Mahanagar Gas. Play on the growing CGD market. Key Highlights. Source: Company Data; PL Research

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1 Play on the growing CGD market June 15, 2016 Avishek Datta Rating Price Band Subscribe Rs380 Rs421 Mahanagar Gas (MGL) is one of the largest City Gas Distributors (CGD) players in the country which caters to high growth market of Mumbai and neighbouring areas. Company supplies CNG and PNG to 1.3m customers. Volume growth of 2% in FY16 has been impacted by lower prices of competing fuels. However, recent cut in domestic gas prices along with increase in liquid fuel prices, in line with rising crude prices, will support volume growth, going forward. Also, supported by lower gas prices, management expects spreads to improve from FY16 levels of Rs5.8/scm. Issue price of Rs421 implies FY16 P/E multiple of 12x. MGL offers a secular growth story at reasonable valuation. We recommend Subscribe with a long term view. Key Highlights IPO Note IPO Fact Sheet Opening Date June 21, 2016 Closing Date June 23, 2016 BRLMs Kotak,Citi Issue Size Rs37.5bn Rs41.6bn OFS 100% Issue Details Pre issue equity (m shares) 988 Post issue equity (m shares)* 988 Post issue Market Cap (Rs bn)* 41.6 Steady growth story: The Indian CGD market is catered to by 20 entities operating in 36 Geographical Areas (GA). Delhi, Mumbai and Gujarat collectively account for ~70% of country s total sales volumes. Gujarat accounts for approximately half of the industrial demand, whereas Delhi and Mumbai constitute approximately 60% of CNG demand. CGD has been identified as a key sector to reduce carbon footprint and GoI has ensured 100% allocation of domestic gas towards consumption of CNG and domestic PNG. MGL is a play on growing and under penetrated Mumbai market: MGL offers CNG and PNG to one of the largest markets of Mumbai and its adjoining areas. Against current market potential of 6.7m vehicles and 5m households, MGL has customer base of only 0.4m vehicles and 0.8m household, thereby, offering immense growth potential. To accelerate its growth momentum, MGL plans to set up 83 CNG stations (188 currently) and lay 675km steel pipeline network (4,200kms currently) over the next five years. Favourable economics: CNG is 30% and 58% cheaper to Diesel and Petrol, respectively, and remains the mainstay of MGL s growth driver. Meanwhile, any potential judicial intervention to promote CNG, given rising green house gases, will offer upside potential to growth, going forward. Key financials (Y/e March) FY13 FY14 FY15 FY16 Revenues (Rs m) 14,977 18,686 20,778 20,653 Growth 15.5% 24.8% 11.2% 0.6% EBITDA (Rs m) 4,827 4,882 4,897 5,129 PAT (Rs m) 2,985 2,972 3,010 3,087 EPS (Rs)* Share Holding (%) Pre IssuePost Issue* Promoters Public & Others *Equity issuance calculated on higher band price Profitability & Valuation FY13 FY14 FY15 FY16 EBITDA/scm RoE 26.5% 24.0% 22.3% 21.0% ROCE 36.7% 33.1% 30.7% 29.6% Working days Capital (81) (71) (73) (84) Source: Company Data; PL Research Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision. Please refer to important disclosures and disclaimers at the end of the report

2 Exhibit 1: Issue details Issue Period Opening date: 21 st June 2016; Closing date: 23rd June 2016 Exchange Issuer Offer Type Listing on both NSE and BSE Mahanagar Gas Limited Initial Public Offering Offer Size including OFS Total 24.9m Equity Shares Face Value Price Band Bid Lot Issue Split (No. of shares) Rs10/ Rs / share 35 equity shares and in multiples thereof QIB Portion: 50% of the issue Non Institutional portion: Not less than 15% of the issue Retail Portion: Not less than 35% of the issue Current Shareholding Pre Offer Post Offer* Book Running Lead manager Source: RHP, PL Research Promoters 100.0% 75.0% Others 0.0% 25.0% Kotak,Citi *Equity issuance calculated on higher price band June 15,

