Mahanagar Gas Ltd (MGL) initial public offer (IPO) hit Dalal Street on Tuesday. The company, which is promoted by GAIL and British Gas, mopped up Rs 309 crore from anchor investors. As of March 31, 2016, MGL served 0.47 million vehicles through its 4,646 km of pipeline and 188 compressed natural gas (CNG) filling stations. It supplies piped natural gas (PNG) to 0.86 million domestic households, 2,800 commercial consumers and 60 industrial consumers. The company is the sole city gas distribution (CGD) operator for Mumbai, Thane, Navi Mumbai, Raigad districts and adjoining areas.
The price band for the IPO has been fixed at Rs 380-421.
The initial share sale of country’s second largest CNG retailer Mahanagar Gas was oversubscribed by 1.10 times on the first day of the offer today.
The initial share-sale programme will open from June 21 and closes on June 23. At the upper end of the price-band, the firm will garner Rs 1,039.64 crore.
MGL has consistently generated over 21 per cent RoE and FY11-16 CAGR for revenue, EBITDA and PAT has been 14 per cent, 6 per cent and 6.5 per cent. It has healthy cash and equivalent balance of Rs 560 crore (in FY16) and average dividend payout of 50 per cent and 40 per cent in the last 5 and 10 years, respectively.
Below are 5 brokerage houses who are bullish on the issue:
Angel Broking: Angel Broking has ‘Subscribe’ rating on Mahanagar Gas IPO. According to the brokerage house, the company has almost similar growth potential as that of the industry peer Indraprastha Gas and it has reported over 22 per cent RoE levels as reported in the last 6 years. Mahanagar Gas has debt free status with yearly cash flow generating potential of over Rs 200 crore.
Centrum Wealth: Over FY11-16, while MGL’s revenue increased at 14.4 per cent CAGR, its net profit has largely remained flat around Rs300 crore. The company has a healthy balance sheet with cash and equivalents of Rs 560 crore, RoE of 21 per cent and ROCE 30 per cent in FY16. Centrum Wealth has ‘Subscribe’ rating on the issue.
Reliance Securities: 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-à-vis peers, the brokerage house recommends ‘Subscribe’ to the issue.
Choice Broking: The company is the sole authorised CGD entity for the distribution of natural gas in Mumbai, its adjoining areas and the Raigad district. CNG and PNG penetration in its operating region stands at 18.7 per cent and 31.7 per cent, respectively. This reflects a huge growth potential for the company. The company generates over 70 per cent of its gas revenue from CNG sales. Going forward, with growing concerns on pollution, Choice Broking feels that the government will compulsory make all the automobiles plying in key cities to be operated on natural gas. This augurs well for MGL. The brokerage has ‘Subscribe’ on the issue.
KR Choksey Shares and Securities: Mahanagar Gas reported an EPS of Rs 31.3 in FY16. While operating profit(EBITDA)/scm has improved to Rs 5.8 from Rs 5.6 in FY14-15, volume growth was lower by 2.1 per cent at 2.43 mmscmd. The brokerage house has valued MGL at 15x FY17-18 EPS, 9x EV/EBITDA and DCF valuations (WACC: 11.6%, Terminal Growth: 4%) to arrive at the target price of Rs 516 per share. It offers and upside of 22.5 per cent from the upper price band of Rs 421 per share. The brokerage house has ‘Subscribe’ on the issue.