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Analyst Meet Update: Strategic growth driven by infrastructure expansion

Our View

MAHGL is to play a key role in India’s transition into the CGD segment towards cleaner energy. As per industry, the Indian government’s USD67bn investment to expand the natural gas sector by 2030 poise significant growth in CNG and DPNG infrastructure. Allocation policies prioritize APM and HP/HT gas, ensuring cost-effective supply. MAHGL’s strategy focuses on expanding customer reach, particularly in Raigad, with major infrastructure investments. The company aims to add 3 lakh D-PNG connections annually in Mumbai. UEPL's network includes 56 CNG stations. The inclusion of natural gas under GST by 2025 could benefit all stakeholders. MAHGL's JV with Baidyanath LNG plans several LNG stations, targeting long-haul transportation. Retrofitting initiatives and a robust capex plan support it’s growth. We maintain a BUY on the stock with a revised TP of Rs 1,730/shr (from earlier Rs 1,560). The increase is on a higher PER (x) multiple revised from 13.5x to 15x in line with to that of Indraprastha Gas ltd (IGL) which has a similar volume growth profile and prefer Mahanagar Gas (MAHGL) in the CGD space.

Key takeaways from the analyst meet

* Industry overview: The Indian government is poised to invest USD67bn in the natural gas sector over the next six years, aiming for significant expansion. By 2030, the Govt. aims to have 17.5K CNG stations and 120mn DPNG connections, a notable increase from the existing 7K stations and 12.9mn DPNG connections. Additionally, consumption is projected to rise from 185mmscmd to 500mmscmd by 2030. In terms of trends, CNG maintains its advantage in the CV/LCV segment, owing to factors like high payload and long-distance capabilities, while EVs are not expected to pose a significant threat. Furthermore, there's minimal overlap between EVs and CNG consumer bases, particularly in the low-end PV segment, where EV penetration remains low due to higher on-road costs. CGD has received top priority in allocation, ensuring reduced reliance on higher-priced RLNG, while any shortfall in APM gas is likely to be offset by increased supply from HP/HT via auctions, potentially addressing the anticipated 30% shortage.

* Allocation Policy: MoPNG guidelines stipulate that domestic gas supply to CGD entities will be allocated up to the available quantity starting from Aug’22. Since Feb’23, gas from HP/HT fields has been prioritized for CNG and Domestic PNG, following a notification by MoPNG in Jan’23. Additionally, the government revised the APM pricing formula effective Apr’23, adopting key recommendations from the Kirit Parikh Committee. The new APM gas pricing is set at 10% of the Indian Crude basket on a monthly basis, with a floor price of USD4/mmbtu and a ceiling of USD6.5/mmbtu for the first two years, followed by an annual escalation of USD0.25/mmbtu.

* Priority Allocation: APM allocation constitutes approximately 70% of the priority volumes, while HP/HT is available to CGD on priority, with the company holding term contracts of around 0.50mmscmd. Additionally, the company has secured term RLNG through competitive bidding for industrial and commercial requirements linked to HH and oil index, with flexible MGQ terms. For spot requirements, they have arrangements with LGX and other suppliers through competitive bidding. The pricing for APM and HPHT has good visibility for the medium term. The blended cost for priority gas currently is at ~USD7.3/mmbtu.

* Infrastructure exclusivity: MAHGL’s infrastructure exclusivity in Mumbai has expired and an extension is in process. In the adjoining areas of Mumbai, the exclusivity extends until 2030, and in Raigad, it is up to 2040. The company also offers tariff flexibility, allowing new operators to use MAHGL’s pipeline network upon payment of a transportation tariff

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