3 Investment Rationale Monopoly player in a growing market MGL is a monopoly player in Mumbai and its adjoining areas. Against current market potential of 6.7m vehicles and 5m households, MGL has customer base of only 0.4m vehicles and 0.8m household, thereby, offering immense growth potential. To accelerate its growth momentum, MGL plans to set up 83 CNG stations (188 currently) and lay 675km steel pipeline network (4,200kms currently) over the next five years, which will drive earnings, going forward. Fuel economics never in doubt: CNG remains the most affordable fuel for transportation in the Mumbai region. At current prices, CNG remains 30% cheaper to Diesel and 55% cheaper to Petrol in Mumbai. Superior fuel economics is likely to drive growth ahead. Exhibit 2: MGL fuel economics Liquid fuel (Rs/km) CNG (Rs/km) % Cheaper (RHS) Bus Car Three wheeler Source: Company Data, PL Research Volume momentum likely to recover: MGL supplies CNG and PNG to 1.3m customers. For FY16, MGL had gas sales volumes of 2.4mmscmd. MGL s FY16 volume growth of 2% was impacted by lower prices of competing fuels. However, recent cut in domestic gas prices along with increase in liquid fuel prices, in line with rising crude prices will support volume growth going forward. June 15,

4 Exhibit 3: MGL s CNG, PNG volume breakdown Domestic 12% Commercial 6% Industrial 8% CNG 74% Source: Company Data, PL Research CGD industry on a growth path The Indian CGD market is catered by 20 entities operating in 36 Geographical Areas (GA). Total CGD gas sales were at ~20mmscmd and it accounts for ~15% of India s gas consumption. Delhi, Mumbai and Gujarat collectively account for ~70% of country s total sales volumes. Gujarat accounts for approximately half of the industrial demand, whereas Delhi and Mumbai constitute approximately 60% of CNG demand. CGD has been identified as a key sector to reduce carbon footprint and GoI has ensured 100% allocation of domestic gas towards consumption of CNG and domestic PNG. With increased government focus on environmental initiative, CGD sector is expected to record faster growth, going forward. Gas consumption by CGD sector is expected to rise to 46mmscmd by FY25E against current levels of 20mmscmd. Exhibit 4: CNG, PNG volume breakdown Domestic PNG 6% CNG 37% Commercial/ind ustrial PNG 57% Source: Company Data, PL Research June 15,

5 Exhibit 5: CGD customer base and steel infrastructure CNG Stations PNG Connections State Geographical Areas Domestic Industrial Commercial Steel Pipeline (In Inch Kilometres) Haryana Sonipat, Faridabad, Gurgaon, Chandigarh 15 18, ,641 Punjab Jalandhar Andhra Pradesh Kakinada, Hyderabad, Vijayawada 29 2, ,103 Assam Tinsukia, Dibrugarh, Sibsagar, Johrat, Golaghat 27, ,261 Gujarat Ghandhinagar, Mehsana, Sabarkantha , ,738 Rajkot , ,525 Ahmedabad , ,349 1,466 Surat, Bharuch & Ankleshwar , ,529 5,122 Valsad 19 62, Navsari 15 74, Nadiad 20 47, Vadodara 15 76, , Others (Halol, Hazira, Khambat, Palej, Surendranagar, Anand, Jamnagar and Bhavnagar) , ,170 Madhya Pradesh Dewas, Gwalior, Indore, Ujjain 16 2, Maharashtra Mumbai & Greater Mumbai * , ,107 1,850 Thane city & adjoining contiguous areas including Mira Bhayender, Navi Mumbai, Thane City, Ambernath, Bhiwandi, Kalyan, Dombivili, Badlapur, Ulhasnagar, , ,704 Panvel, Kharghar & Taloja** Others ( Pune, Pimpri Chinchwad, Hinjewadi, Chakan & Talegaon) 29 13, ,163 Delhi National Capital Territory , ,043 Rajasthan Kota Tripura Agartala 4 13, Uttar Pradesh Kanpur 12 3, Source: Company Greater Noida 21 36, June 15,

6 Risk factors Foreign exchange fluctuations of US Dollars and Indian Rupees: MGL is purchasing Natural gas in US dollars and selling the same in Indian Rupees. Due to high volatility in exchange rates, there may be increase in the cost of business operations which may impact margins. Cost effective alternate fuels availability: MGL is selling Natural gas which is cost effective than other present alternate fuels. Due to advance technology or prices of crude oil going down there can be shift in demand due to alternate fuels becoming cheaper. Increase in cost price or reduction in allocation amount of domestic natural gas: MGL is supplied through GAIL so if there is any change in allocation or pricing criteria, thereby, reducing the volume allocated to company, the cost price of Natural gas will increase affecting the business. June 15,

