Mahanagar Gas (MGL) has announced its first inorganic acquisition in the CGD space, Unison Enviro (UEPL), from the latter’s erstwhile promoters Ashoka Buildcon and North Haven India Infra (a Morgan Stanley affiliate). MGL has acquired 100% stake in the fledgling city gas distribution (CGD) player and has stated UEPL equity value at Rs 5.3 bn, which implies an enterprise value of Rs 6.4 bn. The transaction value implies a price/sales multiple of 8.3x and EV/Ebitda of 3,128x! While this may seem exorbitant, we note UEPL has 3 reasonably large gas authorities (GAs) in its portfolio (37,362sqkm, 10mn population and 2mn households in aggregate). We also note that development so far in the first 3 years has been slow. We believe volumes can easily ramp up to 1mmscmd by FY28e, subject to meaningful investments and good execution.
At that volume level, Ebitda is seen >Rs 2 bn, which more than justifies the acquisition cost. We sense the acquired areas can add a meaningful NPV of Rs 5 bn for MGL (Rs 50/sh). We view this as a significant move forward to address longstanding concerns on growth avenues for MGL beyond the Mumbai metropolitan region (MMR). Reiterate BUY.
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Meaningful potential in the areas acquired: UEPL has rights to 3 GAs, comprising of Ratnagiri, Chitradurga & Devangere, and Latur & Osmanabad, districts. While these areas do seem primarily rural, we believe the large populations and some industrial/ commercial potential in each of these districts can support reasonable volumes of 0.2 0.25mmscmd in 3-4 years. This implies aggregate 1mmscmd additional volumes by FY28E for MGL.
Valuations look reasonable for the medium term: While the marketing exclusivity for Ratnagiri ended in CY22 and rest of the areas will end in CY27, network exclusivity for all GAs exist till CY41-CY43. We believe total volume potential from the 5 GAs combined can be 1mmscmd over 3-5 years which, @Rs 5.5-6/scm of Ebitda, can translate to an Ebitda of Rs 2.1 bn by FY28E. Discounting back to FY24E, we see the implied EV/Ebitda multiple of 4.3x for the UEPL acquisition as reasonable.
We value MGL (standalone) by the DCF methodology, using a WACC of 10.9%, DER of 35%, long-term Ebitda assumption of Rs 9.5/scm and terminal growth rate of 1.5%. Longer-term, we build-in muted volume growth beyond FY25E as well as flattish margins, given our caution around longer-term growth expectations. We value MGL’s acquisition of UEPL too on DCF basis, to derive a value of Rs 50/sh. Our DCF valuation for MGL thus delivers a TP of Rs 1,125/sh, offering 24% upside from CMP.
We remain bullish on MGL for next 12-18 months. We estimate an EPS CAGR of 19% over FY23-FY25E, supported by volume CAGR of 9%, gross margins of Rs 14.7/scm and Ebitda/scm of Rs 9.6/scm. With a strong signal to secure long-term growth via inorganic acquisitions, prospects appear bright. We value the core business via DCF methodology at Rs 1,075/sh. We have also tried to do a roughcut DCF valuation of the newly acquired areas, which works out to Rs 50/sh.
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Key downside risks: (i) Higher gas prices, (ii) inability to pass on gas cost increases, (iii) sharp fall in alternate fuel prices for CNG (iv) slower execution.
Key upside risks: (i) Higher penetration in existing areas, (ii) sharper rise in alternate fuel costs, (iii) stronger regulatory support.
