Additionally, though the marketing exclusivity

of most GAs has expired, still there is only one operator in the area as it makes more sense to enter a new

GA which was has not been penetrated at all as it and provides a huge volume opportunity. Moreover, we

believe that government focus is to create CGD infrastructure in the country which would play a crucial role to

increase share of natural gas in India’s overall energy mix to 15% by 2025 from 6% currently. Hence, regulated

tariff for CGD players would impact investment in building CGD infrastructure and thus we believe returns of

CGD players would remain unregulated.

Volume and margin of CGD companies not to be impacted in near term

We highlight here that PNGRB’s intent is clear to set rules and guideline in order to create competition in

the CGD space. However, clarity on capacity determination for common carriers for respective GAs and

availability of cheap APM gas to new entrants on consistent basis remains key to induce competition for

incumbent companies. In the absence of the same, the implementation if the final regulations would seems

difficult. Thus, we do not expect any significant impact on the volume growth and margin of listed CGD

companies in the near term. Moreover, the matter of marketing exclusivity is sub-judice currently as IGL had

challenged the PNGRB in the Delhi High Court and subsequently MGL has also become party to the case.

Additionally, we believe that there are enough growth opportunities available from the new GAs recently

authorised by PNGRB and thus entering into a matured market would not be prudent for new entrants.

Margin tailwinds from low gas prices

Gross and EBITDA margin of CGD players have expanded sharply since 2015 given strong pricing power in

CNG and domestic PNG business supported by top priority in allocation of cheap domestic gas prices. We

highlight here that MGL has industry-beating gross margins of Rs. 14.7/scm as compared to Rs. 11.9/scm for IGL

and Rs. 7/scm for Gujarat Gas. Better margins reflect a higher share of CNG and domestic PNG at 86% versus

80% for IGL and 22% for Gujarat Gas and ability to retain some portion of gas price cut on a consistent basis.

The government has cut domestic gas prices sharply by 26% to $2.4/mmBtu on gross calorific value (GCV)

basis for H1FY2021E to reflect lower benchmark international gas prices. We highlight here that it is second

consecutive gas price cut (after a reduction of 12.5% to $3.23/ mmBtu for H2FY2020). Moreover, spot LNG

prices are at 10-year low level of $2.3/mmBtu (down from ~6/mmBtu in January 2020). The sustained low gas

price would add to the margins of CGD companies.

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July 03, 2020 | 10

Source: IGL, MGL, GGAS, AGL and Sharekhan Research

Gross margin (Rs./scm) comparison of key CGD players EBITDA margin (Rs./scm) comparison of key CGD players


Weak spot LNG to aid margin for I/C PNG

Source: Bloomberg

Domestic gas prices steadily slide

Source: PPAC India

Gas sourcing mix


Opex trend over FY18-FY20 for MGL, IGL and GGAS


4.34.7

5.05.2 5.25.5

2.6 2.92.3

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Rs/s

cm

MGL IGL GGAS

49% 49%

23%

10% 11%

28% 24%

13% 16%

77%

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MGL IGL GGAS

APM PMT Non-APM RLNG

9.7

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3.83.1

2.5 2.52.9 3.1 3.4 3.7

3.2

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H1F

Y19

H2F

Y19

H1F

Y20

H2F

Y20

H1F

Y21

$/m

mbt

u

Domestic gas price Chg (%)

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July 03, 2020 | 11

Domestic gas pricing guidelines 2014

Domestic gas price =VHH+PHH+VAC*PAC+VNBP*PNBP+VR*PR

VHH+VAC+VNBP+VR

Where,

(1) VHH = Total annual volume of natural gas consumed in USA & Mexico.

(2) VAC = Total annual volume of natural gas consumed in Canada.

(3) VNBP = Total annual volume of natural gas consumed in European Union and Former Soviet Union

(FSU) countries, excluding Russia.

(4) VR = Total annual volume of natural gas consumed in Russia

(5) PHH and PNBP are the annual average of daily prices at Henry Hub (HH) and National Balancing Point

(NBP) respectively, less the transportation and treatment charges of $0.5/mmBtu

(6) PAC and PR are the annual average of monthly prices at Alberta Hub and Russia less the transportation

and treatment charges of $0.5/mmBtu

CNG comparison with petrol: Steep saving of 50-60% in running cost for CNG cars versus petrol cars

