Brokerages ask clients to subscribe to Mahanagar Gas

They cite attractive valuations compared to peers and growth opportunities in the gas distribution space

Mahanagar Gas' Rs 1,000-crore initial public offering (IPO) closes on Thursday. Most brokerages are advising their clients to subscribe to the IPO, citing attractive valuations compared to peers and growth opportunities in the city gas distribution space. Meanwhile, the IPO has been  subscribed four times, and market players are expecting heavy subscription on the last day in all three categories. A synopsis of what the brokerages have to say:

Elara Capital: Available at an attractive valuation
Mahanagar Gas reported earnings per share (EPS) of Rs 31.3 in FY16. While earnings before interest, taxes, depreciation and amortisation (Ebitda)/ scm has improved to Rs 5.8 from Rs 5.6 in FY15, volume growth was a meagre 1.7 per cent. Growth was low on all segments: CNG (compressed natural gas) witnessing 1.7 per cent growth, PNG-domestic at 7.7 per cent growth, while PNG-commercial was flat and PNG-industrial showed a 4.8 per cent decline. Due to the large scope of penetration, we expect a volume growth of five per cent in FY17-18E. We estimate an EPS of Rs 34.6 in FY18. At upper limit of Rs 421, the stock would be valued at 12.2 times the FY18 EPS. Indraprastha Gas is currently trading at 15 times its FY18 EPS of Rs 41.6. At 15 times the FY18 EPS of Rs 34.6, we value MGL at Rs 518.

PhillipCapital: Attractive valuation, volume growth, the key driver

We have a positive view on the city gas distribution (CGD) sector and recommend investors to subscribe this issue. CGD is a stable monopolistic utility business, with strong entry barriers and first-mover advantage. Due to its clean and economic nature, CNG and PNG are widely promoted by the government/courts/policymakers in the form of necessary availability of cheap domestic gas, low taxation, compulsory conversions and expansion push. With crude oil prices recovering towards $50 a barrel, the economics of gas-based fuels have improved considerably, which would lead to more substitution and higher volumes. MGL is expanding into contiguous areas like Raigad, which would provide significant longer-term potential. Valuation at 11-12 times FY18 P/E is attractive on a near 20 per cent RoE/RoCE, debt-free balance sheet, healthy cash flows and peer group trading at 15 times plus.

IIFL: Valued at discount to peers
Mahanagar Gas (MGL) is the sole supplier of natural gas (CNG and PNG) in Mumbai and the adjoining areas of Thane and Navi Mumbai. It is the third largest city gas distributor in the country, following Gujarat Gas and Indraprastha Gas (IGL). Under-penetration of both CNG and PNG, rising prices of alternative fuels, expansion in new regions and deeper penetration in existing areas will continue to drive volume growth for MGL. The company has seen a steady drop in margins, which will get some respite from the recent cut in natural gas prices. At the higher end of the price band, the stock would trade at an FY16 P/E of 13.5 times, compared to 20.6 times for IGL. While MGL would be valued at a discount to IGL, considering the regulatory support IGL enjoys, such a sharp discount is unwarranted. Moreover, MGL has a stronger balance sheet and enjoys healthier return ratios. We recommend ‘subscribe’.