COMPANY INITIATING REPORT

RETAIL EQUITY RESEARCH

Mahanagar Gas Ltd. ACCUMULATE
Gas Rating as per Mid Cap 12 month period
BSE CODE: 539957 NSE CODE: MGL
CMP Rs988 TARGET Rs1114 RETURN 13%
Bloomberg CODE: MAHGL:IN SENSEX: 31,291

23rd June, 2017

Strong growth prospects Company Data

Market Cap (cr) Rs9,759
Mahanagar Gas Limited (MGL), a joint venture between GAIL (India) Ltd and BGAPH
(a subsidiary of Royal Dutch Shell Plc), is one of India's leading natural gas distribution Enterprise Value (cr) Rs9,285
companies. Currently, MGL has a supply network of over 4,838 kms of pipeline and 203 Outstanding Shares (cr) 9.9
CNG filling stations.
Free Float 35%
MGL is the third largest natural gas distribution company in India. Notably, it is the
Dividend Yield 1.9%
sole authorised distributor of CNG and PNG in Mumbai & its adjoining areas.
CNG penetration in Mumbai is relatively low at 25-30% vs Delhi which is at 35-40%. 52 week high Rs1,053
This leaves a lot of headroom for growth for the company. 52 week low Rs493
MGL enjoys the benefit of strong parentage as it is promoted by both GAIL (India) Ltd 6m average volume (lacs) 1.8
and BGAPH (a subsidiary of Royal Dutch Shell Plc) Beta 0.9
MGLs EBITDA/scm is expected to decline to Rs6.75 in FY18E from Rs6.89 in FY17. Face value Rs10
However, the same is estimated to improve to Rs6.92 in FY19E.
Shareholding % Q2 FY17 Q3 FY17 Q4 FY17
Revenue/PAT to grow at 14%/10% CAGR over FY17-19E due to uptick in volume
growth. Promoters 65.0 65.0 65.0
We value the stock at 23x FY19E EPS arriving at a target price (TP) of Rs1,114. FIIs 9.8 11.3 9.8
MFs/Insti 15.4 17.6 18.0
Public 4.7 4.7 5.6
Exclusive rights to distribute gas in Mumbai
Others 5.1 1.4 1.6
MGL is the sole authorised distributor of compressed natural gas (CNG) and piped natural
gas (PNG) in Mumbai & its adjoining areas. Further, the company has expanded its Total 100.0 100.0 100.0
operations to supply natural gas to Raigad district of Maharashtra. The company has Price Performance 3mth 6mth 1 Year
exclusive authorisation to lay, build, expand and operate the city gas distribution (CGD) Absolute Return 11% 29% -
network in Mumbai and its adjoining areas for a period of 25 years. This infrastructure
exclusivity is valid until 2020/2030/2040 for Mumbai/adjoining areas/Raigad district. This Absolute Sensex 7% 20% -
provides the company a competitive edge over peers in its area of operations. Relative Return* 4% 9% -
Volume growth momentum to sustain *over or under performance to benchmark index
The demand of natural gas for CGD in India is expected to remain buoyant on the back of
favorable government policy and promising economics of CNG usages vis-a-vis alternative
fuels. Driven by the benefit of low cost CNG, the conversions have been strong at ~1.2 lakh
annually. Further, the government is undertaking several initiatives to spur demand of
natural gas including setting up of approximately 15,000 kms of new gas transmission
pipeline, expanding into newer cities and extending support on gas allocation to priority
sector. Further, expected growth in the number of CNG operated vehicles and potential rise
in the usage of PNG will drive growth. Given MGLs strong presence in Mumbai &
commencement of gas supply in the Raigad district coupled with new City Taxi Guidelines
2016, it is well positioned to leverage this growth momentum. We factor CNG/PNG volume Y.E Mar (Rs cr) FY17 FY18E FY19E
CAGR of ~9%/10% over FY17-19E. Sales 2,034 2,327 2,653
Healthy financial profile Growth (%) -2.2% 14.4% 14.0%
MGL has a strong balance sheet with healthy free cash flow, sustainably high return on
EBITDA 644 688 768
equity and negligible debt levels. Despite annual capex requirement of ~Rs200cr over FY13-
17, the company has generated free cash flow (FCF) to the tune of ~Rs900cr during the EBITDA Margins % 31.7% 29.6% 28.9%
