Mahanagar Gas IPO - Should you buy?

Mahanagar Gas is a PSU with no debt and a monopoly over the provision of natural gas to Mumbai. It has a juicy dividend yield of 4.15% at the higher end of its price band. As LPG subsidies are phased out and vehicle owners are pushed towards adopting CNG as a fuel, Mahanagar will rake in the moolah. For a vision of what the future might look like, Delhi's more vigorous embrace of natural gas is a good model. Indraprastha Gas which supplies Delhi with natural gas, trades at a substantial premium to Mahanagar with a PE of almost 21 to Mahanagar's 13.5. Mahanagar's profitability has been rather staid, but this should change with a stronger government push towards cleaner fuels. In the meantime, investors can enjoy its scrumptious dividend. Dark risk clouds do hover on the horizon. A regulatory move compelling Mahanagar to open up its infrastructure to competitors in return for a fee as well as a squeezing of the natural gas - petrol cost differential will hurt. However there is little reason yet to expect that either of these will happen. Investors should look at both fundamentals and overall interest to determine whether to buy. A stock that gets oversubscribed early on in the issue period, will tend to do well on listing day. We've put Mahanagar through our four pronged test examining the company's business, management, valuations and financials and we find that it passes it with glowing colours. However we encourage you to go through the test booklet and answer-sheet yourself. Red pen ready? Who's Selling? Mahanagar's promoters GAIL and Royal Dutch Shell are selling 12.5% each, bringing down their combined stake from 90% to 65%. What's this company's business   Is the company's earnings before tax more than Rs 50 cr in the last twelve months? Yes. It is about 469 cr. Will the company be able to scale up its business? Yes. The company's expertise in Mumbai can be used to expand to other cities which are adopting piped gas and CNG for transport. Does the company have recognizable brand/s, truly valued by its customers? Yes. The company has supplied natural gas to Mumbai for 20 years and is currently the sole player in this category in this geography. Does the company have high repeat customer usage? Yes. Mahanagar Gas is a utility and monopoly provider giving it a secure and long term customer base. Does the company have a credible moat? Yes. The company's established infrastructure, brand name and managerial expertise along with its effective monopoly in the segments that it operates, give it a credible moat. Does the company have any regulatory or geopolitical risks? Yes. The threat of being compelled by the regulator to grant access to its infrastructure to competitors is a major one. An increasing divergence between petrol and natural gas prices is also a key risk. Can the business of the company be easily replicated by new players? No. Without heavy investment in infrastructure and a major change in the regulations ending the company's monopoly, new players will find it difficult, if not impossible to replicate the company's busine