Particulars Mumbai Delhi Ahmedabad

Petrol Price (Rs/litre) 87 80.4 77.8

Mileage (km/litre) 12 12 12

Running cost (Rs/km) 7.3 6.7 6.5

CNG price (Rs/kg) 48 43 52.5

Mileage (km/kg) 16 16 16


Savings 59% 60% 49%

Kit cost (in Rs) 35,000 35,000 35,000

Saving per year (in Rs) 76,841 72,270 57,694

Payback period (in years) 0.5 0.5 0.6

Source: MGL, IGL, Gujarat Gas; Sharekhan Research

Domestic PNG price comparison with LPG

Particulars Unit Mumbai Delhi Ahmedabad

Domestic PNG price Rs/scm 29.6 28.6 27.5

Subsidized LPG price Rs/cylinder 579.0 581.5 601.69

Subsidized LPG price Rs/kg 40.8 41.0 42.4

Non subsidies LPG price Rs/cylinder 594.0 594.0 597.5

Non subsidies LPG price Rs/kg 41.8 41.8 42.1

PNG GCV Kcal/scm 9500.0 9500.0 9500.0

LPG GCV Kcal/kg 10800.0 10800.0 10800.0

PNG domestic cost Rs /million Kcal 3115.8 3010.5 2894.7

LPG subsidised cost Rs /million Kcal 3775.4 3791.7 3923.4

LPG non-subsidised cost Rs /million Kcal 3873.2 3873.2 3896.1

Saving of domestic PNG over subsidised LPG -17% -21% -26%

Saving of domestic PNG over non-subsidised LPG -20% -22% -26%

Source: MGL, IGL, Gujarat Gas; Sharekhan Research

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July 03, 2020 | 12

Medium-term catalysts: Potential reduction in domestic gas prices over H2FY2021E-H1FY2022E to help

improve margins

Long-term triggers: Regulatory push to curb pollution and target to increase share of gas in India overall

energy mix to sustain continued high volume growth for the sector.

The CGD dashboard (MGL, IGL and Gujarat Gas)

Particulars MGL IGL Gujarat Gas

Coverage

Key regions Mumbai/Thane Delhi/NCR Gujarat

Population coverage (crore) 2.1 4.6 5.2

Key Assets

CNG retail outlets (numbers) 256 555 401

Pipeline network (km) 5,630 14,605 24,000

Customers

CNG (million) 0.8 1.1 0.7

Domestic PNG (million) 1.3 1.4 1.5

Industrial/Commercial (numbers) 4,021 5,566 16,400

Penetration

CNG 34% 25-30% 15%

Domestic PNG 38% 20-25% 15%

Volume mix (%)

CNG 72.6% 73.7% 15.7%

Domestic PNG 13.7% 6.0% 6.0%

Industrial/Commercial PNG 13.7% 20.3% 78.3%

Gross margin (Rs/scm)

FY18 12.2 11.1 6.6

FY19 12.9 11.0 7.2

FY20 14.7 11.9 7.0

EBITDA margin (Rs/scm)

FY18 7.9 5.9 3.9

FY19 8.2 5.8 4.3

FY20 9.8 6.4 4.7

FY2020 Key financials (Rs crore)

Revenues 2,972 6,485 10,300

EBITDA 1,053 1,520 1,634

PAT 737 1,137 910

RoE (%) 27.5 24.7 32.9

RoCE (%) 34.3 29.1 24.3

D/E (x) 0.0 0.0 0.6

FCF 559 398 827

Valuation (PE basis)

FY21E PE(x) 16.8 33.4 26.4

FY22E PE (x) 12.4 25.3 20.9

5-Year average PE (x) 15.6 17.0 23.6

Dividend yield (%) 3.3% 0.6% 0.3%

Source: MGL,IGL, Gujarat Gas, Sharekhan Research, Note: MGL one-year forward PE is since April-2017

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July 03, 2020 | 13

Why we like MGL – Low gas penetration supports volume growth and industry leading margins; robust balance sheet and strong FCF generation

We believe that MGL favourably placed to benefit from rising demand for CNG and domestic PNG given low penetration in the Mumbai Metropolitan Region (MMR). Existing operational GA provide CNG volume opportunity of 0.35mmscmd annually (16% of FY2020 CNG volume) and domestic PNG volume opportunity of 16 mmscm annually (10-11% of FY2020 domestic PNG volumes). Hence, with gradual relaxation of lockdown norms and things returning to normalcy, we believe that MGL could return to volume growth of 6-7% annually from FY2023 onwards. Moreover, MGL’s Raigad GA has a volume potential of 0.6 mmscmd (20% of MGL’s FY2020 overall sales volume of 3 mmscmd). We model a 2.5% volume CAGR over FY2020-FY2022E. The margin environment remains strong for MGL given expectation of further reduction in domestic gas price over H2FY2021E-H1FY2022E and strong pricing power with favourable economics of CNG versus alternate fuels (running cost of CNG cars is 59% cheaper than petrol cars) in Mumbai. We model an EBITDA margin of Rs. 9.8/Rs. 10.7 per scm in FY2021E/FY2022E. With a rise in volume growth and margin expansion, we expect decent 8% PAT CAGR over FY2020-FY2022E with a robust RoE of 24%.

Low CNG/PNG penetration keeps long-term volume growth outlook intact

MGL’s overall gas sales volume was at 25% of pre-COVID-19 levels in April 2020 and 42% of pre-COVID-19 levels in May 2020 as vehicular traffic was impacted due to the nationwide COVID-19 led lockdown. Thus, we expect sharp 15% decline in gas sales volume to 2.5 mmscmd in FY2021 given weak Q1FY2021E gas demand. However, CNG volumes are expected to pick-up faster as vehicular traffic normalises gradually and gas demand from industrial & commercial customers would improve with a gradual revival of economic activities. Thus, we expect strong 23% y-o-y volume growth in FY2022E.

We expect MGL’s near-term volumes to remain weak but long term volume growth outlook remains promising for its Mumbai GA (key operational area of MGL) as gradual relaxation of the lockdown and a return to normalcy would mean an addition of 3,000 auto rickshaws per month, 800 car additions every month by cab aggregators and an 2,200-2,500 private car getting added per month. Moreover, domestic PNG penetration also remains low at 38% (1.26 million PNG connections for total households of 3.3 million in Mumbai) and has ample scope for improvement as convenience factor could play a key role in higher adoption of domestic PNG.

