Mahanagar Gas IPO - My thoughts

It has been more than a month since the last IPO and finally, there is another IPO on the cards. Mahanagar Gas Limited’s IPO is open for subscription from Jun 21-23 2016 with a price band of Rs. 380/- to Rs. 421/-. At this price band, the size of the issue stands in the range of Rs. 9.38 Billion to Rs. 10.39 Billion. This IPO is an offer of sale from the existing shareholders of the company. Post the IPO, GAIL and British Gas Ltd will continue to hold 32.5% shares each in the company. 35% of the issue is for retail customers.

The company primarily operates in and around Mumbai including Thane and Raigad district. It enjoys a monopoly to distribute gas in Mumbai until 2020, its adjoining areas until 2030 and in the Raigad district until 2040. There is also a possibility to increase this monopoly by a block of 10 years should the government decide to do so. The cost of natural gas for the company was USD 3.06/MMBTU much lower than the cost of imported natural gas which stands at USD 5/MMBTU despite the crash in the gas prices. There is supply equal to 110% of the company’s CNG and domestic PNG demand at this price. The company, however, pays for the raw material for industrial CNG at closer to market rates making the cost rather high. 85% of revenue for Mahanagar Gas comes from domestic CNG/PNG while only 15% of the revenue comes from Industrial CNG and commercial PNG sector.  

Mahanagar Gas Limited – Financial Performance (in Millions)
Details	FY2012	FY2013	FY2014	FY2015	FY2016
Total revenue	13,090.30	15,143.8	18,851.5	20,949.3	20,789.3
Total expenses	8,744.3	11,038.8	14,778.6	16,863.4	16,529.8
Profit/(loss) after tax	3,077.4	2,985.1	2,972.5	3,010.0	3,086.9
Net margin	23.5	19.7	15.8	14.4	14.8

The revenue of the company has grown at a CAGR of 12.26% from 2012 to 2016. Though there was a slight dip in the revenue in 2016 that can be attributed to the fall in the gas price in the previous financial year. There was a 2.1% growth in the volume for the same period. There was also a decline in the cost which has resulted in a growth in profits, though not by a big margin. The margins have declined drastically though since 2012 but has remained consistent in the last 2 years.

With the demand for CNG vehicles set to increase in the next few years especially given the fact that NGT (National Green Tribunal) has banned diesel vehicles with an engine capacity of 2.0 and above in a few cities in Delhi and Kerala, the demand for CNG is also set to increase. Also, the urbanisation in Mumbai and it surrounding areas will help in the growth. What is also going to work for Mahanagar is the assured supply of natural gas at low price. This will ensure that the profitability margins are largely unaffected for the foreseeable future.

The diluted EPS of Rs. 31.36 for FY2016 gives us a PE ratio range of 12.11 and 13.42 for Mahanagar. Its direct competitor, Indraprastha Gas Limited, has a PE of 20.80. Gujarat Gas Ltd (though it mostly caters to industrial sector) has a PE ratio of 21. This is further proof that the valuations are very attractive for Mahanagar. The company also has the highest Rate on Net Worth in the industry at 20.20% for FY 2016.

Overall, Mahanagar Gas Limited’s IPO appears to be excessively discounted considering their sound financials and strong balance sheet. I expect this gap to be addressed when the company lists in the stock exchanges. I am definitely going to apply for this IPO for all the reasons mentioned above. 

For those who plan to apply, applications need to be made for 35 shares or its multiples.