Mahanagar Gas Limited (MGL), India’s top City Gas Distribution (CGD) player, has shown resilience and growth prospects in its Q3 FY25 Earnings Conference Call on January 29, 2025. This analysis discusses MGL’s growth plan, future, challenges, major developments, and whether it is a strong investment proposition as of March 02, 2025.
Growth Strategy
MGL’s growth strategy is multifaceted, focusing on expanding its core CGD business while diversifying into new energy segments. Key elements include:
Expansion of CGD Infrastructure:
- Household Connections: MGL connected 98,469 domestic households in Q3 FY25, bringing the cumulative total to 2.68 million. In its Raigadh geographical area (GA), 87,794 households are connected, with plans for further penetration.
- CNG Stations: The company added 9 CNG stations in Q3, taking the count to 361 stations, and its subsidiary Unison Enviro Private Limited (UEPL) added 3, taking the count to 67. The expansion is towards the increasing demand for cleaner vehicle fuel.
- Pipeline Network: MGL constructed 99.07 kilometers of steel and polyethylene (PE) pipeline, expanding its network to 7,224 kilometers, with another 12.41 kilometers in Raigadh, taking the total to 445.67 kilometers.
Volume Growth:
- MGL recorded a 12.75% growth in average gas sales for the nine months ended December 31, 2024 (4.006 MMSCMD vs. 3.554 MMSCMD in the previous year). CNG volumes increased by 11.44%, industrial and commercial by 25.52%, and domestic PNG by 7.23%.
- UEPL recorded a 17.38% growth in Q3 sales volume (0.192 MMSCMD vs. 0.164 MMSCMD in Q2), adding to a consolidated growth of 12% to 13% for FY25.
Diversification in New Energy:
- LNG for Vehicles: By its joint venture, Mahanagar LNG Private Limited, MGL opened its first LNG fueling station at Aurangabad in October 2024 and sold 91 tons of LNG in Q3 with a current run rate of 2,000 kg/day.
- Lithium-Ion Cell Production: MGL spent INR 35 crores for a 44% holding in Battery Company India Private Limited, a joint venture with International Battery Company (IBC) to set up a lithium-ion cell production unit in Karnataka. The initial phase (1 gigawatt) is likely to commence in 14–18 months with a revenue target of INR 900–1,000 crores and an 18% IRR.
Regulatory Leverage
- MGL is taking advantage of the January 9, 2025, order by Mumbai High Court to phase out petrol and diesel cars in Mumbai and the MMR area and drive CNG and electric vehicles (EVs). The company Managing Director sits on a government committee that has the mandate of enforcing this transition, which can lift CNG volumes by 15%–20% if proposals lean in the direction of CNG.
Subsidiary Integration
- The merger of UEPL into MGL, sanctioned in October 2024 and pending review by the NCLT Mumbai, is expected to rationalize operations and drive consolidated growth.
Future Outlook
MGL’s growth prospects are positive, led by organic growth in its CGD business as well as strategic diversification:
CGD Growth:
- Management expects a 10% volume growth for FY26 with CNG as the key driver (11% growth in 9M FY25), backed by industrial/commercial (25%+ growth) and UEPL/Raigadh (20%+ growth). The Mumbai High Court order could ramp this up to 15%–20% if implemented in a positive manner.
- Capex strategies comprise INR 850–900 crores in FY25 (INR 650 crores already utilized in 9M) and INR 150–200 crores in UEPL for FY26 on CNG stations and pipeline infrastructure.
New Energy Ventures:
- LNG project has a focus in the heavy vehicle segment with possibilities of scalability based on growth in infrastructure.
- The lithium-ion business places MGL in the EV battery segment with a projected earnings start from mid-2026. At INR 870 crores capex in aggregate for Phase 1 and, at potential phase expansion to 5 gigawatts, the business has potential to be an important earnings contribution by FY27–28.
Margin Stability
- MGL sees EBITDA margins of INR 9–12 per SCM, led by reinstated APM gas allocations (100% for domestic, 50% for CNG as of January 16, 2025) and portfolio adjustments. A softer LNG market in the next 2–3 years can further support margins.
