Mahanagar Gas IPO hits markets; 10 things you should know before subscribing

Mahanagar Gas (MGL) IPO hit capital markets on Tuesday. The promoter of the company, GAIL India and British Gas Asia Pacific Holdings Pte Ltd (BGAPH) are selling 1.23 crore shares each. The issue size is expected to be around Rs 1,040 crore (assuming subscription at Rs 421). However, since no new shares are being issued, MGL will not receive any funds from the offer. All the proceeds from the issue will go to the promoters.

Not more than 50 per cent of the issue will be allocated to qualified institutional buyers. Further, at most 15 per cent of the issue will be available for non-institutional bidders and the remaining 35 per cent for retail investors.

Mahanagar Gas has raised Rs 309.3 crore from more than 20 anchor investors by selling shares at a price of Rs 421 apiece — the higher end of the IPO price band, as per a filing to the stock exchanges. The company has allotted over 73.48 lakh shares to anchor investors, including BNP Paribas, Morgan Stanley, Abu Dhabi Investment Authority, Merrill Lynch Capital Market, DSP BlackRock and SBI Life Insurance Company.

The initial share sale of country’s second largest CNG retailer Mahanagar Gas continued to witness strong investor response with the issue getting oversubscribed 3.92 times on the second day of the three-day offering.

Here are 10 things you should know about Mahanagar Gas IPO before investing:

About the company: Mahanagar Gas is one of the largest city gas distribution (CGD) companies in India with over 20 years of experience in supplying natural gas (NG) in Mumbai. MGL is presently the sole authorised distributor of compressed natural gas (CNG) and piped natural gas (PNG) in Mumbai, its adjoining areas and Raigad district in Maharashtra.

About the issue: The issue will open for subscription of June 21 and will close on June 23. The company has set price band of Rs 380-Rs 421 for the issue.

Objects of the issue: The IPO is entirely an offer for sale of 2.47 crore shares (25% stake) by the promoters GAIL and BG Asia Pacific Holdings PTE Ltd (1.23 crore shares each). The entire IPO consists of an offer for sale and the company will not receive any funds raised from the issue.

Presence: The company has established its presence in Mumbai and adjoining areas for supply for CNG and PNG. Additionally, in the 4th round of bidding, the company has been allotted rights to operate in Raigadh district. Over FY09-16, the number of CNG increased at 13.8 per cent CAGR to 0.47 million in Mumbai and adjoining areas. According to Centrum Wealth, with the rising population in the region and the increasing use of CNG vehicles, is expected to considerably boost sales volumes for MGL.

Key competitive strengths: The company is well placed in Mumbai, as the sole authorised CNG/ PNG distirbutor. The company has infrastructure exclusivity and established infrastructure network.

Risk factors: According to Centrum Wealth, an increase in cost of natural gas or decline in gas allocation could affect operations. Any adverse judgement by Delhi High Court for marketing exclusivity in Mumbai region could increase competition and affect business.

Strong promoters’ Background and sound financials: MGL is jointly promoted by GAIL & BGAPH. GAIL – a Maharatna PSU – is the largest natural gas transmission company in India. Singapore-headquartered BGAPH – a part of Royal Dutch Shell plc (Feb’16) – is an international exploration and production and LNG company. MGL has delivered strong financial performance with consistent growth and profitability with an excellent track record of dividend distribution policy.

Promoter’s stake: Pre-issue promoter group stake in MGL stands at 90 per cent, while public stake is 10 per cent. Post IPO, promoter group stake will decline to 65 per cent.

Valuations: According to Choice Broking, at the lower band of Rs 380 per share, MGL’s share is valued at a P/E multiple of 12.2x (to its restated FY16 EPS), which is at a significant discount to the average P/E multiple of 32.1x of peers. At a higher price band of Rs 421, the company’s share is priced at P/E multiple of 13.5x.

Sharekhan believes at the upper band of the offer price of Rs 421, MGL is valued at 14x FY2016 earnings and 12x FY2016 earnings (adjusted for cash and liquid investments). On EV/EBITDA basis, it is valued at 6.5x. The offer price is substantially lower than the current valuation multiples of its listed peers (Indraprastha Gas & Gujarat Gas). IGL is trading at 19x its FY2016 earnings and 10x EV/EBITDA, while Gujarat Gas is trading at 12x EV/EBITDA based on FY2016 earnings.

Should you invest?

Centrum Wealth: Over FY11-16, while MGL’s revenue increased at 14.4 per cent CAGR, its net profit has largely remained flat around Rs300 crore. The company has a healthy balance sheet with cash and equivalents of Rs 560 crore, RoE of 21 per cent and ROCE 30 per cent in FY16. Centrum Wealth has ‘Subscribe’ rating on the issue.

Reliance Securities: Considering MGL’s vast network, potential growth opportunities in newer areas, robust natural gas consumption outlook suggesting steady growth, strong management background, high entry barriers and attractive issue price (upper price band) vis-à-vis peers, the brokerage house recommends ‘Subscribe’ to the issue.

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