Mahanagar Gas - June 2016

India | Oil & Gas
15 June 2016
IPO Note
Global Markets Research
Mahanagar Gas
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Background of the company
Price Band: INR 380 421
Mahanagar Gas Limited (MGL), a JV between GAIL and British Gas, is

coming with an IPO. Each promoter holds 45% stake while the rest
10% is held by Govt of Maharashtra. MGL is a CGD player with
operations in Mumbai, adjoining areas and Raigad. With a network of
4,646km, it sells CNG through 188 CNG stations to 0.47mn vehicles. It
supplies PNG-domestic to 0.86mn households. It supplies PNGcommercial to 2,800 consumers and PNG-Industrial to 60 industries.
Opening date: 21 June 2016

Closing date: 23 June 2016
About the IPO

Total outstanding shares are 98.8mn. Each of promoters is selling
12.34mn shares, total comprising 25% of the equity. QIB portion is
50% while 15% is for non-institutional bidders and rest 35% for retail
investors. 60% of the QIB portion is for the anchor investors. Price
band is INR 380-421. 0.2mn shares have been reserved for employees,
with a discount of INR 38.
Large potential for growth
Mumbai, adjoining areas and Raigad has a total motor vehicle
population of 6.7mn, out of which, the company targets a population
of 1.8mn. Current population of 0.47mn CNG vehicles reflects a 26%
penetration and offers scope for growth. PNG-domestic has a potential
of 3mn households, out of which only 0.86mn have been connected
so far. Rise in LPG prices would also result in pick up; total consumers
being 9,000-10,000 out of which, only 2,800 have been connected so
far.
Highest EBITDA/scm of INR 5.8 in FY16
MGL reports an EBITDA/scm of INR 5.8 in FY16 compared with INR 3.6
of Gujarat Gas (GUJGA IN) and INR 5.3 of Indraprastha Gas (IGL IN).
With possible increase in domestic gas prices, we expect softening of
EBITDA/scm going forward. We build in INR 5.5-5.6 in FY17-18E.
Available at an attractive valuation
MGL reported an EPS of INR 31.3 in FY16. While EBITDA/scm has
improved to INR 5.8 from INR 5.6 in FY15, volume growth was meager
1.7%. Growth was low on all segments- CNG witnessing 1.7% growth,
PNG-domestic at 7.7% growth while PNG-commercial was flat and
PNG-industrial showed a 4.8% decline. Due to the large scope of
penetration, we expect a volume growth of 5% in FY17-18E. We
estimate an EPS of INR 34.6 in FY18. At upper limit of INR 421, the
stock would be valued at 12.2x FY18 EPS. IGL is currently trading at
15x its FY18 EPS of INR 41.6. At 15x FY18 EPS of INR 34.6, we value
MGL at INR 518.
Key Financials
YE
March
FY15
Revenue
(INR mn)
20,949
YoY
(%)
11.1
EBITDA
(INR mn)
4,897
EBITDA
margin (%)
23.4
Adj PAT
(INR mn)
3,010
YoY
(%)
1.3
Adj. EPS
(INR)
30.5
RoE
(%)
21.4
RoCE
(%)
17.9
P/E EV/EBITDA
(x)
(x)
13.8
8.1
FY16
20,789
(0.8)
5,130
24.7
3,087
2.6
31.3
20.2
17.1
13.5
7.8
FY17E
22,503
8.2
5,130
22.8
3,133
1.5
31.7
19.0
15.6
13.3
7.8
FY18E
23,937
6.4
5,496
23.0
3,415
9.0
34.6
19.1
15.6
12.2
7.3
Note: Price used is upper limit of INR 421; Source: Company, Elara Securities Estimate
Swarnendu Bhushan swarnendu.bhushan@elaracapital.com +91 22 6164 8504

Elara Securities (India) Private Limited
Mahanagar Gas
Financials (YE March)