Additionally, MGL had won CGD rights for Raigad district in 2015 during the fourth round of CGD bidding and the same is expected to hold gas demand potential of ~0.6 mmscmd (20% of MGL’s FY2020 gas sales volumes). We expect the Raigad district to witness strong gas demand growth, as the GA develops with the upcoming international airport in Navi Mumbai and Trans-Harbour link and drive volume growth beyond existing GAs.

MGL’s areas of operation – Large addressable market size given low CNG/domestic PNG penetration

Areas of operations Mumbai & Greater Mumbai

Mira-Bhayander, Navi Mumbai, Thane City, Kalyan, Taloja, Ambernath, Dombivli, Ulhasnagar, Badlapur, Bhi-

wandi, Kharghar and Panvel

Raigad District Adjacent to existing area of operation)

Infrastructure exclusivity period Till 2020 Till 2030 Till 2040

Population coverage 21 million and 3.3 million households

Pipelines network 5,630 km

PNG connections 1.26 million (38% penetration)

CNG stations 256 stations

CNG customers 0.75 million (34% penetration)

Industrial/Commercial PNG customers

4,021

Source: Company, Sharekhan Research

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July 03, 2020 | 14

Low CNG and domestic PNG penetration

Overall volume mix of MGL (73% from CNG)

Source: Company; Sharekhan Research


MGL’s area of operations

Source: Company

Commercial PNG (restaurants) low penetration

MGL Gas sourcing (87% from domestic gas supply)



APM49%

PMT10%

Non-APM28%

RLNG13%

CNG72.6%

Domestic PNG13.7%

Industrial/Commercial PNG

13.7%

12,000

31%0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Market size (nos.) Penetration (%)

2.2

3.3

34% 38%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

CNG Domestic PNG

Market size (million) Penetration (%)

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July 03, 2020 | 15

CNG volume opportunity of 0.35 mmscmd annually (16% y-o-y growth)

CNG penetration in MMR is at only 34% with an average utilisation rate of 50-55% (serving 2,900 customers with a annual volume of 3 mmscm per outlet) for MGL’s CNG station. Given favorable economics of CNG versus petrol (running cost for CNG cars is 59% lower than that for petrol cars) and focus to reduce vehicular pollution (at 130 ppm versus acceptable limit of 60 ppm) would drive higher conversion of petrol vehicles to CNG. Hence, we remain optimistic of CNG volume growth for MGL over the long term. With addition of 3,000 auto rickshaws per month, 800/month car additions by cab aggregators and private car addition of 2,200-2,500 per month provides CNG volume opportunity of 0.36 mmscmd, which translated into a 16% annual volume growth for MGL.

Low CNG penetration of 34% in MMR

MGL adds 15 CNG stations annually

Source: Sharekhan Research


CNG volume mix by vehicle category

Expect 2% CNG volume CAGR over FY20-FY22E



CNG volume growth potential of 0.35mmscmd annually

Category wise CNG vehiclesVehicle addition/

monthkm/day kg/km Kg/day

million kg/year

mmscmd/year

Private vehicles 2500 30 20 1.5 16.4 0.06

Cab aggregators + Taxi 800 150 20 7.5 26.3 0.09

Auto rickshaws 3000 80 24 3.3 43.8 0.16

Buses 40 150 2.8 53.6 9.4 0.03

Total CNG demand growth potential (mmscmd) 0.35

MGL FY2020 CNG sales volume (mmscmd) 2.14

Y-o-Y growth potential (%) 16%


Private vehicles

23%

Cab aggregators +

Taxi23%

Auto riskshaws

47%

Buses6%2.2

34%

0.0

0.5

1.0

1.5

2.0

2.5

Market size (million) Penetration (%)

188 203 223 236 256 266 286 301

8 15 20 13 20 10 20 15

3.6 3.4 3.2 3.43.1

2.42.9 2.9

0.0

1.0

2.0

3.0

4.0

0

100

200

300

400

FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

CNG stations (numbers)Addition in CNG stations (numbers)CNG volume per station per annum (mmscm)

693 724 791 784 627 816 873

3.2% 4.5%9.2%

-0.8%

-20.0%

30.0%

7.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

0

200

400

600

800

1000

FY17 FY18 FY19 FY20 FY21E FY22E FY23E

CNG volume (mmscm) y-o-y growth

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July 03, 2020 | 16

Break-up of MGL’s CNG volume by vehicle category

Category wise CNG vehiclesNumber of

vehicleskm/day kg/km Kg/day

million kg/quarter

mmscmd/year

Private vehicles 320,000 30 20 1.5 43.2 0.06

Cab aggregators + Taxi 66,000 150 20 7.5 44.6 0.09

Auto rickshaws 300,000 80 24 3.3 90.0 0.16

Buses 2,500 150 2.8 53.6 12.1 0.03

Total CNG demand (million kg) 190

Q4FY2020 CNG sales volume (million kg) 180

Source: MGL, Sharekhan Research

Convenience is king in driving domestic PNG penetration

Benefits Advantage of using Domestic PNG as cooking fuel versus LPG cylinders

Un-interrupted supplyGreater convenience with uninterrupted supply of cooking gas unlike the case of LPG cylinders (needs to be booked and wait for delivery by OMCs).

