Indraprastha Gas vs MGL – 4 Points Analysis

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This blog is going to cover the most intriguing question in the mind of investors leaning to encash huge Gas & Gas Distribution sector opportunities.

And that is: Which one is better? Indraprastha Gas Limited or Mahanagar Gas Limited?

 

Watch: Comparative Analysis of City Gas Distribution Companies

Let’s begin.

Industry Analysis

India is the 3rd largest energy consumer in the world, after the US and China.

Natural gas has emerged as a reliable alternative for more polluting fossil fuels.

The Government of India has set an ambitious target of increasing the share of natural gas in its primary energy basket from 6% to 15% by 2030 following its clean energy agenda.

The government has accorded priority in domestic gas allocation to PNG (Domestic) and CNG (Transport) segments.

City Gas Distribution (CGD) market in India is projected to grow at a CAGR of 10%  by 2030. The main Growth Driver is increasing natural gas Demand from automotive, industrial, commercial & residential end-user segments.

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In June 2020, Petroleum and Natural Gas Regulatory Board (PNGRB)  allowed any eligible entity can set up an LNG station in any geographical area (GA) or anywhere else.

This shall mean that the GA license awarded to City gas distribution companies such as Indraprastha Gas Limited, Mahanagar Gas Limited shall be without exclusivity.

However, it may be noted that CGD being an asset-heavy play the entry barriers remain very high for new players to set up LNG stations in GA owned by these players.

In this industry, market dominance comes through scale, capacity, reach, and infrastructure.

However, natural gas remains an alternative fuel to the consumers as the consumer always compares natural gas fuel such as Piped Natural Gas (PNG) which is used for cooking with Liquid Petroleum Gas (LPG).

Also Compressed Natural Gas( CNG ) which is used as a transport fuel is always compared with petrol & diesel.

One sectoral tailwind supporting this sector is dwindling natural gas prices globally that has led to CGD players reducing the retail prices of all of their products in October last month.

At current prices, PNG would be around 15 % economical as compared to LPG on an energy equivalent basis.

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CNG would offer over 62 % savings towards the running cost when compared to Petrol driven vehicles while CNG would offer over 40 % savings towards the running cost when compared to Diesel driven vehicles.

 

Business Analysis: Indraprastha Gas vs Mahanagar Gas

Business Analysis - Indraprastha Gas and MGL
Background of Indraprastha Gas and MGL
Product and Revenue Mix of Indraprastha Gas and MGL
Both cos have almost similar revenue mix

Let us dig deeper into what lies in the financials of these 2 companies

 

Financial Analysis: IGL vs MGL

EBITDA Margin of Indraprastha Gas and MGL

The EBITDA margin difference between MGL & IGL has always been ~9%-10%. What makes MGL so good with operating margins against Indraprastha Gas Limited?

The answer lies in the cost of Raw material (i.e. Gas).

As per GoI mandate, City Gas Distribution (CGD) firms serving CNG & Domestic PNG are given first Priority and 110% allocation of domestic gas production.

MGL & Indraprastha Gas both receive 110% allocation of gas at Administrative Price Mechanism (APM) prices which are a tad lower than prevalent global gas prices for CNG and PNG (domestic) customers.

So the company with a higher volume mix of Domestic PNG + CNG shall stand on a better ground(cost structure).

Let us check who makes most of it in the chart below:

Industrial and Domestic PNG Distribution

 

With Higher allocation to CNG+ Domestic PNG MGL is better placed against IGL

The Other factor which impacts the cost is the distance between demand centers and supply centers wrt their Industrial & commercial PNG.

As the cost of transporting gas through the pipeline is a costly affair and increases the cost for Indraprastha Gas located in far Delhi from the ports as most of balance gas requirement is met through imports.

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Whereas with proximity to the west coast Mumbai-based Mahanagar Gas is at a vantage point.

ROCE of Indraprastha Gas and MGL
Cashflow of Indraprastha Gas and MGL
WIth above benchmark (0.80) CFO/EBITDA both the business stands good in term of cash flow

 

Valuation Analysis: IGL vs MGL

Historical PE of Indraprastha Gas and MGL
Past 2-year average PE: IGL @30 while IGL@15.

 

Reason for the difference in Valuation Multiple

MGL lagging in Sales growth rate by a margin as evident from this chart. Sales growth difference explains the valuation multiples dichotomy

 

So the bottom line is: Market pays for Growth. Period.

 

4-Points Comparative Analysis of Indraprastha Gas and Mahanagar Gas

Analysis of Indraprastha Gas and Mahanagar Gas

 

Conclusion – Which One is Better? Indraprastha Gas or Mahanagar Gas?

Growth Investor should prefer Indraprastha Gas (IGL) as it strives to grow in new territories and keeps the quarter on quarter momentum maintained.

However, MGL is less risky and available with a margin of safety, so investors with value bias shall prefer MGL over IGL.

Disclaimer: The blog is not an investment recommendation but written for educational purposes only.


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Amitabh Vatsya

Amitabh Vatsya

Amitabh Vatsya is an active Investment Vlogger (http://youtube.com/c/Sadhansimplified) | Loves to share his ideas at http://wealthsutra.wordpress.com | Follow him @amitabhvatsya
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