Widely read:
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%.
- 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 business. - Can the company's product be easily substituted or become outdated?
No. Whilst substitutes such as Liquified Petroleum Gas (LPG), petrol and diesel do exist for the company's products, the switching costs are high and consumers face a great deal of inconvenience while switching. - Do the customers of the company have bargaining power?
No. The company is a monopoly provider. - Do the suppliers of the company have bargaining power?
Yes. However the company's supplier GAIL is also a major shareholder and hence unlikely to take significant pricing actions to the company's detriment. - What degree of competition does the company face?
Very little. The company is a monopoly provider. Competition comes from the providers of substitutes to its products.
- Do any of the founders of the company still hold at least a 5 per cent stake in the company? Or do promoters totally hold more than 25 per cent stake in the company?
The two promoters of the company currently hold a 90% stake in the company. This will fall to 65% after the issue which is well above the 25% threshold. - Do the top three managers have more than 15 years of combined leadership at the company?
Yes. - Is the management trustworthy? Is it transparent in disclosures in consistent with Sebi guidelines?
Yes. - Is the company fighting any past cases in court or with the regulator that casts doubts on the intention of the management?
No. - Does the company change its accounting policies frequently?
No. Information on this question is limited for an IPO. However there is no indication from the company's financials that this has been the case. - Has the promoter pledged any of his holding in the company?
No.
- Did the company generate current and five-year average return on equity of more than 15 per cent and return on capital of more than 18 per cent?
Particulars 2015-16 Average 2011-16 ROE 21.00% 23.30% ROCE 30.86% 34.89% - Was the company's cash flow-positive during the previous year and at least four out of the last five years?
Yes, in all 5 years. - Did the company increase its revenue by 10 per cent CAGR in the last five years?
Yes, revenue growth (CAGR) was 11.73% in last 5 years. - Is the company's debt-to-equity ratio less than 1 or is its interest coverage ratio more than 2?
Yes, the company is debt free. - Does the company rely on substantial working capital in its day-to-day affairs?
No, working capital is only 23.72 cr which is only 1% of total assets. - Can the company run its business without relying on external funding in the next three years?
Yes, company is cash positive and has limited expansion plans. In last 5 years average free cash flow of 239 cr. In the absence of any significant expansion plan, it is likely to remain same. - Is there a sudden spurt of over 15% in the short-term borrowings of the company?
No, short term borrowing stood at a mere 9.4cr at end of 2015-16 which was converted into equity shares on June 7.
- Does the stock offer operating earning yield of more than 8 per cent on its enterprise value?
Operating Yield on the basis of price band is 8.7% to 7.82%, depending on the issue price. - Is the stock's price to earnings less than its five or ten year median level?
Its P/E ratio based on price band is 12.16 to 13.47. This is at a significant discount to Indraprastha's P/E of almost 21. - Is the stock's price to book value less than its five or ten year average level?
Price to book value ratio based on price band is 2.46 to 2.72, depending on the issue price. This compares favourably with Indraprastha's P/B ratio of 3.58.
Live Update!
Day 1
The IPO has been oversubscribed on day 1 as a whole. However some categories have not yet been fully subscribed leaving opportunities open for some investors. Have a glimpse at its break-up below.
| Category | No of Times Subscribed | % of Issue Offered to Category | |
| 1 | Anchor Investors | 1 | 29.75% |
| 2 | Qualified Institutional Buyers (QIBs) | 1.82x | 19.8% |
| 3 | Non Institutional Investors | 0.23x | 14.9% |
| 4 | Retail Individual Investors (RIIs) | 1.09x | 34.7% |
| 5 | Employee Reserved | 0.02x | 0.8% |
| Total | 1.10x | 100% |
Day 2
The IPO has been subscribed nearly 4 times with over-subscription in most categories.
| Category | No of Times Subscribed | % of Issue Offered to Category | |
| 1 | Anchor Investors | 1x | 29.75% |
| 2 | Qualified Institutional Buyers (QIBs) | 6.44x | 19.8% |
| 3 | Non Institutional Investors | 2.39x | 14.9% |
| 4 | Retail Individual Investors (RIIs) | 3.23x | 34.7% |
| 5 | Employee Reserved | 0.15x | 0.8% |
| Total | 3.92x | 100% |
Day 3
| Category | No of Times Subscribed | % of Issue Offered to Category | |
| 1 | Anchor Investors | 1x | 29.75% |
| 2 | Qualified Institutional Buyers (QIBs) | 89.92x | 19.8% |
| 3 | Non Institutional Investors | 327.22x | 14.9% |
| 4 | Retail Individual Investors (RIIs) | 11.32x | 34.7% |
| 5 | Employee Reserved | 2.34x | 0.8% |
| Total | 100.33x | 100% |
Read other stories on Mahanagar Gas Limited
Mahanagar Gas shares rise 23.5% on trading debut
Mahanagar Gas IPO does not move the needle much for GAIL
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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