Net operating income
EBITDA
Depreciation
Interest cost
FY16
FY17E
FY18E
20,949
20,789
22,503
23,937
25,000
5,496
24,000
4,897
5,130
5,130
799
841
948
1,023
4,098
4,289
4,182
4,472
12
29
10
23,000
22,000
407
427
504
633
20,000
4,493
4,686
4,676
5,097
19,000
Less: Taxation
1,483
1,600
1,543
1,682
33.0
34.1
33.0
33.0
3,010
3,087
3,133
3,415
FY15
FY16
FY17E
FY18E
Effective tax rate (%)

PAT
Balance Sheet (INR mn)
Equity capital
Reserves
893
893
893
893
13,181
14,386
15,640
17,005
96
3,500
1,181
3,400
Others
3,227
3,898
4,005
4,490
3,300
Total liabilities
18,485
20,402
21,835
23,666
Fixed assets
14,436
15,885
15,615
16,092
3,505
3,796
5,469
7,066
Less: current liabilities
3,171
3,161
3,131
3,373
Net working capital

Total assets
334
636
2,338
3,692
18,485
20,402
21,835
23,666
Cash Flow Statement (INR mn)
FY15
FY16
FY17E
FY18E
Operating cash flow
4,550
4,722
3,914
5,075
(1,866)
(2,289)
(678)
(1,500)
2,684
2,433
3,235
3,575
Investing cash flow
(2,160)
(2,456)
(678)
(1,500)
Financing cash flow
(1,829)
(1,994)
(1,808)
(2,069)
Net change in cash
561
272
1,428
1,506
Closing cash
888
1,449
1,721
3,149
Ratio Analysis
FY15
FY16
FY17E
FY18E
Capex
Free cash flow to firm
FY18E
EBITDAM (RHS)
8.8
10
8
6
3,200
3,100
3,000
2.6
1.5
1.3
2,900
2,800
FY15
FY16
PAT (LHS)
0
FY17E FY18E
Adj PAT growth (RHS)
Source: Company, Elara Securities Estimate
Return ratios
25
21.4
(%)
Current assets
(INR mn)
116
1,181
3,882
FY17E
(%)
44
3,882
22
FY16
Profit trend
1,181
3,882
23
156
3,715
23.0
Net operating income (LHS)
1,027
Investments
24
22.8
FY15
Deferred taxes
Total borrowings
25
23.4
21,000
PBT
Other income
24.7
(%)
EBIT
Revenue & margin growth trend
FY15
(INR mn)
Income Statement (INR mn)
20.2
20
15
17.9
19.0
19.0
17.1
15.6
15.6
FY17E
FY18E
10
Income Statement Ratios (%)

Revenue growth
11.1
(0.8)
8.2
6.4
EBITDA growth
0.3
4.7
0.0
7.1
Adj PAT growth
1.3
2.6
1.5
9.0
EBITDAM
23.4
24.7
22.8
23.0
Adj net margin
14.4
14.8
13.9
14.3
340.1
145.6
415.3
528.0
Net debt/Equity (x)
(0.4)
(0.4)
(0.4)
(0.5)
ROE (%)
21.4
20.2
19.0
19.1
ROCE (%)
17.9
17.1
15.6
15.6
34.6
FY15
FY16
ROE (%)
ROCE (%)
Return & Liquidity Ratios

Int/PBIT
Per Share Data & Valuation Ratios

Diluted Adj EPS (INR)
30.5
31.3
31.7
Adj EPS growth
1.3
2.6
1.5
9.0
Book value (INR)
462
489
521
518
DPS (x)
15.8
15.8
15.9
17.3
P/E (x)
13.8
13.5
13.3
12.2
EV/EBITDA (x)
8.1
7.8
7.8
7.3
Price/Book (x)
0.9
0.9
0.8
0.8
Dividend Yield (%)
3.8
3.8
3.8
4.1
Note: pricing used is upper limit of INR 421; Source: Company, Elara Securities Estimate
Mahanagar Gas
The landscape
MGL operates in Mumbai, adjoining areas and Raigad. Its
marketing exclusivity in Mumbai and adjoining areas
expired in 2012 and 2014. However, it has filed a writ
petition in the court challenging the same. Its marketing
exclusivity in Raigad is valid till 2020. Network exclusivity
is valid till 2020 for Mumbai, till 2030 for adjoining areas
and till 2040 for Raigad.
Exhibit 1: Operational areas of MGL
PNG-industrial is the only segment where we do not

expect much of growth in the near term due to smaller
number of industries and low price of alternate fuels. As
and when Raigad gets operational, we expect volume
growth from industries there.
Exhibit 2: Large scope for growth
Currently serviced
Target market
CNG vehicles (mn)
0.5
1.8
PNG-domestic households (mn)
0.9
3.0
2,800
9,000-10,000
PNG-commercial (#)
Favorable sourcing of gas

