Stock Pick From Refineries Sector

MGL is a city gas distribution (CGD) company supplying Compressed Natural Gas (CNG) and Piped Natural gas (PNG) in various pockets in Mumbai, adjoining areas and Raigad district of Maharashtra. In FY16, its CNG and PNG businesses accounted for 71.05 per cent and 28.95 per cent, respectively of total gas sales revenue.

According to the Petroleum and Natural Gas Regulatory Board (PNGRB), number of CNG operated motor vehicles has grown steadily at a CAGR of 13.75 per cent during FY09 and FY16 in Mumbai and its adjoining areas. PNGRB’s bidding round could be a large opportunity for growth with eleven geographical areas in Maharashtra and sixty geographical areas (GAs) in rest-of-India, offering multiple opportunities to MGL for expansion beyond Mumbai.

MGL has about 188 CNG gas stations and around 860000 residential users. The company contributes around 27 per cent market share as compared to 20 per cent market share of Indraprastha Gas (IGL). It has about 2920 industrial clients as compared to 26000 industrial clients of IGL.

On financial front, MGL’s top line increased by 12 per cent CAGR during last five fiscal years. The company’s bottom line also rose by 0.1 per cent CAGR from FY12 to FY16. MGL’s revenue decreased by 0.76 per cent to Rs 2079 crore in FY16 as compared to previous financial year. The company’s net profit also rose by 2.36 per cent to Rs 309 crore in FY16 on yearly basis.

We see that MGL enjoys better growth and margins. We believe MGL enjoys better margins in PNG over IGL. However, over the last year, the performance of both the companies was impacted by lower crude prices. MGL’s bottom line has remained however in the range of Rs 300 crore with margins above 15 per cent. The company expects capex to be in the range of Rs 250 crore going forward, mainly due to expansion in Raigad district. It believes it will be able to fund the same through cash.

On valuation front, MGL share price is trading at PE multiple of 15.36x while IGL is trading at higher premium of PE multiple of 18.7x at share price of 620. We see that MGL has given ROE (Return on Equity) of above 20 per cent over last 5 years, with FY16 ROE of 20.2 per cent; while IGL’s current ROE is 17 per cent in FY16. The book value per share for MGL is Rs 154 per share and hence PB multiple of 2.5x looks attractive vs PB of IGL of 3.44x. Hence, we recommend our readers to BUY this stock.