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Acquires CGD player – Unison Enviro Pvt Ltd

Mahanagar Gas (MGL) has announced its first inorganic acquisition in the CGD space, Unison Enviro Pvt Ltd (UEPL), from the latter’s erstwhile promoters Ashoka Buildcon and North Haven India Infra (a Morgan Stanley affiliate). MGL has acquired 100% stake in the fledgling CGD player and has stated UEPL equity value at Rs5.3bn, which implies an enterprise value of ~Rs6.4bn (gross debt on the books of UEPL as of FY22, stood at Rs1.13bn). The transaction value implies a price/sales multiple of 8.3x and EV/EBITDA of 3,128x! While this may seem exorbitant, we note UEPL has 3 reasonably large GAs in its portfolio (37,362sqkm, ~10mn population and ~2mn households in aggregate). We also note that development so far in the first 3 years has been slow (our estimate based on the reported FY22 revenues suggests volumes at Rs2bn, which more than justifies the acquisition cost. We sense the acquired areas can add a meaningful NPV of Rs5bn for MGL (~Rs50/sh). We view this as a significant move forward to address longstanding concerns on growth avenues for MGL beyond the Mumbai Metropolitan Region (MMR). Reiterate BUY.

* Meaningful potential in the areas acquired: UEPL has rights to 3 GAs, comprising of Ratnagiri, Chitradurga & Devangere, and Latur & Osmanabad, districts. 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 ~1mmscmd additional volumes by FY28E for MGL (company’s Q3 run rate was 3.4mmscmd).

* Valuations look reasonable for the medium term: While the marketing exclusivity for Ratnagiri ended in CY22 and rest of the areas will end in CY27, network exclusivity for all GAs exist till CY41-CY43. We believe total volume potential from the 5 GAs combined can be ~1mmscmd over 3-5 years which, @Rs5.5-6/scm of EBITDA, can translate to an EBITDA of ~Rs2.1bn by FY28E. Discounting back to FY24E (@10%), we see the implied EV/EBITDA multiple of 4.3x for the UEPL acquisition as reasonable.

* Maintain BUY: At CMP, the stock trades at 8.9x FY25E EPS and 3.9x EV/EBITDA, which we believe offers attractive risk reward. We remain bullish on MGL for next 12-18 months. We estimate an EPS CAGR of 19% over FY23-FY25E, supported by volume CAGR of ~9%, gross margins of Rs14.7/scm and EBITDA/scm of Rs9.6/scm. With a strong signal to secure long-term growth via inorganic acquisitions, prospects appear bright. We value the core business via DCF methodology at Rs1,075/sh (WACC @10.9%, EBITDA/scm @Rs 9.5, TV growth at 1.5%). We have also tried to do a roughcut DCF valuation of the newly acquired areas (WACC @10.8%, EBITDA/scm Rs6, TV 3.5%), which works out to Rs50/sh. This leads to a target price of Rs1,125/sh for MGL implying 24% upside. Maintain BUY.

* Key downside risks: i) Higher gas prices, ii) inability to pass on gas cost increases, iii) sharp fall in alternate fuel prices for CNG (petrol/diesel), iv) slower execution.

* Key upside risks: i) Higher penetration in existing areas, ii) sharper rise in alternate fuel costs, iii) stronger regulatory support

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