Domestic gas prices fell in October 2019 first time in nearly two years as a part of the government’s biannual price reset exercise.
ET Intelligence Group: The stock of Mahanagar Gas (MGL), which has been lagging behind its peer Indraprastha Gas (IGL) in valuation since April 2019, is likely to regain lost ground in the near-term following rising gas demand, lower gas prices, and the completion of stake sale by Shell India.
Mahanagar Gas (MGL), a city gas distribution company, caters to Mumbai and its adjoining areas. It currently trades at a 45 per cent discount to IGL’s price-earnings ratio (P/E) compared with the average 34 per cent discount since its listing on bourses in 2016, according to Bloomberg. MGL and IGL used to trade at a similar valuation about two years ago even though volumes sold by MGL were nearly half of IGL’s.
In FY19, MGL sold nearly three million metric standard cubic meter per day (mmscmd) of the gas, while IGL sold 5.9 mmscmd.
Over the past one and half years, Shell India has sold a portion of 32 per cent stake in MGL in several tranches. This created an incremental supply of the stock thereby affecting its market price. However, with the sale of the final instalment of 10 per cent in August 2019, Shell has completely exited the company. This will restrict a further supply of the stock.
Domestic gas prices fell in October 2019 first time in nearly two years as a part of the government’s biannual price reset exercise. Assuming the gas distributors will retain a portion of the price cuts, MGL will benefit more given its lower volume growth compared with its peer. The operating margin of MGL is superior to IGL.
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MGL plans to add 46 CNG (compressed natural gas) stations in the current fiscal and 2.3 lakh new PNG (piped natural gas) connections to support volume growth. In the past four years, its sales volume grew by 5.9 per cent annually. In addition, the transition to the BS VI emission compliance by April 2020 offers a volume growth opportunity for gas distributors. Maruti Suzuki India, the country’s largest passenger carmaker with 55 per cent market share, does not have compatible diesel engines in the near to medium term. This has made Maruti to push for the CNG/ petrol variants. These factors are expected to support MGL’s stock valuation in the near term.