period. Further, we expect the cashflows to strengthen going ahead led by strong PAT Adj. 393 428 478
profitability (FCF of ~Rs500cr over FY17-19E). Notably, the company continues to register 27.4% 8.8% 11.8%
Growth (%)
strong return ratios with RoEs/RoCE in excess of 20%/30%. The robust balance sheet
provides MGL the financial flexibility to expand its network. Adj.EPS 39.8 43.3 48.4
Valuations Growth (%) 27.4% 8.8% 11.8%
Strong demand coupled with governments push for the adoption of natural gas bodes well P/E 24.8 22.8 20.4
for MGL. Further its scalable business model (exclusivity rights in Mumbai & adjacent
P/B 5.3 4.8 4.3
areas), superior return ratios and strong dividend payout (~50%) will continue to drive re-
rating in the stock. The stock currently trades at 22.8x/20.4x FY18E/19E EPS. We expect EV/EBITDA 14.9 13.9 12.3
revenue/PAT to grow at a CAGR of 14%/10% over FY17-19E. Hence, we value the stock at ROE (%) 23.4 22.0 22.0
23x FY19E EPS arriving at a target price (TP) of Rs1,114. D/E 0.0 0.0 0.0
Valuations growing commercial and financial hub, provides
At CMP, the stock is quoting at P/E multiple of 20.4x incremental opportunities to capture the demand for
FY19E earnings versus a range of 17x to 44x for leading natural gas from domestic customers as well as
gas distribution companies. We assign a target multiple commercial sector.
of 23x to FY19E EPS of Rs48.4 and arrive at a target Further, the company has expanded its operations to
price of Rs1,114. The target multiple is in line supply natural gas to Raigad district of Maharashtra.
Indraprastha Gas Ltd (IGL) which has a similar The company has identified six pockets in Raigad for
business model. While MGL owns exclusive rights of suppling natural gas. The supply of PNG & CNG is
distribution of CNG & PNG in Mumbai, its adjoining expected to commence in FY18.
areas & Raigad district, IGL has exclusive rights in
Given the low-cost advantage, stringent environmental
Delhi & NCR regions. Importantly, CNG penetration in
norms & large untapped potential, CNG market is
Mumbai at 25-30% is relatively lower when compared
poised for growth. Driven by the benefit of low cost, the
to Delhi at 35-40%. Furthermore, MGL boasts of a
conversions have been strong at ~1.2 lakh annually.
strong balance strength with healthy free cash flow,
Moreover, the new city taxi guidelines 2016 mandates
superior return ratios with RoEs in excess of 20% and
all app-based taxis to run on cleaner fuel. As of now,
negligible debt levels. As the Mumbai gas distribution
only 50% of taxis are plying on CNG. Currently, MGLs
market is hugely under-penetrated, MGL is increasing
penetration into CNG vehicles space in Mumbai region
its penetration in Mumbai & its adjoining areas for
is 30%, thus providing a huge scope for the company.
CNG, domestic PNG, commercial PNG and industrial
Hence, we expect the companys CNG volumes to
PNG. This augurs well for the volume growth going
register a CAGR of ~8% over FY17-19E.
ahead.
The company currently has a PNG customer base of ~9
1 Yr fwd P/E band lakh and has added close to 3.5 lakh customers over the
last five years. We expect the strong momentum to
continue and project volume CAGR of 10% over FY17-
19E.
As of March 31, 2016, the company has 57 CNG filling
stations out of overall 188 CNG filling stations and 0.27
mn domestic PNG customers out of 0.86 million
customers in the adjoining areas.
Break-up of CNG filling stations
Type of CNG filling stations No. of stations as
Peer comparison of FY16
Owned by company 13
Company Sales (cr) EBITDA Margin % Owned by:
FY17 FY18E FY19E FY17 FY18E FY19E BPCL 53
MGL 2,034 2,327 2,653 31.7 29.6 28.9 HPCL 54
IGL 3,815 4,318 4,862 - 24.7 23.8 IOCL 29
GUJGAS 5,093 6,827 7,255 15.1 16.5 17.6 Owned by other private and other parties 39
Total 188