Safer fuelThe narrow inflammable range makes PNG much safer cooking fuel than LPG cylinder. The pres-sure of PNG is 200 times lesser than LPG cylinders and is also lighter in the air and thus in case of leakage it will mix in air and evaporate instantly.

Easy billingBilling is based on period gas consumption and no need to pay in advance like in case for book-ing LPG cylinder.


PNG volume potential - 16 mmscm per year (11% growth)

Annual addition of PNG connections 110

PNG consumption per household (scm/month) 12

Domestic PNG growth potential annually (scm) 16

MGL FY2020 domestic PNG sales volume (mmscm) 148

Y-o-Y growth potential 11%


Domestic PNG has ample scope for growth given low penetration of 38% in MMR

Domestic PNG accounting for only 14% of MGL overall volume of 3mmscmd and there is low penetration of the cooking fuel at 38% (addressable market size of ~ 3.3 mm households) in the MMR. We expect higher penetration of domestic PNG in the coming years as it is a convenient cooking fuel over LPG and thus we expect huge volume growth opportunity as more households get connected to the PNG network. We see strong case for adoption of domestic PNG due to the convenience factor (un-interrupted supply, safer fuel and easy billing) and thus LPG cylinder prices would not impact penetration of domestic PNG and a gradual phase-out of LPG subsidy may also remove the economic advantage for LPG cylinders. MGL’s plans to add 110k new households every year (10-11% y-o-y growth) to its existing domestic PNG customer base of 1.26 million.

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July 03, 2020 | 17

Consistent margin expansion – weak gas price and pricing power to improve margin

MGL’s management has successfully expanded its gross margins sharply by 57% to Rs. 14.7/scm in FY2020 as compared only Rs. 9.4/scm in FY2016 given ability to retain some portion of gas cost savings. The rise in margins clearly reflects the strong pricing power enjoyed by MGL, supported by favourable economics of CNG versus petrol (running cost of CNG cars is at 59% discount to that of petrol cars in Mumbai). APM gas prices were cut sharply by 26% to $2.4/mmBtu from April 2020 but MGL passed on CNG price cut of only Rs. 2/kg as margins required a price cut of Rs3.2/kg to fully reflect reduction in domestic gas price. This helped MGL to clock highest ever gross margin of Rs15.3/scm in Q4FY2020 and Rs. 14.7/scm in FY2020. Going forward, we expect gross/EBITDA margins to expand further to Rs. 15.2/Rs. 15.5 per scm and Rs. 9.8/Rs. 10.7 per scm in FY2021E/FY2022E given low gas cost tailwinds with expectation of further cut in domestic gas price over H2FY2021E-H1FY2022E given decline in the benchmark international gas prices.

Domestic PNG volume trend

I/C PNG volume trend



Annual addition of 110k new domestic PNG connection

I/C customer base



32803604 3824 4021 4121 4321 4521

0

1000

2000

3000

4000

5000


I/C PNG customers

0.91.0 1.0 1.1

1.31.4

1.51.6

0.00.20.40.60.81.01.21.41.61.8

FY16 FY17 FY18 FY19 FY20 FY21E FY22E FY23E

Mill

ion

Domestic PNG connections

111 123 137 148 155 166 177

8.5%

10.7%12.0%

7.6%

5.0%

7.0% 7.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

0

50

100

150

200


Domestic PNG volume (mmscm) y-o-y growth

134 139 149 148 137 150 165

2.5%4.1%

6.7%

-0.2%

-8.0%

10.0% 10.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

020406080

100120140160180


I/C PNG volume (mmscm) y-o-y growth

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July 03, 2020 | 18


Lower gas cost and opex


MGL retains benefit of lower gas cost

Strong margin expansion


APM gas price cut by 26% to $2.4/mmbtu

Source: PPAC India, Sharekhan Research

Best in class gross margin (Rs./scm) for MGL


Best in class EBITDA margin (Rs./scm) for MGL


2.0

3.23.4

3.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

MGL IGL

Rs/s

cm

Actual CNG price cut Estimated CNG price cut

23.0 21.7 22.625.9

27.5

13.610.9 10.4

13.0 12.8

3.8 4.0 4.3 4.7 5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

FY16 FY17 FY18 FY19 FY20

Blended realisation (Rs/scm) Gas cost (Rs/scm) Opex (Rs/scm)

9.410.8

12.2 12.914.7

5.66.9

7.9 8.29.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

FY16 FY17 FY18 FY19 FY20

Gross margin (Rs/scm) EBITDA margin (Rs/scm)

14.7

11.9

7.0

14.0

0 5 10 15 20

MGL

IGL

GGAS

AGL

9.7

6.4

4.7

10.2

0 2 4 6 8 10 12

MGL

IGL

GGAS

AGL

5.054.66

3.823.06

2.5 2.482.893.063.363.69

3.232.39

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

0

1

2

3

4

5

6

H2F

Y15

H1F

Y16

H2F

Y16

H1F

Y17

H2F

Y17

H1F

Y18

H2F

Y18

H1F

Y19

H2F

Y19

H1F

Y20

H2F

Y20

H1F

Y21

$/m

mbt

u

Domestic gas price Chg (%)