7 Financial Highlights MGL revenues have 11% CAGR over the past three years MGL s financial performance has been impressive with revenue CAGR of 11% over FY13 16 period. EBITDA during the period has been steady at Rs5.1bn (up 2% CAGR over FY13 16). EBITDA has been impacted by sharp volatility in prices of competing fuels. However, recent cut in domestic gas prices along with increase in liquid fuel prices, in line with rising crude prices will support volume and earnings growth, going forward. Exhibit 6: Sales grew at 11% CAGR over FY13 16 Net sales Exhibit 7: While EBIDTA was up 2% over FY13 16 Operating Profit (Rs bn) (Rs bn) FY13 FY14 FY15 FY FY13 FY14 FY15 FY16 Source: Company Data, PL Research Source: Company Data, PL Research Exhibit 8: PAT growth was at 1% PAT Exhibit 9: Spreads have improved off FY15 lows EBIDTA/scm (Rs bn) (Rs/scm) FY13 FY14 FY15 FY FY13 FY14 FY15 FY16 Source: Company Data, PL Research Source: Company Data, PL Research June 15,

8 Business Description MGL is one of the largest CGD companies in India with over 20 years of experience in supplying Natural gas in Mumbai and its adjoining areas. The company is presently the sole authorised distributor of CNG and PNG in Mumbai, its adjoining areas and the Raigad district in Maharashtra. As of FY16, MGL supplied CNG to over 0.47m vehicles through network of 188 CNG filling stations. Also, the company provided PNG connection to approximately 0.86m domestic households, over 2,866 commercial and 60 industrial consumers in Mumbai and its adjoining areas. For FY16, CNG and PNG businesses accounted for 74.21% and 25.79%, respectively, of the total volume of Natural gas sold and 71.05% and 28.95%, respectively, of total gas sales revenue. Mumbai and its adjoining areas offers immense growth opportunities for MGL as the city has 2.71m households and approximately 6.7m motor vehicles in Mumbai, Thane region and Panvel region. Additionally, the number of CNG operated motor vehicles has grown steadily at a CAGR of 13.75% from March 31, 2009 to March 31, 2016 in Mumbai and its adjoining areas. Growth is likely to be led by (i) anticipated growth in the number of CNG operated vehicles considering the current cost effectiveness of CNG as a fuel, (ii) potential growth in the number of households in areas of operation and (iii) on commencement of gas supply to consumers in the Raigad district. June 15,

9 Exhibit 10: MGL footprint Source: Company June 15,

10 Company Background MGL is one of the largest CGD companies in India with more than 20 years of experience in supplying Natural gas in Mumbai. MGL is the sole authorised distributor of CNG and PNG in Mumbai, its adjoining areas and the Raigad district in Maharashtra. It is promoted by GAIL and BGAPH, each holding 49.75% of shares outstanding (89.3m). 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. As on March 31, 2016, MGL had a supply network of over 4,646 kms of pipelines, including approximately 4,231 kms of polyethylene pipeline ("PE pipeline") and 415 kms of steel pipeline, and 1880 CNG filling stations. MGL's network of 188 CNG filling stations includes stations owned and operated by MGL, OMCs, private parties or situated at bus depots of state transport undertakings. Promoter and Management Bandwidth Promoter Group GAIL: GAIL is the largest natural gas transmission company in India. It owns and operates a transmission network of approximately 11,000 kms of high pressure natural gas trunk pipelines across India with a total capacity of approximately 206 MMSCMD. For fiscal 2016, the average gas transmitted by GAIL was MMSCMD. GAIL is engaged in the transmission, exploration and production of LPG and other gas projects. Further, it operates seven plants in India which process natural gas to produce LPG. It also owns and operates a petrochemical plant that produces high density polyethylene and linear low density polyethylene used in making pipelines. BGAPH: BGAPH is headquartered in Singapore and is involved in the day to day management of its investments in India, Egypt, Mauritius and South East Asia. Through its subsidiaries and associated companies, it is engaged in the business, amongst others, of exploration and production of oil and gas, LNG importation and marketing, and the transmission and distribution of natural gas. On February 15, 2016, Royal Dutch Shell plc ( Shell ) completed the acquisition of BG Group plc (now BG Group Limited) and its subsidiaries. Accordingly, Shell has become the ultimate holding company of all the BG Group companies, including that of BGAPH. June 15,