Since the new policy giving priority to CNG and PNGdomestic consumers and allocation of 110% of last six
months sales volume, the company is assured of cheaper
domestic gas. It currently sources 88.5% of its total
purchase from domestic sources (APM and PMT). For
rest, it depends on spot and term LNG contracts with
suppliers.
Oil & Gas
Source: Company, Elara Securities Research
Exhibit 3: Gas sourcing in FY16

Term LNG
6%
Spot LNG
6%
Domestic
gas
allocation
88%
Large scope for growth

MGL has built a network of 4,646km of pipelines with
188 CNG stations. Only 13 of the CNG stations are
owned while the rest are in the premises of Oil
Marketing Companies (OMCs) or in bus depots.
It is currently servicing 0.47mn CNG vehicles. Total
population of motor vehicles in the operational areas
stands at 6.7mn out of which, MGL targets a conversion
of 1.8mn. It plans to add a total of 83 CNG stations in
next five years. Pipeline network is expected to increase
by 675km in next five years.
Domestic gas, accounting for 80% of the domestic gas

allocation, is currently priced at USD 3.4/mmBtu. Rest of
the gas comes from Panna-Mukta and Tapti, priced at
USD 5.73/mmBtu and USD 5.57/mmBtu respectively.
Sales breakdown
In FY16, CNG accounted for 74% of the total sales while
PNG-domestic accounted for 12%. PNG-commercial and
PNG-industrial accounted for 6% and 8% respectively.
MGL currently supplies PNG-domestic to 0.86mn

households. The operational areas currently have a total
of 3mn households. The current thrust of the
government on PNG-domestic would definitely result in
growth in this segment.
Currently, 2,800 out of 9,000-10,000 commercial
consumers have been connected. As commercial LPG
prices rise along with oil prices going forward, the
company is expected to see growth in demand.
Mahanagar Gas
Exhibit 4: CNG leads the show
Exhibit 7: Valuation of MGL

PE (x)
PNGindustrial
8%
PNGcommercial
6%
15
FY18 EPS (INR)
34.5
Target price (INR)
518
Upside from upper limit (%)
PNGdomestic
12%
Exhibit 8: Peer comparison

FY16
CNG
74%
IGL
MGL
CNG stations (nos)
340
188
Self owned (nos)
129
13
10,151
4,646
6.85
3.14
CNG (mn vehicles)
0.87
0.47
PNG-domestic (mn households)
0.64
0.86
PNG-commercial/indsutrial (nos)
2,580
2,926
Domestic
89.0
88.5
RLNG
11.0
11.5
CNG
3.1
1.8
PNG
0.9
0.6
Total
4.0
2.4
11.2
9.4
Infrastructure
Pipeline (km)
Exhibit 5: CNG volume growth
Compression capacity (mn kg/day)
9.2
9.2
6.6
6.3
Consumers
10
5.0
5.0
6
4
1.7
(%)
(mmscmd)
CNG volume
Growth (%) (RHS)
Financials
Gross margin (INR/scm)
17.8
20
7.1
5.6
PNG volume
EBITDA/scm (INR)
5.8
ROE (%)
17.2
20.2
12
ROCE (%)
15.0
17.1
14.7
12.2
Valuation metrics (FY18E)