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July 03, 2020 | 19

Running cost of CNG cars is 59%/39% cheaper compared to that of petrol/diesel in Mumbai

Particulars Petrol Car Diesel Car Diesel Bus

Price (Rs/litre) 87 79 79

Mileage (km/litre) 12 16 4


CNG (Rs/kg) 48 48 48

Mileage (km/kg) 16 16 4.5


Savings 59% 39% 46%

Kit cost (in Rs) 35,000 1,25,000 3,00,000

Saving per year (in Rs) 76,766 34,605 4,87,185

Payback period (in years) 0.5 3.6 0.6


CNG price build-up in Mumbai

Particulars Unit Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21

CNG retail price Rs/kg 51.57 51.99 49.95 49.95 47.95

CNG VAT Rs/kg 6.13 6.18 5.94 5.94 5.70

CNG Gross price (net of VAT) Rs/kg 45.4 45.8 44.0 44.0 42.2

CNG Excise Rs/kg 5.6 5.6 5.4 5.4 5.2

CNG net price Rs/kg 39.9 40.2 38.6 38.6 37.1

CNG net price Rs/scm 28.1 28.3 27.2 27.2 26.1

Source: MGL; Sharekhan Research

Domestic PNG price build-up in Mumbai

Particulars Unit Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21

PNG Domestic retail price Rs/scm 31.5 31.8 28.6 28.6 29.6

PNG Domestic VAT Rs/scm 3.8 3.8 3.4 3.4 3.5

PNG Domestic price (net of VAT) Rs/scm 27.8 28.0 25.2 25.2 26.1

PNG Domestic Excise Rs/scm 0.0 0.0 0.0 0.0 0.0

PNG Domestic net price Rs/scm 27.8 28.0 25.2 25.2 26.1

Source: MGL; Sharekhan Research

Cash-rich balance sheet; robust FCF generation and consistent dividend payouts

MGL has a robust balance sheet and strong cash flow generation with nil debt on books. Annual FCF generation amounts to Rs. 550-700crore, which implies a healthy FCF yield of 6-7% for MGL. Robust cash flows have helped MGL to maintain consistently dividend payout ratio of 35-45% over FY2017-FY2020 with dividend of Rs. 35/share (including a special dividend of Rs. 15/share) in FY2020. Cash & investments stood at Rs. 1,351 crore as on March 31, 2020, which is at 13% of current market capitalisation of MGL.

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July 03, 2020 | 20


Cashflow from operations


Negative net debt/equity ratio

Robust FCF generation track record


Robust balance sheet with net cash position


Consistent dividend payout


Dividend and FCF yield


603780

953

1,351 1,447

1,850

2,226

0

500

1,000

1,500

2,000

2,500


Rs c

rore

Cash and current investments

-0.3-0.4 -0.4

-0.5 -0.4-0.5

-0.5-0.6

-0.5

-0.4

-0.3

-0.2

-0.1

0.0


x

Net debt/Equity

532652 685

983

539

993 1,030

0

200

400

600

800

1,000

1,200


Rs c

rore

Cashflow from operations

278

383322

559

289

693 680

0

100

200

300

400

500

600

700

800


Rs c

rore

FCF

1.7% 1.8% 1.9%

3.3%

2.4%3.2% 3.4%

2.6%

3.6%3.0%

5.3%

2.7%

6.5% 6.4%

0%

1%

2%

3%

4%

5%

6%

7%


Dividend yield FCF yield

18 19 20 35 25 35 37

45%39%

36%

47%

40% 40% 40%

0%

10%

20%

30%

40%

50%

0

5

10

15

20

25

30

35

40


DPS (Rs/share) Dividend payout (%)

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July 03, 2020 | 21


Revenue trend


Consistent margin expansion led by low gas price

EBITDA/PAT trend


Financials in charts

Volume likely to recover sharply in FY2022E


RoE trend


RoCE trend


938 9861,077 1,080

919

1,1321,204

0

200

400

600

800

1,000

1,200

1,400


Gas sales volume (mmscm)

2,0342,233

2,7912,972

2,435

2,9993,192

0

500

1,000

1,500

2,000

2,500

3,000

3,500


Rs c

rore

Revenues

644780

8851,053

904

1,2111,287

393478

546

737629

852 902

0

200

400

600

800

1,000

1,200

1,400


Rs c

rore

EBITDA PAT

22.124.3 24.3

27.5

20.2

24.322.8

0.0

5.0

10.0

15.0

20.0

25.0

30.0


%

RoE

31.434.2 34.3 34.3

25.3

30.7 28.9

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0


%

RoCE

6.97.9 8.2

9.7 9.810.7 10.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0


EBITDA margin (Rs/scm)

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July 03, 2020 | 22

Valuation: Discount versus peers to narrow down given industry-leading margin and volume recovery

MGL’s valuation is attractive, given its FY2022E PE of 12.4x is at steep discount 51% discount to that of IGL. Even on EV/EBITDA and P/BV basis, MGL trades at a 49% and 41% discount to IGL. We believe that MGL’s steep valuation gap with IGL should narrow down given industry leading margin and potential sharp volume recovery in FY2022E.

