Mahanagar IPO opens tomorrow; 4 brokerages say it's a good 'buy'
NEW DELHI: The Rs 1,040 crore initial public offering (IPO) of Mahanagar Gas (MGL) will hit the primary market on Tuesday. The gas distribution company has set the price range for its initial public offering (IPO) at Rs 380-421. At the upper band of the price band, MGL’s FY18E PE ratio stands at 10.7 times, which will be at an 18 per cent discount to IGL and 21 per cent discount to its Asian peers.
Many brokerages have given a buy rating on the issue.
Edelweiss Securities: Ebitda to improve | Rating: N/A
The brokerage believes said MGL is a pureplay on the steady gas business as the segment has high entry barriers. Inorganic growth opportunity in 11 geographical areas in Maharashtra, underpenetrated market and the rollout at Raigad district would be key drivers for the firm, the brokerage said.
“MGL has high exposure to domestic city gas (85 per cent). Its Ebitda margin has declined in the recent past until FY15 in line with that of IGL. We expect margins to expand going forward given improved feedstock allocation and pricing. Furthermore, the company enjoys a strong financial profile — highest margin in the industry, high RoE (over 20 per cent), stable positive cash flows and virtually debt free,” Edelweiss said.
The brokerage said the IPO price looks fair.
Centrum Broking: Rise in CNG demand likely | Rating: Subscribe
Centrum Broking is positive on the issue given the current cost-effectiveness of CNG as a fuel and the anticipated growth in the number of CNG operated vehicles. CNG revenues accounted for 70.5 per cent of the distributor’s total revenue in FY16.
“Investors can ‘subscribe’ to the issue for listing gains. Post listing, the price performance would depend on MGL’s profit growth,” the brokerage said.
IIFL: PNG holds bigger scope | Rating: Subscribe
Out of a total of 2.7 million households in Mumbai, PNG is being supplied to 0.86 million households. IIFL said while domestic PNG customers are sticky, industrial and commercial customers do switch between alternate fuels.
“With sharp fall in crude prices during FY16, PNG volumes were impacted. However, PNG prices are expected to recover with the recent bounce back in crude oil prices,” the brokerage said, adding that “Over the next five years, the company plans to add 675km of steel and PE pipeline to augment its network and deepen its penetration.”
Choice Broking: Healthy dividend payout: | Rating: Subscribe
Choice Broking pointed out that the firm is ‘almost’ debt-free and had a cash and cash equivalent of Rs 550 crore at the end of FY16. It is likely to benefit from the government’s move to cap subsidised LPG cylinders.
“MGL gas consistently maintained a dividend payout ratio of over 50 per cent and dividend per share of Rs 15.8 per share. This translates into a dividend yield of 3.8 per cent on the higher price band,” the brokerage said in a note. The company has improved its working capital cycle over FY12-16, it added.
Reliance Securities: Valuation gap with IGL to shrink: | Rating: Subscribe
As per the PNGRB regulations, the company enjoys exclusive authorisation to lay, build, expand and operate CGD network in Mumbai (until 2020), its adjoining areas of Thane & Navi Mumbai (until 2030) and Raigad district (until 2040).
“However, we believe the valuation gap will shrink, going forward given growth prospects of MGL. 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-a-vis peers, we have a subscribe rating on the issue,” said the brokerage.
The issue is an offer for sale (OFS) wherein the existing promoters, GAIL and Singapore-based BG Asia Pacific Holdings, since acquired by Royal Dutch Shell, intend to sell 12,347,250 shares each, aggregating to 24,694,500 shares of face value Rs 10 each.
As of March 31, the company claimed to have supplied CNG to over 0.47 million vehicles through a network of 188 CNG filling stations. It has PNG connection to approximately 0.86 million domestic households, over 2,866 commercial and 60 industrial consumers in Mumbai and its adjoining Areas.
The company has clocked a 12.42 per cent a compound announce growth rate (CAGR) of 12.42 per cent in total revenue increased to Rs 2,121.62 crore in FY16 from Rs 1,328.34 crore in FY12. The profit after tax (PAT) rose 0.08 per cent on annualised basis to Rs 308.68 crore in FY16 from Rs 307.74 crore in FY12.
The issue closes on Thursday.