Company P/E ROE% Source: Company, Geojit Research

FY17 FY18E FY19E FY17 FY18E FY19E MGLs customer base
MGL 24.8 22.8 20.4 23.4 22.0 22.0
FY13 FY14 FY15 FY16 FY17
IGL 27.1 23.6 21.1 - 20.3 19.6
CNG (in
GUJGASz 48.7 25.5 20.4 11.71 20.0 21.4 285.5 359.1 421.3 470.5 545.5
000s)
Source: Bloomberg, Geojit Research
PNG (in
643.5 708.6 804.0 865.2 952.2
Investment Rationale 000s)
Sole player in gas distribution in Mumbai
MGL is the sole authorised distributor of CNG & PNG
in Mumbai and its adjoining areas. Mumbai being a Source: Company, Geojit Research
 spot contracts with RLNG suppliers, including GAIL.
Focus on expanding presence to enhance The company sources natural gas from GAIL under
customer base three agreements viz; Domestic Natural Gas agreement,
Over the last five years, the company has set up 2 City Panna Mukta & Tapti agreement and Gas Sales
Gate Stations (CGSs), 43 CNG filling stations, laid down agreement. The company receives 0.5 mmscmd of
114.33 kms of steel & 1,243 kms of Polyethylene (PE) natural gas as per the Panna Mukta and Tapti
pipeline (including medium and low pressure PE agreement and 1.67 MMSCMD is sourced pursuant to
network) and added 0.35 million PNG customers. the domestic natural gas agreement. Further, it has also
Currently the company is having 203 CNG filling entered into the gas sale agreement with GAIL for
stations (owned by MGL is 14), over 4,838 kms of supply of 0.15 MMSCMD of RLNG on a firm basis and
pipeline, 4 CGS and CNG & PNG customer base of 0.15 MMSCMD of RLNG on a fallback basis. The
~0.54 million & ~0.94 million respectively. Further, company also procures RLNG for meeting the
continuing its expansion spree, the company is planning requirements of industrial and commercial PNG, i.e.,
to expand its operations both in the existing areas and non-priority sector from other domestic sources like
new markets which will lead to improvement its reach GAIL, HPCL, BPCL, among others, both on term and
and customer base. MGL is planning to increase its steel spot basis.
& PE pipeline network by more than 675 kms and will
add 83 CNG filling stations during the next five years. Long term and mid-term contracts with GAIL for the
procurement of natural gas
Besides, the company is also seeking to enter into new
markets by participating in the bidding process for new Gas
Present Gas
Allocation/Contract
Maximum
Permissible
Sourcing Supply Source
city gas distribution projects as well as through Agreements
ed Quantity Availability
(MMSCMD) (MMSCMD)
inorganic growth.
Domestic
Strong entry barriers provide a competitive edge Natural Gas
Allocated by
Government
1.67
Up to 1.83 (110% of
allocation)
Agreement
The company has a rich experience of more than 20
years in building and operating its CGD network in PMT PMT (Allocated
0.50
Up to 0.55 (110% of
Agreement by Government) allocation)
Mumbai and its adjoining areas. The company has
exclusive authorisation to lay, build, expand and GS Term RNLG with 0.15 on a firm basis
Agreement GAIL 0.15 on a fallback basis
operate the CGD network in Mumbai and its adjoining
areas for a period of 25 years. This infrastructure Source: Company, Geojit Research
exclusivity is valid until 2020 for Mumbai, until 2030 for
the adjoining areas and until 2040 for the Raigad Volumes of natural gas purchased from GAIL (MMSCMD)
district. The period of exclusivity is extendable in blocks
of 10 years as per the PNGRB regulations. This
exclusivity benefit mandates a new operator to only use
the companys distribution network upon the payment
of transportation tariff. Taking into consideration, the
companys infrastructure exclusivity coupled with lead
time in procuring domestic natural gas, the requirement
of regulatory approvals and high capex in setting up of
CGD network, this provides the company a competitive
edge over peers in its area of operations.