Company outlook

Low penetration to drive volume growth; low gas cost to expand margins: MGL is favourably placed to

benefit from low CNG penetration of 34% and domestic PNG of 38% in MMR , which provides sustained 6-7%

annual volume growth opportunity given government’s focus to reduce vehicular pollution and increase share

of gas in overall energy mix of India. Potential reduction in domestic gas prices over H2FY2021E-H1FY2022E

and weak spot LNG prices bodes well for margin expansion. We model 2.5% volume CAGR over FY2020-

FY2022E and EBITDA margin of Rs. 9.8/Rs. 10.7 per scm in FY2021E/FY2022E and thus expect decent 8% PAT

CAGR over FY2020-FY2022E with a robust RoE of 24%.

Valuation

Initiate stock idea coverage with a Buy rating and price target of Rs. 1,380: MGL’s long-term business

fundamentals remain strong with robust margins, potential volume recovery in FY2022E with gradual relaxation

of COVID-19 led lockdown norms and a strong RoE of 24%. MGL’s stock price performance has lagged peers

in CY2020YTD (up 1%, IGL up 5% and GGAS up 26%) and its valuation is attractive at 12.4x FY2022E EPS (20%

discount to its historical average one-year forward PE multiple of 15.6x and steep discount of 51% to that IGL

on FY2022E PE basis) given robust balance sheet (net cash), FCF yield of 7% and dividend yield of 3%. Hence,

we initiate coverage on MGL with Buy rating and PT of Rs. 1,380 (valued at 16x FY2022E EPS).


One-year forward P/E (x) band

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Apr-

17

Jun-

17

Aug-

17

Oct

-17

Dec-

17

Feb-

18

Apr-

18

Jun-

18

Aug-

18

Oct

-18

Dec-

18

Feb-

19

Apr-

19

Jun-

19

Aug-

19

Oct

-19

Dec-

19

Feb-

20

Apr-

20

Jun-

20

P/E

(x)

P/E (x) Avg. P/E (x) Peak P/E (x) Trough P/E (x)

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July 03, 2020 | 23



One-year forward P/BV (x) band

One-year forward EV/EBITDA (x) band

Peer comparison

ParticularsCMP

(Rs / Share)O/S

Shares (Cr)MCAP (Rs Cr)

P/E (x) EV/EBITDA (x) P/BV (x) RoE (%)

FY21E FY22E FY21E FY22E FY21E FY22E FY21E FY22E

MGL 1,071 10 10,581 16.8 12.4 11.3 8.1 3.2 2.8 20.2 24.3

IGL 447 70 31,318 33.4 25.3 21.3 16.1 5.5 4.9 17.5 20.4

Gujarat Gas 322 69 22,156 26.4 20.9 15.1 12.1 5.6 4.7 23.1 24.4

AGL 161 110 17,729 48.0 34.6 32.0 22.2 9.8 7.9 32.0 22.2

Source: Sharekhan Estimates

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Apr-

17

Jun-

17

Aug-

17

Oct

-17

Dec-

17

Feb-

18

Apr-

18

Jun-

18

Aug-

18

Oct

-18

Dec-

18

Feb-

19

Apr-

19

Jun-

19

Aug-

19

Oct

-19

Dec-

19

Feb-

20

Apr-

20

Jun-

20

P/BV

(x)

P/BV (x) Avg. P/BV (x) Peak P/BV (x) Trough P/BV (x)

5.0

7.0

9.0

11.0

13.0

15.0

17.0

Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19 Oct-19 Jan-20 Apr-20 Jul-20

EV/E

BITD

A (x

)

EV/EBITDA Avg. EV/EBITDA Peak EV/EBITDA Trough EV/EBITDA

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July 03, 2020 | 24

Financials

Statement of Profit and Loss Rs cr


Net sales 2,791 2,972 2,435 2,999 3,192

Employee cost 71 81 83 86 90

Other expenditure 436 459 413 455 486

Total expenditure 1,906 1,919 1,531 1,788 1,905

Operating profit 885 1,053 904 1,211 1,287

Other income 78 99 109 119 129

Depreciation 126 162 172 191 211

EBIT 837 990 841 1,139 1,206

Interest 0 7 0 0 0

PBT 837 984 841 1,139 1,206

Tax 291 246 212 287 303

Adjusted PAT 546 737 629 852 902

Source: Company; Sharekhan estimates

Balance Sheet Rs cr


Sources of Fund

Equity capital 99 99 99 99 99

Reserves & surplus 2,300 2,854 3,181 3,624 4,093

Net-worth 2,399 2,953 3,280 3,723 4,192

Deferred tax liabilities 205 161 161 161 161

Other long-term liabilities 2 50 50 50 50

Total loans 0 0 0 0 0

Capital employed 2,606 3,163 3,490 3,933 4,402

Application of Funds

Net block 1,763 1,931 2,059 2,168 2,257

CWIP 370 487 437 437 487

Investments 654 1,121 1,121 1,121 1,121

Other non-current assets 132 205 205 205 205

Current Assets

Inventory 19 19 15 19 20

Sundry Debtors 100 68 69 85 90

Cash & Bank Balances 299 229 325 728 1,105

Other Current Assets 104 68 70 87 92

Total Current Assets 522 384 480 919 1,308

Less: Current Liabilities & Provisions

Trade Payables 152 132 116 143 153

Other Current Liabilities & Provisions 683 834 696 774 823

Total Current Liabilities & Provisions 836 966 812 917 976

Net current Assets excluding cash -612 -811 -658 -726 -773

Total Assets 2,606 3,163 3,490 3,933 4,402


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July 03, 2020 | 25

Key Ratios


Margins (%)

