Is Mahanagar Gas An Attractive Stock?

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Let’s delve deeper into Mahanagar Gas Stock Analysis and its future outlook. Let’s figure out if Mahanagar Gas is an attractive stock to hold in the portfolio.

Mahanagar Gas is one of India’s leading Natural Gas Distribution Companies GAIL (India) Limited (A Maharatna Company of Govt. of India) is the promoter of MGL.

The company has market dominance in the MMR region and has sufficient infrastructure to establish its dominance.

The company’s shares have 52 weeks price band of INR 1246-663 and a total market capitalization of INR 92 billion which makes it a Mid-Cap company. The shares have a P/E ratio of 13.78 and a dividend yield of 2.14%

Now, let’s take a deep dive into the fundamentals of the company.

The company will be evaluated on 10 parameters and each would be given a rating out of 5 stars. From this, we will arrive at a combined stock rating for the company. As the ratings are based on long term past performance, they are relevant for at least 3 years in the future until FY 2022.

The parameters are as follows:


1. Economic Moat
2. Business Model and Management
3. Growth Ratios
4. Profitability Ratios
5. Cash Flow Ratios
6. Liquidity and Solvency Ratios
7.Efficiency Ratios
8. Valuation Ratios
9. ROE (Du Pont Analysis)
10. Future Prospects
(All units are INR Millions except ratios and per share data)

 

1.Economic Moat (★ ★ ★ ★ ☆)

The company operates in an asset-heavy industry in which market dominance comes through scale, capacity, reach, and infrastructure. MGL connects 1.2+ million households as well as over 4000+ small commercial and industrial establishments.

They also supply CNG to more than 700,000+ vehicles in Mumbai, Thane, Mira-Bhayander, Navi Mumbai, and nearby areas.

Besides this 3342 ST/ TMT / MSRTC / NMMT / PMPML buses, and more than 6580 /Tempos/Trucks/Private buses are using CNG supplied through its wide distribution network.

The company has an infrastructure consisting of about 450 km of steel pipings and over 470 km PE pipeline over 250+ CNG stations through 1268+ dispensing points.

This along with the backing of GAIL gives a wide economic moat to the company in the Mumbai Metropolitan Region (MMR). Therefore this category gets 4 stars in Mahanagar Gas fundamental analysis.

 

2. Business Model and Management (★ ★ ★ ★ ☆)

The business model of the company is focused on Natural Gas distribution in the Mumbai and nearby regions. MGL has over 1 million+ domestic customers connected through its wide network of over 5032 km.

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This comprises of carbon steel (CS) and polyethylene (PE) pipeline.

Domestic PNG is used for various purposes like cooking and water heating. It is also widely used by Hospitals, Nursing Homes, Hotels, Flight kitchens, Restaurants, Places of Worship, etc.

PNG satisfies most of the requirements for fuel across all segments, being efficient, non-polluting, and relatively economical.

This shows the critical application that the company plays in the utility infrastructure.

The company has over 4000+ small commercial and 72+ Industrial connections. MGL also has got a track record of almost 100% reliability in its gas supply.

During the devastating floods of Mumbai in July 2005, when most other utilities failed, MGL’s gas supply continued uninterrupted. This overall shows a good business model focused on the customer.

Mr Manoj Jain is the Chairman of the company and has diverse experience of more than 34 years with GAIL (India) Ltd. Mr. Sanjib Datta is the MD of the company and has 32+ years of experience in handling assignments in the natural gas sector.

Overall the management has been stable and has shown interest in minority shareholder’s wealth. Therefore this category gets 4 stars in Mahanagar Gas fundamental analysis.

 

3. Growth Ratios (★ ★ ★ ★ ☆)

Mahanagar Gas Shares Fundamental Analysis

The revenue has seen a CAGR growth of 11.43% over the last 10 years. The operating income and net income have also increased by 8.44% and 8.55% CAGR respectively.

The working capital has been positive and the Cap-Ex has increased over recent years which indicates upcoming expansion. Therefore this category gets 4 stars in Mahanagar Gas fundamental analysis.