Secured fuel supplies

The company sources most of its natural gas
requirement from GAIL as per the long term agreement
between the two parties. The price of domestic natural
gas is determined by the administered price mechanism
(APM). While the company secures 94% of the total
natural gas requirement through long term and mid-
term contracts with GAIL, the balance is met through
Source: Company, Geojit Research
Promising long-term growth prospects for CGD
The demand of natural gas for city gas distribution
(CGD) in India is expected to remain buoyant on the
back of favorable government policy and promising
economics of CNG usage vis-a-vis alternative fuels. In
addition to this, increasing pace of gas networks in Overall revenue to grow at ~8% CAGR during FY16-19E
newer geographies coupled with increased use of PNG
in domestic, industrial and commercial sectors will
drive growth going ahead. Priority allocation of
domestic gas to CNG and PNG coupled with
development of CNG grid bodes well for the sector.
Besides, the governments thrust on promoting CGD
sector in India also augurs well for the sector. The
government plans to set up approximately 15,000
kilometres of new gas transmission pipelines, expansion
into newer cities and extend support on gas allocation Source: Company, Geojit Research
to priority sector. In February 2014, the government
increased allocation of natural gas to CGD companies to EBITDA margin to remain healthy
100%. Further, in August 2014, the government revised Owing to its exclusivity of gas distribution rights in
the allocation to 110% requirement of each CGD entity Mumbai & adjacent areas coupled with the benefit of
for supply to the priority sector. passing on the increase in the cost of natural gas to its
Given MGLs strong presence in Mumbai and customers has enabled MGL to sustain its EBITDA
commencement of gas supply in Raigad district, we margin above 20% over FY13-17. Going forward, we
believe it is better placed to leverage this growth expect EBITDA margin to ease to 29.6%/28.9% in
momentum. The company has exclusivity of natural gas FY18E/19E on account of higher fuel costs.
distribution in Mumbai until 2020, its Adjoining Areas
until 2030 and the Raigad district until 2040. EBITDA to grow at 9% CAGR over FY17-19E

CGD Demand: Priority Sector and Non-Priority Sector

Source: Company, Geojit Research

PAT to improve by 10% CAGR during FY17-19E
Source: Company, Geojit Research Adjusted net profit grew modestly by 7% CAGR over
FY13-16. We expect Adj. PAT to witness a CAGR of 10%
largely in-line with robust sales growth.
Financials
PAT to grow at 10% CAGR over FY17-19E
Sturdy volume growth and geographical
expansion to provide impetus to revenue growth
MGLs revenue has grown at a CAGR of ~8% over
FY13-17 owing to healthy growth in volumes &
realisation. Volume growth during the period under
consideration grew by ~5% CAGR backed by healthy
growth in CNG and domestic PNG volumes. Further,
~2% CAGR growth in realisation during the period
under review also aided to revenue growth. Going
ahead, we expect the revenue to grow at a CAGR of 14% Source: Company, Geojit Research
during FY16-19E mainly driven by uptick in volume
growth.
Healthy balance sheet supplies PNG connection to more than 0.94mn/~3,000
/220 domestic households/commercial/ industrial
MGL enjoys a strong balance strength with healthy free
consumers.
cash flow, sustainably high return on equity and
MGL has a robust supply network of over 4,838 kms of
negligible debt levels. Despite annual capex
pipelines as of March 31, 2017.
requirement of ~Rs200cr over FY13-17, the company
continues to generate healthy FCF to the tune of
~Rs900cr during the period. Further, we expect the MGLs sales break-up
cashflows to strengthen going ahead led by strong
profitability (FCF of ~Rs500cr over FY17-19E). Further,
the company continues to register strong return ratios
with return of equity (ROE) of more than 20% and
return on capital employed of over 30%. Further, we
expect ROE & ROCE to remain healthy at 22% and
~33% respectively in FY19E led by healthy free cash
flow generation. The company has good track record of
paying dividends as it consistently maintained dividend Source: Company, Geojit Research
of more than Rs. 15 per share translating into dividend
payout of over ~50% over FY13-17. We expect the
company to sustain its robust dividend payout going Sales volume mix (In MMSCMD)
ahead.

