Mahanagar Gas IPO Review – Should you invest?

Mahanagar Gas IPO reviewMahanagar Gas IPO Review – Should you invest?

Mumbai based, Mahanagar Gas IPO would open for subscription next week. Mahanagar Gas Ltd is one of one of the largest city gas distribution (CGD) companies in India. The company revenues grew at 18% CAGR in last 5 years. This is the 11th mainline IPO in India in 2016. What are the positive factors in a Mahanagar Gas IPO? What are the hidden factors about this IPO? Should you invest in this Mahanagar Gas IPO or not? In this article, I would do Mahanagar Gas IPO Review.

About Mahanagar Gas Limited

Mahanagar Gas Ltd is one of the largest city gas distribution (CGD) companies in India. They have more than 20 years of experience in supplying natural gas in Mumbai and  are presently the sole authorized distributor of compressed natural gas (CNG) and piped natural gas (PNG) in Mumbai, its Adjoining Areas and the Raigad district in the state of Maharashtra, India. They are promoted by GAIL and BGAPH, each of who holds 49.75% of its Equity Shares. GAIL is a Maharatna public sector undertaking and the largest natural gas transmission company in India. BGAPH is headquartered in Singapore and is a part of the BG Group, an international exploration and production and LNG company.

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Issue details of Mahanagar Gas IPO

  • IPO opens: 21-Jun-2016
  • IPO closes: 23-Jun-2016
  • Face Value: Rs 10 per share
  • Issue price band: Rs 380 to Rs 421 per share
  • Issue size: Rs 939 Crores on lower price band
  • Market lot: 35 shares and in multiples of 35 shares therein
  • Minimum investment: Rs 13,300 on lower price band
  • Lead Managers: Kotak Mahindra Capital & Citigroup Global Markets
  • Listing: BSE / NSE
  • Download Mahanagar Gas IPO  Prospectus from SEBI Website at this link.

Objects of the Mahanagar Gas IPO issue

1) Achieving listing benefits by listing on stock exchanges

2) Carry on Offer for Sale on behalf of selling shareholders. Company would not get any proceeds from this.

Company Financials (reinstated)

  • The company generated revenue of Rs 1,073.56 Crores  for the year ended Mar-11 and Rs 2,135.63 Crores for the year ended Mar-15.
  • The company posted a profit of Rs 225.5 Crores for the year ended Mar-11 and profit of Rs 301 Crores for the year ended Mar-2015.
  • Its restated EPS for FY 2015 is Rs 33.69 and last 3 years average EPS Rs 33.5.

Mahanagar Gas IPO - Financials

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Reasons to invest Mahanagar Gas IPO

  • Revenues have grown from Rs 1,073 Crores FY11 to Rs 2,135 Crores in FY15 indicating a strong revenue growth of over 18% CAGR.
  • Good Profits of over 14% in FY15. However one should note that profits are in declining trend in last couple of years. One should keep an eye on it.
  • Well positioned in Mumbai Metro, one of the most populous cities in the world and second largest metropolitan city in India. Cost effective availability of domestic natural gas.

Reasons not to invest in a Mahanagar Gas IPO

  • The majority of its natural gas supply requirements is met by the allocation of domestic natural gas from the MoPNG at a price determined in accordance with the New Domestic Natural Gas Pricing Guidelines 2014. Any increase in the cost price of natural gas or any reduction in the allocation amount of domestic natural gas may have an adverse effect on its business, results of operations and cash flows.
  • The price of domestic natural gas and RLNG we purchase is denominated in United States dollars, while the selling price is in Indian Rupees. In the event that they are unable to pass on the cost of any devaluation of the Indian Rupee to its customers on a timely basis, or at all, its business, results of operations and cash flows could be adversely affected.
  • BG Group plc, the company in ultimate control of BGAPH (one of its Promoters) is subject to a proposed acquisition by Royal Dutch Shell plc. In the event the proposed acquisition is completed during the course of this Offer or subsequently, part control of the Company, to the extent held by BGAPH, would indirectly vest in the Shell. There can be no assurance that Shell will be required to make an open offer to the shareholders of the Company.
  • In the event alternative fuels become more cost effective, or a fuel of choice to its customers, its business, results of operations and cash flows and could be adversely affected.
  • The majority of its total revenue is attributable to its CNG business. Any decrease in volume of CNG sold by them may have an adverse effect on its business, results of operations, financial condition and cash flows.
  • Other risk factors (Internal and external) can be viewed in the draft prospectus from Page no. 17 onwards.

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Recommendation / Investment strategy – Mahanagar Gas IPO

  • On the upper price band of Rs 421 and on FY15 EPS of Rs 33.69, P/E ratio works out to 12.5x. Similarly, on last 3 years EPS of Rs 33.5, P/E Ratio works out to be 12.57x. Means company is asking issue price for P/E ratio between 12.5x to 12.57x.
  • Its competitors, IGL shares are trading at a P/E ratio of 15.1x and GGL is trading at 21x, hence the issue price of Mahanagar Gas is reasonably priced.
  • Company revenues grown at 18% CAGR in last 5 years. Its share price is reasonably priced. Profits are over 14%. Considering all these positive and risk factors, investors can invest in this IPO for medium to long term perspective.

Disclaimer: I have an interest in investing in this IPO. The idea of giving positive and negative factors to investors in this article is to create awareness and education about this IPO. One should NOT constitute this as investment advice to buy or not to buy this IPO. Please consult your investment advisor before you invest in such high risk investment options.

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Mahanagar Gas IPO Review – Should you invest


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