The upcoming IPO of Mahanagar Gas Limited (MGL) has been tentatively scheduled to open on 20 June 2016. This will be 11th IPO to hit the Indian markets this year. Sources with knowledge of the matter have told IPO Central that the pricing of this forthcoming IPO will be kept in the range of INR455 – 485 per share, although a formal announcement will be made a week before the IPO. Before the IPO opens, it helps to understand the operations of the company. Here is a quick snapshot of Mahanagar Gas’ operations and more importantly, profits.
Mahanagar Gas was incorporated in May 1995 as an equal stake joint venture between GAIL and British Gas plc for the purposes of undertaking the business of city distribution and marketing of natural gas in Mumbai, its adjoining areas and the Raigad district in Maharashtra. Both parties hold 49.75% stake while the government of Maharashtra holds close to 0.5% ownership. Since BG Group has been taken over by Royal Dutch Shell, the latter now has the ultimate ownership of BGAPH (BG Asia Pacific Holdings Pte. Limited) stake in Mahanagar Gas.
MGL is presently the sole authorised distributor of compressed natural gas (CNG) and piped natural gas (PNG) in the above mentioned areas and this means it has a monopoly in Mumbai – one of the most densely populated cities in the world. Another factor going in the favour of Mahanagar Gas is that its infrastructure exclusivity is valid until 2020 for Mumbai, until 2030 for the Adjoining Areas and until 2040 for the Raigad district. The period of exclusivity is extendable in blocks of 10 years as per the regulations.
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The company’s monopoly is not restricted to its access to customers as Mahanagar Gas also gets a preferential treatment with supply of natural gas. CNG and domestic PNG customers are defined by the Ministry of Petroleum and Natural Gas as priority sector and Mahanagar Gas gets natural gas at lower rates to service the priority sector. According to the draft prospectus, the company’s cost of natural gas last year was at USD3.82/MMBTU which was substantially lower than the market price of imported natural gas. Although natural gas prices have crashed this year and India’s cost of imported natural gas now stands at USD5/MMBTU, MGL’s cost is still on the lower side. Moreover, this supply is ensured at 110% (calculated every six months) of MGL’s CNG and domestic PNG requirements. This priority sector accounts for more than 85% of Mahanagar Gas’ annual revenues.
There should be little doubt that the natural gas demand from the Priority Sector will continue to grow in coming years. In many parts of the country, traditional automotive fuels like diesel are being replaced by CNG on pollution concerns. This is good for Mahanagar Gas and offers long term revenue visibility. Assured supplies at lower prices take away other big variable from the profitability equation which means Mahanagar Gas is in a sweet spot.
Financial performance of Mahanagar Gas
Since Mahanagar Gas has a monopoly in a massive market like Mumbai, it is only natural that its revenues keep on growing steadily (unless people start taking renewable energy sources such as solar and wind more seriously). In line with this, revenues have expanded at an average rate of 18.8% over the last four years. While up has been the only way for revenues in recent years, the same is not true for profits. Despite the obvious advantages to the company, its profits and margins have been declining in recent years. The culprit here is the rising costs of natural gas which have not been fully passed on to the consumers. Thankfully, the company is low on gearing and incurred only INR12 million in finance costs. Despite a declining trend, double digit margins should be good for investors.
This Infrastructure Exclusivity is valid until 2020 for Mumbai, until 2030 for the Adjoining Areas and until 2040 for the Raigad district. The period of exclusivity is extendable in blocks of 10 years as per the PNGRB Regulations.
Mahanagar Gas’ consolidated financial performance (in INR crore)
|Profit/(loss) after tax||2,255.1||3,077.4||2,985.1||2,972.5||3,010.0|
Continue coming back on IPO Central as we intend to publish our analysis and review of Mahanagar Gas IPO at a later stage. Meanwhile, check out this page to see grey market premiums (GMP) and what other readers have got to say.