Volume catalysts in place for Mahanagar Gas

Proposal to shift the existing taxi aggregators to CNG, if implemented, will boost volume

The Maharashtra government’s proposals to mandate the use of clean fuels such as compressed natural gas (CNG) by taxi aggregators such as Ola, Uber and fleet taxis like Meru, Tab, etc, could rub off favourably on Mahanagar Gas. Mahanagar Gas, which enjoys a near-monopoly situation in Mumbai, Thane and Raigad, stands to gain from implementation of any such proposal.

“If the draft rules go through in their current form, it could lead to 25,000 CNG conversions within the next year (just the aggregators). This, for Mahanagar Gas, could lead to potential incremental CNG demand of Rs 0.15 mscmd (million standard cubic meter a day), six per cent of its current volumes,” estimates Saurabh Handa, analyst at Citigroup in a recent report.

There are other triggers also which would aid its volumes and boost overall performance. The company has started expansion in the Raigad district, which should benefit from the proposed new airport, new smart city, a new port and Delhi-Mumbai industrial corridors. All of these will improve vehicular movement in Raigad, leading to higher CNG demand.

Analysts believe the company could grow its earnings by 14 per cent over FY16-19. “Healthy and virtually unregulated return ratios of 30 per cent, strong free cash flow yield of four per cent, dividend payout of 50 per cent and visible volume expansion opportunity make Mahanagar Gas our preferred bet in the gas space,” believe analysts at Ambit Capital.

Not surprisingly, the scrip has raced ahead of the benchmark Sensex in the past one month. The stock has gained 12.8 per cent in this period against a decline of 2.9 per cent in the Sensex. At current levels, the stock trades at 20 times the FY17 estimated earnings , at a slight premium to its larger peer Indraprastha Gas (IGL), which trades at 18 times. Unlike IGL, a large part of CNG sold by Mahanagar Gas is on the network of oil marketing companies (OMCs). It currently pays Rs 2.74 per kg to OMCs for using their CNG filling stations. In case its exclusivity period ends, Mahanagar Gas could face competition and might have to make higher payments to OMCS.

However, both the companies are a play on the under-penetrated segment of cleaner fuels and prospects for these companies appear good. While the end of exclusivity remains a key monitorable, their plans to scale up operations in other cities will offset some pressure. In this backdrop, high valuations are likely to sustain as well, believe analysts.