Given its robust balance strength, we believe this will

aid the company in providing the financial flexibility to
expand its network.
RoE to remain above 20%, led by strong free cash flow
generation

Source: Company, Geojit Research

Key Risks:
Any uptick in the cost price of natural gas.
Reduction in allocation amount of domestic
natural gas from MoPNG.
Source: Company, Geojit Research Alternative fuels becoming more cost effective.
Adverse exchange rate fluctuations.
Mahanagar Gas Ltd: Business overview
Incorporated in 1995, Mahanagar Gas Limited (MGL) is
one of India's leading natural gas distribution
companies. MGL is a joint venture between GAIL
(India) Ltd and BGAPH (a subsidiary of Royal Dutch
Shell Plc). It operates primarily in Mumbai and
adjoining areas. It is the sole authorised distributor of
compressed natural gas (CNG) and piped natural gas
(PNG).
MGL supplies CNG to ~0.54mn vehicles through the
network of over 203 CNG filling stations. It also
 Standalone Financials

Profit & Loss Account Balance Sheet

Y.E March (Rs cr) FY15A FY16A FY17A FY18E FY19E Y.E March (Rs cr) FY15A FY16A FY17A FY18E FY19E
Sales 2,095 2,079 2,034 2,327 2,653 Cash 145 172 148 209 333
% change 11.1% -0.8% -2.2% 14.4% 14.0% Accounts Receivable 96 89 95 108 123
EBITDA 490 513 644 688 768 Inventories 17 18 24 28 33
% change 0.3% 4.7% 25.6% 6.9% 11.5% Other Cur. Assets 61 56 63 70 77
Depreciation 80 84 95 106 121 Investments 371 388 467 467 467
EBIT 410 429 549 582 647 Gross Fixed Assets 1,671 1,845 2,085 2,347 2,697
Interest 1 3 1 0 - Net Fixed Assets 1,064 1,160 1,305 1,460 1,689
Other Income 41 43 53 67 78 CWIP 380 429 412 400 300
PBT 449 469 601 649 725 Intangible Assets - - - - -
% change 1.7% 4.3% 28.2% 8.0% 11.8% Def. Tax (Net) (103) (118) (138) (138) (138)
Tax 148 160 207 221 246 Other Assets 31 44 112 112 112
Tax Rate (%) 33.0% 34.1% 34.5% 34.0% 34.0% Total Assets 2,063 2,238 2,487 2,716 2,995
Reported PAT 301 309 393 428 478 Current Liabilities 622 700 630 657 685
Adj.* - - - - - Provisions - - - - -
Adj. PAT 301 309 393 428 478 Debt Funds 25 4 3 1 -
% change 1.3% 2.6% 27.4% 8.8% 11.8% Other Liabilities 8 6 14 14 14
No. of shares (cr) 8.9 8.9 9.9 9.9 9.9 Equity Capital 89 89 99 99 99
Adj EPS (Rs) 30.5 31.3 39.8 43.3 48.4 Reserves & Surplus 1,318 1,439 1,741 1,944 2,197
% change -8.4% 2.6% 27.4% 8.8% 11.8% Shareholders Fund 1,407 1,528 1,840 2,043 2,296
DPS (Rs) 17.5 17.5 19.0 19.0 19.0 Minority Interest - - - - -
Total Liabilities 2,063 2,238 2,487 2,716 2,995
BVPS (Rs) 157.5 171.0 186.3 206.8 232.4