Gross Profit Margin 49.9 53.6 57.5 58.4 58.4

OPM 31.7 35.4 37.1 40.4 40.3

EBIT Margin 30.0 33.3 34.6 38.0 37.8

Tax Rate 34.7 25.1 25.2 25.2 25.2

Net Profit Margin 19.6 24.8 25.9 28.4 28.3

Financial Ratios

Gross Debt/Equity (x) 0.0 0.0 0.0 0.0 0.0

Interest Coverage (x) NA NA NA NA NA

Average Cost of Debt (%) NA NA NA NA NA

Inventory Days (number) 3 2 2 2 2

Debtors Days (number) 12 10 10 10 10

Creditors Days (number) 17 17 17 17 17

Net Working Capital Days (number) -2 -5 -5 -5 -5

Fixed Assets Turnover Ratio (x) 1.4 1.3 0.9 1.0 1.0

Adjusted EPS (Rs) 55.3 74.6 63.7 86.3 91.3

Cash EPS (Rs) 68.1 91.0 81.1 105.6 112.7

DPS (Rs) 20.0 35.0 25.5 34.5 36.5

Dividend Payout (%) 36.2% 46.9% 40.0% 40.0% 40.0%

BVPS (Rs) 243 299 332 377 424

RoNW (%) 24.3 27.5 20.2 24.3 22.8

RoCE (%) 34.3 34.3 25.3 30.7 28.9

Valuation (x)

CMP (Rs/share) 1,071 1,071 1,071 1,071 1,071

Mcap (Rs crore) 10,581 10,581 10,581 10,581 10,581

EV (Rs crore) 10,282 10,351 10,255 9,852 9,476

P/E (x) 19.4 14.4 16.8 12.4 11.7

P/BV (x) 4.4 3.6 3.2 2.8 2.5

EV/EBITDA (x) 11.6 9.8 11.3 8.1 7.4

EV/Sales (x) 3.7 3.5 4.2 3.3 3.0

Dividend Yield (%) 1.9% 3.3% 2.4% 3.2% 3.4%

Growth rates (%)

Revenue 25.0 6.5 -18.1 23.2 6.4

EBITDA 13.5 18.9 -14.1 33.9 6.3

EBIT 15.2 18.3 -15.0 35.3 5.9

PBT 15.2 17.5 -14.5 35.4 5.9

Adjusted PAT 14.3 34.9 -14.6 35.4 5.9

AEPS 14.3 34.9 -14.6 35.4 5.9


Cash Flow Statement Rs cr


Cash flow from operating activities 685 983 539 993 1,030

Cash flow from investing activities -439 -752 -141 -181 -221

Cash flow from financing activities -235 -242 -302 -409 -433

Net change in cash and cash equivalents 12 -11 96 403 377

Opening cash balance 92 299 229 325 728

Closing cash balance 299 229 325 728 1,105

Free Cash Flows (FCF) 322 559 289 693 680

Free Cash Flows to Equity (FCFE) 391 768 348 812 860


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About company

Mahanagar Gas (MGL) is a dominant CGD player in and around Mumbai with CNG/PNG sales volumes of 2.1 mmscmd/0.8 mmscmd in FY2020. MGL derives 73% of its volumes from CNG, 14% from domestic PNG and the remaining from commercial/industrial PNG. The company sources its entire gas requirement for CNG and domestic PNG from low-cost domestic gas. The company has 256 CNG stations, 1.26 million PNG customers and a pipeline network of 5,630 km.

Investment theme

The government’s aim to increase the share of gas in India’s energy mix to ~15% by 2025 (from 6% currently) and the thrust to reduce air pollution provides a regulatory push for strong growth in CNG and domestic PNG volumes for MGL. The company’s margins are expected to remain strong given expectation of downward revision in the domestic gas prices for H2FY2021E and low spot LNG prices. Key Risks

� Lower-than-expected gas sales volume in case of delay in volume recovery due to COVID-19 led demand slowdown.

� Any change in domestic gas allocation policy, depreciation of Indian rupee, and any adverse regulatory changes could affect margins and valuations.

Additional Data

Key management personnel

Manoj Jain Chairman

Sanjib Datta Managing Director

Deepak Sawant Deputy Managing Director

Sunil M Ranade Chief Financial OfficerSource: Company website

Top 10 shareholders

Sr. No. Holder Name Holding (%)

1 Schroders PLC 5.9

2 L&T Mutual Fund Trustee Ltd/India 3.5

3 SBI Life Insurance Co Ltd 2.5

4 Stichting Depositary Apg Emerging 1.7

5 Life Insurance Corp of India 1.6

6 Vanguard Group Inc/The 1.4

7 Tata Asset Management Ltd 1.2

8 FMR LLC 1.2

9 Bajaj Allianz Life Insurance Co Ltd 1.1

10 HDFC Asset Management Co Ltd 1.0Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

Understanding the Sharekhan 3R Matrix

Right Sector

Positive Strong industry fundamentals (favorable demand-supply scenario, consistent

industry growth), increasing investments, higher entry barrier, and favorable

government policies

Neutral Stagnancy in the industry growth due to macro factors and lower incremental

investments by Government/private companies

Negative Unable to recover from low in the stable economic environment, adverse

government policies affecting the business fundamentals and global challenges

(currency headwinds and unfavorable policies implemented by global industrial

institutions) and any significant increase in commodity prices affecting profitability.