11 Financials Exhibit 11: Income Statement (Rs m) Y/e March Net Sales 10,507 12,967 14,977 18,686 20,778 20,653 Material Costs 5,183 6,209 8,122 11,443 12,957 12,297 Purchase RMC 5,185 6,213 8,132 11,464 12,988 12,296 Employee Costs Power & Fuel ,045 Repairs to P&M Rent Stores & Spares Other Misc. Costs ,001 Operating Profit 3,775 4,987 4,827 4,882 4,897 5,129 Other Income P B D I T 3,886 5,181 5,145 5,227 5,304 5,556 Depreciation Interest Pre tax Profit 3,323 4,540 4,423 4,418 4,493 4,686 Provision for Tax 1,068 1,462 1,438 1,445 1,483 1,600 Profit After Tax 2,255 3,077 2,985 2,972 3,010 3,087 Source: RHP, Company Data June 15,

12 Exhibit 12: Balance Sheet (Rs m) Y/e March Total Assets 9,847 11,431 12,722 13,985 15,337 16,563 Gross Block 9,640 11,523 13,737 15,176 16,715 18,497 Less: Depreciation 3,250 3,886 4,480 5,261 6,074 6,854 Net Fixed Assets 6,391 7,637 9,257 9,915 10,640 11,643 C W I P 2,892 3,218 3,148 3,454 3,796 4,289 Other non current assets Investments 1,130 2,355 3,021 3,421 3,715 3,846 Inventories Debtors 1, , Loans/ Adv. etc ( ) Current Liabilities 2,052 2,284 3,223 3,815 4,347 5,017 ( ) Provisions 926 1,747 1,884 1,943 1,973 1,983 Cash / Bank ,449 1,721 Capital Employed 9,847 11,431 12,722 13,985 15,337 16,563 Equity Capital Reserves 8,257 9,777 10,933 12,076 13,181 14,386 Debt Other non current liabilities Deferred tax liability incl deposit ,027 1,181 Source: RHP, Company Data June 15,

13 Exhibit 13: Cash Flow (Rs m) Y/e March Cash Flow from Operations PBT 3,323 4,540 4,424 4,418 4,493 4,686 Adjustment for Depreciation (Profit) / Loss on Sale of Assets (Profit) / Loss on Sale of Investments 0 (16) (40) Fixed Assets Written Off Provision for Doubtful Debt 1 2 (3) 4 (2) 3 Other Provisions (6) Bad Debts written off Exchange Fluctuation (Net) (3) 2 Dividend Income (66) (131) (200) (224) (241) (150) Interest Income (20) (32) (48) (60) (76) (104) Finance Cost Operating Profit befor WC changes 3,815 5,078 4,923 4,961 4,997 5,284 Changes in WC Direct Taxes Paid (1,058) (1,150) (1,465) (1,286) (1,390) (1,501) Net Cash from Operating Activities 2,942 4,280 4,389 3,976 4,267 4,254 Cash Flow from Investing Activities Purchase of Fixed Assets (2,321) (2,135) (2,266) (1,768) (1,976) (2,211) Sale of Fixed Assets (Purchase) / Sale of Investments (175) (1,225) (666) (400) (278) (127) Other Bank balance (2) (56) (185) (102) (662) (218) Interest Received Dividend Received Net Cash from Investing Activities (2,413) (3,257) (2,854) (1,999) (2,607) (2,286) Cash Flow from Financing Activities Proceeds from / (Repayment) of Borrowings (2) (3) (6) (19) 76 (18) Dividend Paid (491) (777) (1,340) (1,563) (1,563) (1,563) DDT (82) (126) (217) (266) (266) (318) Interest Paid (7) (3) (6) (4) (8) (15) Net Cash from Financing Activities (582) (910) (1,570) (1,852) (1,761) (1,914) Cash & Cash equivalents at the beginning Inc. /(Dec.) in Cash and Cash Equivalents (54) 113 (35) 126 (101) 54 Cash & Cash equivalents at the end Source: RHP, Company Data June 15,

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