 

4. Profitability Ratios (★ ★ ★ ★ ☆)

Mahanagar Gas Shares Fundamental Analysis

The gross margin has declined over recent years due to increasing COGS and inflation-related costs which the company is not able to pass down to its customers.

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The other margins along with return on assets have seen a good improvement over the years.

The profitability outlook for the company is also stable for the near future

Therefore this category gets 4 stars in Mahanagar Gas fundamental analysis.

 

5. Cash Flow Ratios (★ ★ ★ ★ ★)

The net income margin has shown signs of improvement and the Cap-Ex as a percentage of sales has also increased.

The free cash flow as a percentage of net income has been positive as well. The operating and free cash flow growth has seen fluctuations due to the Cap-Ex cycles of the company.

Overall, MGL has a good cash flow position.

Therefore this category gets 5 stars in Mahanagar Gas fundamental analysis.

 

6.Liquidity and Solvency Ratios (★ ★ ★ ★ ★)

The company has long term debt which is only around 10% of the total capital structure. The debt to equity and leverage ratio has been flat over the years and the profitability has also improved. 

The current and quick ratios are also stable over the years. This overall indicates good liquidity and solvency positions for the company.

Therefore this category gets 5 stars in Mahanagar Gas fundamental analysis.

Mahanagar Gas Shares Fundamental Analysis

 

7. Efficiency Ratios (★ ★ ★ ★ ★)

The table in the excel model is color formatted so the worst performance over the period is highlighted in red color and the best performance is highlighted by green.

Mahanagar Gas Shares Fundamental Analysis

 

Overall the business efficiency has improved significantly as the company expanded its scale and undertook new business ventures.

The Inventory days have declined along with the receivables period. The payable days have almost been stable over the years.

The cash conversion cycle has decreased from -0.1 days to -16 days over the last 10 years.

This overall is a good indicator of business efficiency. Therefore this category gets 5 stars in Mahanagar Gas fundamental analysis.

 

8. Valuation Ratios (★ ★ ★ ★ ☆)

Mahanagar Gas Shares Fundamental Analysis

The company’s shares have been trading at increasingly higher multiples since 2016 due to improving profitability and growth prospects.

Overall the shares have been corrected significantly and remain a good value investment considering the fundamentals and dividend yield of the company. 

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Therefore this category gets 4 stars in Mahanagar Gas fundamental analysis.

 

9. ROE 5 way Du Pont Analysis (★ ★ ★ ★ ☆)

The leverage ratio has been flat over the years and the asset turnover has declined. The interest burden ratio has also seen stability along with the operating margin increase.

The tax efficiency has remained stable for the company. Overall the Return on Equity has been flat over recent years due to improving the financial position of the company.

Therefore this category gets 4 stars in Mahanagar Gas fundamental analysis.

Mahanagar Gas Shares Fundamental Analysis
 

10. Future Prospects (★ ★ ★ ★ ☆)

Some insights for the coming years from management discussion & analysis (MD&A) and con calls are as follows.

  • The effect of Covid-19 will be of extraordinary expenses related to workforce and sanitization costs and will impact the profitability in the short term. The management can look for deferring Cap-ex to conserve cash during uncertain times.
  • For the quarter ended 30-06-2020, the company reported a Standalone sales of INR 277 Crore, down 63% from last quarter Sales of INR 752 Crore and down -63% from last year same quarter Sales of INR 757 Crore Company has reported net profit after tax of INR 45 Crore in the latest quarter.
  • The industry is opening to new private companies which can significantly reduce the profitability for the company over the long term. However, the shares appear to be a good investment in the near future due to attractive dividends.

Overall the company has solid fundamentals along with improving profitability.

The share price may not see a sharp increase in the near future but the company is still a good buy and hold considering the dividend yield. Therefore this category gets 4 stars in Mahanagar Gas fundamental analysis.

Read more Research Reports here.

Overall Fundamental Rating:

MAHANAGAR GAS SHARES (4.3/5)

Therefore it is a 4-star stock – ★ ★ ★ ★ ☆

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Cover Image: Bloomberg Quint

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Billion Dollar Valuation shares thorough research into the Fundamentals of the businesses listed in India. With their insightful write-ups, they uncover a lot on the table.
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