Is Mahanagar Gas Stock Rout Justified?
Shares of Mahanagar Gas have declined by more than a third this year.
Shares of Mumbai’s only city gas distributor Mahanagar Gas Ltd. have declined by more than a third since its last peak in November despite the government’s push to increase the consumption of cleaner fuels in India. The slide can be attributed to three main reasons—a promoter selling stake, rupee depreciation and higher gas prices.
Pressure On The Stock
Promoter Selling Stake
Royal Dutch Shell Group’s subsidiary BG Asia Pacific Holdings Pte. Ltd., which is a promoter of Mahanagar Gas, has so far sold 22.5 percent stake, according to data compiled by BloombergQuint from exchanges.
BG Asia Pacific changed its strategy to invest more in the upstream exploration businesses. It offloaded shares in two tranches, selling at a discount to the prevailing market price. The company’s left with 10 percent. According to the Securities and Exchange Board of India’s listing regulations, it can’t sell the remainder until July 1, 2019.
Rupee Depreciation
In the last one year, the rupee depreciated by close to 9.5 percent against the U.S. dollar, while gas prices rose. Mahanagar Gas purchases fuel using dollars—which means it needs to pay more if the Indian currency weakens.
Rising Input Gas Prices
Moreover, rising administered gas prices for explorers in India increased investor concerns about the company’s ability to maintain margins.
...But Stays Most Preferred Pick
Yet, Mahanagar Gas, according to Bloomberg data, is the most-preferred pick among the three listed city gas distributors with only four analysts rating it a ‘Sell’ out of the 23 tracking the stock. Here’s why:
Room To Protect Margins
Compressed and piped natural gas, which are used as alternatives to petrol, diesel and liquefied petroleum gas, are at least 30-40 percent cheaper. That gives Mahangar Gas the room to increase retail prices. In the last one year, the company has hiked CNG and PNG prices thrice, helping it maintain margins.
Cleaner Fuel Push To Aid Volumes
Natural gas is cleaner and less polluting than conventional fuels, one of the reasons why the government wants to increase its percentage in the energy mix from 6 percent to 15 percent by 2030. Besides helping India reduce its carbon footprint in accordance with the COP-21 protocol, that would reduce the oil import bill.
Mahanagar Gas’ volumes jumped over the last two years. With natural gas penetration at just 30 percent in Maharashtra, the growth potential is huge for city gas distributors, according to a Kotak Securities report.
Mahanagar Gas has exclusive mandate to lay, build, expand and operate gas network in Mumbai till 2020, in Thane urban and adjoining municipalities until 2030, and in Raigad district till 2040.
Cheaper Than Peers
Despite being India’s most profitable listed city gas distribution company, it trades at a steep discount to its peers. It offers highest upside for investors.
(Corrects an earlier version to update the time frame to track the stock price slump.)