Mahanagar Gas looks to spread wings with Unison Enviro deal
Mahanagar Gas Ltd’s (MGL) shares closed nearly 9% up on Monday on the NSE, also hitting a new 52-week high during trading hours. Investors are visibly excited about the city gas distribution (CGD) company acquiring 100% stake in Unison Enviro Pvt. Ltd (UEPL). The deal will help MGL expand to territories outside Mumbai, a dominant area of operations. This aids MGL’s long-term volume growth outlook.
“MGL’s volume growth has been weaker (versus Indraprastha Gas/Gujarat Gas) and UEPL acquisition provides MGL an opportunity to expand its operations beyond Mumbai and should help address growth concerns,” said analysts at Kotak Institutional Equities. According to them, the acquisition price of ₹531 crore may appear steep at 5.9x FY22 EV/sales. “But we note CGDs are typically long-gestation projects, and sales/profitability typically improves with scale,” they said.
UEPL is engaged in the supply of natural gas to domestic, commercial, and industrial sectors. The deal is MGL’s first inorganic acquisition in the CGD sector. The company said the purchase will enable it to expand to newer markets in Maharashtra (Ratnagiri, Latur and Osmanabad) and Karnataka (Chitradurga and Davanagere).
“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 about 1mmscmd additional volumes by FY28E for MGL,” said ICICI Securities analysts.
In the December quarter, MGL’s sales volume stood at 3.4mmscmd. The company’s volume growth has been muted in the past few quarters due to high gas prices. To be sure, it could be a long wait before the gains of the acquisition reflect in volumes. This is because MGL would have to invest in infrastructure and ramp up execution. Note that while UEPL has clocked strong revenue growth over FY20-FY22, it reported a loss of ₹24.9 crore in FY22.
Hence, until volume growth uptick is visible, scope for meaningful upsides in MGL stock appear capped. Nitin Tiwari, executive vice president, Yes Securities, said, “As of now, MGL is trading at discount to peers Indraprastha Gas and Gujarat Gas. A visibility on sustained volume growth is essential for rerating and this acquisition can perhaps help narrow the discount.” MGL’s shares trade at 9.5 times estimated earnings for FY24, as per Bloomberg data. Indraprastha and Gujarat Gas shares trade at 17.4 times and 25.7 times, respectively.
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