Challenges
While strong, MGL has a number of challenges:
Regulatory Uncertainty:
- Implementation of the Mumbai High Court directive is uncertain. The committee’s report, to be submitted by April 22, 2025, may tilt in favor of EVs over CNG, capping volume upside.
Competition from EVs:
- EVs’ growth in the 3-wheeler and bus space (e.g., BEST buses, where 2,000 out of 3,000 are CNG) represents a long-term risk to CNG volumes. The management discounts this threat based on EVs’ minimal effect on total volumes.
Forex and Commodity Price Volatility:
- A weakening rupee (INR 85.5–86 as of January 2025) raises the cost of gas procurement by INR 0.22–0.25 per rupee, cutting into margins unless absorbed through price increases or hedging.
- Declining crude prices (e.g., Brent weakening) lower alternative fuel prices (LDO, FO), compressing industrial margins unless LNG prices are competitive.
New Venture Risks:
- The lithium-ion venture is exposed to execution risks and Chinese price competition. Although management is optimistic about government protection (e.g., import tariffs), a price collapse could test the assumed 18% IRR.
Key Advancements
MGL has made notable strides that enhance its competitive position:
Mumbai High Court Order: A game-changer for CNG adoption, potentially replicating Delhi’s NCR success, where CNG volumes surged post-regulation.
LNG Station Launch: The launch of the Aurangabad LNG station represents MGL’s foray into a high-potential segment and aligns with India’s decarbonization vision.
Lithium-Ion JV: A tie-up with IBC harnesses tried and tested technology (tried and tested in South Korea), making MGL a first mover in India’s EV battery space.
Awards and Recognition: MGL’s Bronze Award for FY24 Annual Report and Greentech Global Workplace Safety Award 2024 are indicators of operational excellence and credibility.
Is Mahanagar Gas a Good Buy?
As of March 02, 2025, MGL has a balanced investment thesis, with stability and growth potential. Here’s a thorough analysis:
Strengths:
Strong Fundamentals:
- Revenue and profitability are strong, with 9M FY25 EBITDA at INR 1,131 crores and PAT at INR 793 crores. Q3 EBITDA was INR 313 crores, while PAT was INR 225 crores.
- A 120% interim dividend (INR 12 per share) indicates confidence in cash flows.
Growth Trajectory:
- Double-digit volume growth (12.75% in 9M FY25) and a 10% CAGR growth estimate for FY26–27, possibly higher with regulatory tailwinds, supports revenue growth.
- Diversification into LNG and lithium-ion cells diversifies risk and accesses high-growth industries.
Valuation Appeal:
- With an assumed share price of INR 1,500–1,600 (indicative, based on past trends), a P/E multiple of 15–18x FY25E earnings (estimated PAT of INR 1,000–1,100 crores) indicates reasonable valuation for a growth utility.
- Dividend yield of ~1.5%–2% provides stability.
Policy Support:
- The Mumbai High Court order and government emphasis on cleaner fuels suit MGL’s business model, potentially accelerating CNG uptake.
Risks:
Margin Pressure: Margins declined in Q3 (INR 10.3/SCM vs. INR 13.95/SCM in FY24) owing to delayed price increases and forex uncertainty. Continued crude/LNG price weakness may limit upside.
EV Threat: Not imminent, EV penetration may take away CNG supremacy in the long term (5–10 years).
Execution Risk: Success of the lithium-ion business depends on timely execution and acceptance in the market, with revenue still 1.5 years away.
Verdict:
MGL is a buy for investors looking for a combination of stability and modest growth. Its main CGD business provides stable cash flows, while new businesses give room for upside. At a P/E of 15–18x and with a 10%+ growth expectation, it is attractive to long-term investors willing to settle for utility-like returns (12%–15% annualized, including dividend). Aggressive growth hunters, though, may find the EV and forex risk dampening near-term enthusiasm. Watch Q4 FY25 numbers (April–May 2025) and the committee’s report (released April 2025) for affirmation of CNG volume drivers.
Conclusion
Mahanagar Gas Limited is well-placed to ride India’s transition to clean energy, marrying its mature CGD leadership with futuristic investments in EV batteries and LNG. Although issues of competition from EVs and forex fluctuations continue to haunt it, its growth strategy, regulatory support, and balance sheet strength make it a compelling investment on March 02, 2025, specifically for those who value resilience over speculation.