Mahanagar Gas' Unison Enviro acquisition lights up its growth prospects

Tailwinds for the industry in the form of decline in gas prices are also near-term positive

Mahanagar Gas (MGL) has acquired Unison Enviro (UEPL), an entity previously owned by Ashoka Buildcon and North Haven, which is an affiliate of Morgan Stanley India Infra Fund. MGL will take 100 per cent stake in UEPL for a consideration of Rs 531 crore. MGL is a leading natural gas distribution company supplying compressed natural gas (CNG) to vehicles and piped natural gas (PNG) to domestic, commercial, and industrial consumers in Mumbai, Navi Mumbai, Thane and adjoining areas and Raigad district.

UEPL has the licence to develop and operate city gas distribution business in Ratnagiri and Latur and Osmanabad geographical areas in Maharashtra and also Chitradurga and Davanagere in Karnataka. Investors have seen this as a very positive development with the stock price of MGL immediately being pushed up by almost 9 per cent.

The transaction is likely to be completed after September 2023 (approx 5 years after the award of license). Given UEPL’s gross debt of Rs 11,300 crore, this implies an Enterprise Value (EV) of Rs 640 crore and therefore, a high price/sales multiple of 8.3x and an astronomical EV/Ebitda ratio of 3,120x.

UEPL’s coverage includes 37,362 sq km, with roughly 10 million population and about two million households in aggregate. Analysts believe that UEPL currently has volumes of 0.1 mmscmd or even less. Analysts covering the deal say volumes can ramp up to around 1 mmscmd by FY28, given investments in the range of Rs 700 – 800 crore. At that consumption level, EBITDA (assumed industry mid-range of Rs 6/scm) for UEPL would be over Rs 200 crore, which would more than justify the cost. Under those assumptions, MGL is adding an NPV (net present value) of Rs 50 per share through the buyout. MGL’s own Q3, FY23 run-rate was 3.4 mmscmd.

Ratnagiri is also contiguous to Raigad which MGL has rights to, and this could lead to potential synergy benefits. The acquisition could also address concerns about lower volume growth for MGL and it gives MGL an opportunity to expand beyond the Mumbai Metropolitan area.

MGL’s Q3 FY23 Ebitda of Rs 260 crore and Adjusted PAT of Rs 170 crore, was slightly above the street estimates, due to higher realisations, lower employee costs, and higher Other Income. MGL was affected by lower CNG volume growth due to higher gas prices. But the gross margin improved despite an increase in APM gas prices, which the company successfully passed on. There were hopes that the Kirit Parikh Committee would reduce APM gas prices but this did not happen. MGL hiked prices in October and November, from Rs 80 per kg to Rs 89.5 in two stages. Given falling crude and spot LNG prices, this should have led to improved spreads in Q4, FY23. Hopes remain that APM price revisions in March would be downwards, given global trends. Cabinet approval for a price cut as recommended by the Committee would be expected.

The EBITDA spread in Q3, at Rs 8.16/scm was up 140 per cent YoY and up 2.7 per cent QoQ, which was more than the increase in gas input costs. Ebitda spreads could improve further to Rs 9.5/scm in FY24. There are risks of course such as slower volume growth, margin compression, adverse regulatory changes, higher LNG prices, slower infrastructure rollout and competition from electric vehicles. Also this acquisition is long-gestation.  

Most analysts are calculating target prices at between Rs 1,050-1,100 which offers an upside from the current levels of Rs 987. There’s consensus on “Buy” or “Add” ratings.