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Tuesday, June 21, 2016

Mahanagar Gas Limited (MGL) IPO Review


Issue Highlights
Issue Period
21/3/16-23/3/16
Price Band (Rs.)
380-421
Issue Size(shares)
2,46,94,500
Issue Size (Rs. crore)
1039.64
Issue Type
100% Book built
Face Value (Rs.)
10
Listing
BSE,NSE
Industry
CGD (City Gas Distribution)
Registrar
Link Intime India Pvt. Ltd.
Minimum Bid Quantity
35 shares
Maximum Retail Subscription
Rs. 1,91,555 ( 13 lots)
BRLM
Kotak Mahindra, City Group

Issue Details


Offer for Sale: 2,46,94,500 equity shares
 Fresh Issue:  Nil
 Equity Shares Outstanding Prior to the Issue: 8,93,41,600
#  Equity Shares Outstanding After The Issue: 9,87,77,778

# 94,36,178 CCDs (compulsorily convertible debenture) allotted to the government of Maharashtra will be converted into equity shares of face value Rs. 10

Objects of the Issue

(1)    To avail the listing benefits
(2)    Carrying out the offer for sale
# company shall not receive any proceeds from this offer and all issue related expenses shall be borne by selling share holders

Industry Profile

Presently, India is the world’s 4th largest LNG(Liquefied Natural Gas)  importer accounting for around 6% of the total  global trade. This  import dependence is supposed to decrease with rising domestic LNG production.
India  is having an LNG network of around 15,000 km with a capacity of 401 MMSCMD (Million Metric Standard Cubic Meter Per Day) spread over 15 states and union territories with GAIL being a leading player owning around 73 % of the pipeline network. MoPNG (ministry of petroleum and natural gas) is planning to set a national gas grid with a capacity of up to 721 MMSCMD in coming 5-6 years.
LNG is supplied through CGD (city gas distribution) network to Gas stations (which is used as CNG fuel in vehicles) and to domestic houses (used as a PNG -Piped Natural Gas ) as a fuel.
LNG is also used as an alternative to commercial LPG in industries and for other commercial purposes.

Company Profile

MGL is one of the largest CGD companies in India with an experience of 20 years of supplying natural gas in Mumbai. Presently, MGL is the sole distributor of CNG and PNG in Mumbai and adjoining Raigad district.
MGL is promoted by GAIL (Gas authority of India limited) and BGAPH (BG Asia Pacific Holding Pte. Ltd) with each entity having an equal stake of 49.75 %.
MGL  receives natural gas at its CGSs (City Gas Stations) through GAIL’s pipelines  and this natural gas is then distributed through MGL’s network of pipelines to CNG filling stations and PNG consumer stations.

Risks & Threats

(1)    The price of domestic gas and RNLG (Re-liquefied Natural Liquefied Gas) is denominated in US dollars whereas sales is done in Indian rupees and thus rupee devaluation against the US dollar is one of the biggest dampener for this company
(2)    Rising prowess of renewable energy does not augur good for this company
(3)    Around 70 % of the total revenue is attributed to CNG Sales
(4)    Whole business depends on the well-being of GAIL’s network  of pipelines and any disruption or damage to the same could wreak a havoc for the company



Financial Profile #

Parameter
FY 15
PEG (Profit, trailing 4 years)##
1.85
Net Profit Margin (%)
14.37
Return on Capital Employed (%)
29.37
Return on Equity (%)
17.55
Price to Book Value
2.42
Operating Cash to Net Profit
1.4
AR collection Period (Days)
18
EV/EBITDA
7.66
M-Cap to Sales
1.99
Current Ratio
1.09
Profit CAGR (%)
7.49
# using upper end of the price-band FY 15 data
## using post issue OS shares

Comparison with the Peers #


PEG
NPM (%)
ROCE(%)
ROE(%)
EV/EBITDA
MGL
1.85
14.37
29.37
17.55
7.66
IGL
1.48
11.89
18.37
20.86
6.99
Gujarat Gas
NM
4.92
10.04
22.28
NA



# moneycontrol data as on 21 June

Inference

After quite a long time we come across an issue which does not prima-facie seem to be an aggressively priced one with a PE multiple of 13.82 but the same comes with a few cautions.  MGL is not that smart on profitability front and hence a low CAGR growth of net-profit sets  its PE to Growth ratio at 1.85 and this is not a cheap valuation and the comparison with the IGL too vouch for the same. But we have seen many overpriced IPOs performing well on future prospects and thus this issue too is supposed to sail through successfully. In future the expansion of PNG network holds a great potential but in past we have seen how IGL was locked in horns with its regulatory bodies.
the biggest threat to this company is the rupee devaluation against the dollar.
The success lies in the fact that how efficiently MGL succeeds in passing the rising input costs on its customers. This is almost an debt-free company with good operating cash flows. This issue shall definitely be oversubscribed. I shall apply for this issue.

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