PE (x)
EV/EBITDA (x)
7.4
7.3
PBV (x)
2.6
0.8
FY18E
FY17E
1.6
FY16
FY15
FY14
FY13
FY12
3.3
5.8
5.3
16
(%)
(mmscmd)
Exhibit 6: PNG volume growth
5.7
Sourcing volume (%
Sales volume (mmscmd)
FY18E
FY17E
FY16
FY15
FY14
FY13
0
FY12
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
23
Growth (%) (RHS)
Valuation
IGL is currently trading at 15x its FY18 EPS of INR 41.6.
Using the same valuation for MGL, we value the
company at INR 518, which offers a 23% upside to the
upper limit of INR 421 for the IPO pricing.
The Note is based on our estimates and is being provided to you (herein referred to as the Recipient) only for information
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The information contained in this note is of a general nature and is not intended to address the circumstances of any
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Disclosures for U.S. Investors
The research analyst did not receive compensation from Mahanagar Gas Limited.
Elara Capital Inc.s affiliate did not manage an offering for Mahanagar Gas Limited.
Elara Capital Inc.s affiliate does not expect to receive compensation from Mahanagar Gas Limited in the next 3 months.
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ravi.sodah@elaracapital.com
+91 22 6164 8517
Sumant Kumar
Analyst
Agri, Travel & Hospitality, Paper
sumant.kumar@elaracapital.com
+91 22 6164 8503
Swarnendu Bhushan
Analyst
Oil and gas
swarnendu.bhushan@elaracapital.com
+91 22 6164 8504
Manuj Oberoi
Sr. Associate
Banking & Financials
manuj.oberoi@elaracapital.com
+91 22 6164 8535
Harshit Kapadia
Associate
Power, Capital Goods
harshit.kapadia@elaracapital.com
+91 22 6164 8542
Priyanka Sheth
Editor
priyanka.sheth@elaracapital.com
+91 22 6164 8568
Gurunath Parab
Production
gurunath.parab@elaracapital.com
+91 22 6164 8515
Jinesh Bhansali
Production
jinesh.bhansali@elaracapital.com
+91 22 6164 8537
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Mahanagar Gas - June 2016

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Mahanagar Gas - June 2016

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India | Oil & Gas

Global Markets Research

Background of the company

Price Band: INR 380 421

Mahanagar Gas Limited (MGL), a JV between GAIL and British Gas, is

Opening date: 21 June 2016

About the IPO

Swarnendu Bhushan swarnendu.bhushan@elaracapital.com +91 22 6164 8504

Financials (YE March)

Effective tax rate (%)

Less: current liabilities

Net working capital

Cash Flow Statement (INR mn)

Operating cash flow

Investing cash flow

Financing cash flow

Net change in cash

Source: Company, Elara Securities Estimate

Source: Company, Elara Securities Estimate

Net operating income (LHS)

Revenue & margin growth trend

Income Statement (INR mn)

Income Statement Ratios (%)

Adj PAT growth

Adj net margin

Net debt/Equity (x)

Source: Company, Elara Securities Estimate

Return & Liquidity Ratios

Per Share Data & Valuation Ratios

Adj EPS growth

Book value (INR)

Dividend Yield (%)

Elara Securities (India) Private Limited

PNG-industrial is the only segment where we do not

CNG vehicles (mn)

PNG-domestic households (mn)

Favorable sourcing of gas

Oil & Gas

Source: Company, Elara Securities Research

Exhibit 3: Gas sourcing in FY16

Source: Company, Elara Securities Research

Large scope for growth

Source: Company, Elara Securities Research

Domestic gas, accounting for 80% of the domestic gas

MGL currently supplies PNG-domestic to 0.86mn

Exhibit 7: Valuation of MGL

FY18 EPS (INR)

Target price (INR)

Upside from upper limit (%)

Exhibit 8: Peer comparison

CNG stations (nos)

Self owned (nos)

CNG (mn vehicles)

PNG-domestic (mn households)

Source: Company, Elara Securities Estimate

Exhibit 5: CNG volume growth

Compression capacity (mn kg/day)

Growth (%) (RHS)

Source: Company, Elara Securities Estimate

Valuation metrics (FY18E)

Exhibit 6: PNG volume growth

Sales volume (mmscmd)

Source: Company, Elara Securities Estimate

Source: Company, Elara Securities Research