Efficient, cheap, overlooked

Summary: A consistently efficient business with strong structural advantages is trading below its historical valuation. This story examines the gap between performance and perception. It also explores the key risks that could shape its future trajectory.

Summary: A consistently efficient business with strong structural advantages is trading below its historical valuation. This story examines the gap between performance and perception. It also explores the key risks that could shape its future trajectory. At a hefty 27 per cent discount to its five-year median price-to-earnings multiple, Mahanagar Gas or MGL, as it is known, is hard to overlook. When you add its annual revenue growth of 36 per cent in the last four years and a business efficiency record few can match, the question writes itself: whether a business this efficient, growing this fast, deserves a second look at this price. The efficiency engine MGL is the one-half of a duopoly. It operates city gas distribution networks in Maharashtra, primarily in the Mumbai-Thane-Raigad belt, and in parts of Karnataka. Its larger peer, Indraprastha Gas (IGL), controls the Delhi-NCR region.  MGL stands apart for its efficiency. Since 2002, it has never posted a return on equity (ROE) below 18 per cent. This is despite the capital-intensive nature of the business where gas distributors lay pipeline networks and build compressed natural gas (CNG) stations upfront, often years before meaningful revenue follows. Yet MGL’s efficiency metrics have held through the years. The reason is structural. MGL derives 71 per cent of its revenue from CNG, which offers auto consumers roughly 30 per cent cost savings over petrol, a hard economic advantag