Right Quality

Positive Sector leader, Strong management bandwidth, Strong financial track-record,

Healthy Balance sheet/cash flows, differentiated product/service portfolio and

Good corporate governance.

Neutral Macro slowdown affecting near term growth profile, Untoward events such as

natural calamities resulting in near term uncertainty, Company specific events

such as factory shutdown, lack of positive triggers/events in near term, raw

material price movement turning unfavourable

Negative Weakening growth trend led by led by external/internal factors, reshuffling of

key management personal, questionable corporate governance, high commodity

prices/weak realisation environment resulting in margin pressure and detoriating

balance sheet

Right Valuation

Positive Strong earnings growth expectation and improving return ratios but valuations

are trading at discount to industry leaders/historical average multiples, Expansion

in valuation multiple due to expected outperformance amongst its peers and

Industry up-cycle with conducive business environment.

Neutral Trading at par to historical valuations and having limited scope of expansion in

valuation multiples.

Negative Trading at premium valuations but earnings outlook are weak; Emergence of

roadblocks such as corporate governance issue, adverse government policies

and bleak global macro environment etc warranting for lower than historical

valuation multiple.Source: Sharekhan Research

Disclaimer: This document has been prepared by Sharekhan Ltd. (SHAREKHAN) and is intended for use only by the person or entity to which it is addressed to. This Document may contain confidential and/or privileged material and is not for any type of circulation and any review, retransmission, or any other use is strictly prohibited. This Document is subject to changes without prior notice. This document does not constitute an offer to sell or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Though disseminated to all customers who are due to receive the same, not all customers may receive this report at the same time. SHAREKHAN will not treat recipients as customers by virtue of their receiving this report.

The information contained herein is obtained from publicly available data or other sources believed to be reliable and SHAREKHAN has not independently verified the accuracy and completeness of the said data and hence it should not be relied upon as such. While we would endeavour to update the information herein on reasonable basis, SHAREKHAN, its subsidiaries and associated companies, their directors and employees (“SHAREKHAN and affiliates”) are under no obligation to update or keep the information current. Also, there may be regulatory, compliance, or other reasons that may prevent SHAREKHAN and affiliates from doing so. This document is prepared for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Recipients of this report should also be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The user assumes the entire risk of any use made of this information. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. The investment discussed or views expressed may not be suitable for all investors. We do not undertake to advise you as to any change of our views. Affiliates of Sharekhan may have issued other reports that are inconsistent with and reach different conclusions from the information presented in this report.

This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject SHAREKHAN and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction.

The analyst certifies that the analyst has not dealt or traded directly or indirectly in securities of the company and that all of the views expressed in this document accurately reflect his or her personal views about the subject company or companies and its or their securities and do not necessarily reflect those of SHAREKHAN. The analyst further certifies that neither he or its associates or his relatives has any direct or indirect financial interest nor have actual or beneficial ownership of 1% or more in the securities of the company at the end of the month immediately preceding the date of publication of the research report nor have any material conflict of interest nor has served as officer, director or employee or engaged in market making activity of the company. Further, the analyst has also not been a part of the team which has managed or co-managed the public offerings of the company and no part of the analyst’s compensation was, is or will be, directly or indirectly related to specific recommendations or views expressed in this document. Sharekhan Limited or its associates or analysts have not received any compensation for investment banking, merchant banking, brokerage services or any compensation or other benefits from the subject company or from third party in the past twelve months in connection with the research report.

Either SHAREKHAN or its affiliates or its directors or employees / representatives / clients or their relatives may have position(s), make market, act as principal or engage in transactions of purchase or sell of securities, from time to time or may be materially interested in any of the securities or related securities referred to in this report and they may have used the information set forth herein before publication. SHAREKHAN may from time to time solicit from, or perform investment banking, or other services for, any company mentioned herein. Without limiting any of the foregoing, in no event shall SHAREKHAN, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind.

Compliance Officer: Mr. Joby John Meledan; Tel: 022-61150000; email id: [email protected];

For any queries or grievances kindly email [email protected] or contact: [email protected]

Registered Office: Sharekhan Limited, 10th Floor, Beta Building, Lodha iThink Techno Campus, Off. JVLR, Opp. Kanjurmarg Railway Station, Kanjurmarg (East), Mumbai – 400042, Maharashtra. Tel: 022 - 61150000. Sharekhan Ltd.: SEBI Regn. Nos.: BSE / NSE / MSEI (CASH / F&O / CD) / MCX - Commodity: INZ000171337; DP: NSDL/CDSL-IN-DP-365-2018; PMS: INP000005786; Mutual Fund: ARN 20669; Research Analyst: INH000006183;

Disclaimer: Client should read the Risk Disclosure Document issued by SEBI & relevant exchanges and the T&C on www.sharekhan.com; Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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