Mahanagar Gas IPO Offers Decent Bet In City Gas Distribution Sector

Mumbai: Mahanagar Gas Limited’s (MGL) 25 percent offer for sale values the Mumbai gas distributer at a market capitalization of Rs 4158 crores at the hiher end of the price band of Rs 380-421 per share. On the other hand, rival Indraprastha Gas Ltd’s (IGL) market capitalization on Friday was Rs 8643 crores.

There is little not to like the initial public offer of city gas distributor Mahanagar Gas that opens on Tuesday. The company has near-monopoly in the supply of compressed natural gas (CNG) and piped natural gas (PNG) in Mumbai and surrounding areas.

There is good growth potential, and government policy support assures cheap domestic gas supply for the chunk of its business. Volume and revenue growth have been healthy over the years, and the balance sheet is robust with negligible debt and tidy cash reserves.

MGL’s comparatively better return on equity and higher dividend payout makes the discount in valuation look a bit unwarranted. According to Antique Stock Broking Ltd calculations, MGL’s dividend payout for FY15 and FY16 stood at 52 percent and 51 percent, respectively, whereas that of IGL was much lower at 22 percent and 20 percent, for the same period.

Many factors work in favor of Mahanagar Gas, the country’s third-largest city gas distributor after Gujarat Gas and Indraprastha Gas. For starters, the huge market of Mumbai, where the company has a wide network and infrastructure exclusivity for city gas distribution (CGD) until 2020, is still significantly under-penetrated. So are the areas in Thane and Raigad where the infrastructure exclusivity is up to 2030 and 2040.

As on March 2016, Mahanagar Gas supplied PNG to about nine lakh connections and catered to about five lakh CNG vehicles — growing its customer base at an annual average of about 11 per cent and 19 per cent respectively, during 2012-16.

A large number of vehicle owners are expected to convert to CNG given the fuel’s price competitivenessvis-a-vis diesel and petrol; this should increase if crude oil price goes up.

Besides households, the company supplies PNG to commercial and industrial establishments. Mahanagar Gas also plans to tap into new opportunities when bidding takes place in other geographical areas in Maharashtra and other States.