Mahanagar Gas Pre-IPO Review - Needs to Come in at a Discount to IGL

Value investor- India mid & small caps

Bhaskar Chakraborty

Equity Bottom-Up

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<li>
<a href="https://www.smartkarma.com/entities/6969" target="_blank" data-smartkarma-citation="entities:6969:1">Indraprastha Gas (IGL IN)</a> is the sole provider of CNG and PNG to the NCR market. Pan-NCR gas pipelines and retail fuel stations provide a sustainable moat.</li>
<li>IGL enjoys freedom in pricing 100% of the gas that it sells. 88% of the gas that it procures is from domestic sources with fixed/below market costs. This allows IGL to seamlessly pass on any change in input costs and preserve its margins irrespective of crude price.</li>
<li>NCR market with 21% penetration in automobiles and 34% penetration in domestic PNG offers a long runway for growth. Regulatory tailwinds to address air quality in NCR will continue to aid growth over medium term.</li>
<li>Company has ventured into new markets on its own and via JVs and has reported excellent ROEs in these ventures.</li>
<li>A key trigger for the stock is the inclusion of natural gas under GST. This will make it favourable for industrial units to replace FO/LSHS (which are included under GST) with natural gas.</li>
<li>Company sports a debt-free balance sheet and offers a free cashflow yield of 3.5% at current level (CMP Rs277). We recommend BUY with target price of Rs346/share.</li>
</ul>



Indraprastha Gas (IGL IN) is the sole provider of CNG and PNG to the NCR market. Pan-NCR gas pipelines and retail fuel stations provide a sustainable moat.
IGL enjoys freedom in pricing 100% of the gas that it sells. 88% of the gas that it procures is from domestic sources with fixed/below market costs. This allows IGL to seamlessly pass on any change in input costs and preserve its margins irrespective of crude price.
NCR market with 21% penetration in automobiles and 34% penetration in domestic PNG offers a long runway for growth. Regulatory tailwinds to address air quality in NCR will continue to aid growth over medium term.
Company has ventured into new markets on its own and via JVs and has reported excellent ROEs in these ventures.
A key trigger for the stock is the inclusion of natural gas under GST. This will make it favourable for industrial units to replace FO/LSHS (which are included under GST) with natural gas.
Company sports a debt-free balance sheet and offers a free cashflow yield of 3.5% at current level (CMP Rs277). We recommend BUY with target price of Rs346/share.


IGL: Monopoly Business with Pricing Freedom, BUY for 25% Upside