Cash flow Ratios

Y.E March (Rs cr) FY15A FY16A FY17A FY18E FY19E Y.E March FY15A FY16A FY17A FY18E FY19E
Pre-tax profit. 449 469 601 649 725 Profitab. & Return
Depreciation 80 84 95 106 121 EBITDA margin (%) 23.4 24.7 31.7 29.6 28.9
Changes in W.C 14 4 (88) 3 1 EBIT margin (%) 19.6 20.6 27.0 25.0 24.4
Others 22 19 (92) (67) (78) Net profit mgn.(%) 14.4 14.8 19.3 18.4 18.0
Tax paid (139) (150) (207) (221) (246) ROE (%) 22.3 21.0 23.4 22.0 22.0
C.F.O 427 425 309 471 522 ROCE (%) 32.9 31.8 35.7 33.4 33.4
Capital exp. (198) (221) (223) (250) (250) W.C & Liquidity
Change in inv. (28) (13) (78) - - Receivables (days) 15.4 14.3 15.4 15.4 15.4
Other invest.CF (35) 5 53 67 78 Inventory (days) 4.2 4.5 6.9 6.9 6.9
C.F - investing (261) (229) (249) (183) (172) Payables (days) 25.5 26.1 39.1 39.1 39.1
Issue of equity - - 9 - - Current ratio (x) 0.5 0.5 0.5 0.6 0.8
Issue/repay debt (2) (2) (2) (1) (1) Quick ratio (x) 0.5 0.5 0.5 0.6 0.8
Dividends paid (183) (188) (225) (225) (225)
Turnover &Levg.
Other finance.CF 9 (1) 133 (0) -
Gross asset T.O (x) 1.3 1.2 1.0 1.0 1.1
C.F - Financing (176) (191) (84) (227) (227)
Total asset T.O (x) 1.0 0.9 0.8 0.8 0.9
Chg. in cash (10) 5 (24) 61 124
Adj. debt/equity (x) 0.0 0.0 0.0 0.0 0.0
Closing cash 145 172 148 209 333
Valuation ratios
EV/Net Sales (x) 4.2 4.2 4.7 4.1 3.6
EV/EBITDA (x) 17.8 16.9 14.9 13.9 12.3
P/E (x) 32.4 31.6 24.8 22.8 20.4
P/BV (x) 6.3 5.8 5.3 4.8 4.3
 Recommendation Summary Dates Rating Target
23-June-2017 Accumulate 1,114

Source: Bloomberg, Geojit BNP Paribas Research

Large Cap Stocks; Mid Cap and Small Cap;

Buy - Upside is 10% or more. Buy - Upside is 15% or more.
Hold - Upside or downside is less than 10%. Accumulate* - Upside between 10% - 15%.
Reduce - Downside is 10% or more. Hold - Absolute returns between 0% - 10%.
Reduce/Sell - Absolute returns less than 0%.
To satisfy regulatory requirements, we attribute Accumulate as
Buy and Reduce as Sell.
The recommendations are based on 12 month horizon, unless otherwise specified. The investment ratings are on absolute positive/negative return basis. It is
possible that due to volatile price fluctuation in the near to medium term, there could be a temporary mismatch to rating.
* For reasons of valuations/return/lack of clarity/event we may revisit rating at appropriate time. Please note that the stock always carries the risk of being
upgraded to BUY or downgraded to a HOLD, REDUCE or SELL.
Geojit Financial Services Limited has outsourced the preparation of this research report to DION Global Solutions Limited whose relevant disclosures are
available hereunder. However, Geojits research desk has reviewed this report for any untrue statement of material fact or any false or misleading
information.

General Disclosures and Disclaimers

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ABHIJIT KUMAR Digitally signed by ABHIJIT
KUMAR DAS
DAS Date: 2017.06.22 19:05:35 +05'30'

Geojit Financial Services Ltd. (formerly known as Geojit BNP Paribas Financial Services Ltd.), Registered Office: 34/659-P, Civil Line Road, Padivattom,
Kochi-682024, Kerala, India. Phone: +91 484-2901000, Fax: +91 484-2979695, Website: geojit.com. For investor queries: customercare@geojit.com, For
grievances: grievances@geojit.com, For compliance officer: compliance@geojit.com.

Corporate Identity Number: L67120KL1994PLC008403, SEBI Regn.Nos.: NSE: INB/INF/INE231337230 I BSE:INB011337236 & INF011337237 | MSEI:
INE261337230, INB261337233 & INF261337233, Research Entity SEBI Reg No: INH200000345, Investment Adviser SEBI Reg No: INA200002817, Portfolio
Manager:INP000003203, NSDL: IN-DP-NSDL-24-97, CDSL: IN-DP-CDSL-648-2012, ARN Regn.Nos:0098, IRDA Corporate Agent (Composite) No.: CA0226.
Research Entity SEBI Registration Number: INH200000345