Shares of Mumbai’s city gas distributor, Mahanagar Gas Ltd (MGL), have declined 4.5% this week. Shell India may finally exit the city gas distribution business by selling its 10% stake in the company, said a Mint report on Monday. Shell holds its stake in MGL through its wholly owned subsidiary BG Asia Pacific Holdings Pte. Ltd.
What does this mean for MGL?
On a fundamental basis, the impact of this development is expected to be limited. “The stake sale could, however, have a technical overhang on the stock as we had seen during the earlier two tranches of stake sale in April/August, 2018, (stock down 4-7% each)," said analysts from Jefferies India Pvt. Ltd in a report on 5 March.
Last April, Shell India had sold a 8.5% stake in MGL. A further 14% stake was sold in August, thus reducing its stake in the company from 32.5% to 10%.
“We see limited fundamental impact as dependence on promoter is less now, given that MGL is already an established player with >20 years in operation," pointed out Jefferies India analysts in the note.
And what’s more, it’s not as if investors were gung-ho on MGL. This fiscal year so far has turned out to be rather gloomy, with MGL shares underperforming the Nifty 500 index. This is despite the fact that volume growth has been nothing to complain about.
For the nine months ended 31 December, MGL’s total sales volume increased by 9.8% on a year-on-year basis. During this time, its net profit rose by about 10% to around ₹413 crore.
MGL's December quarter results were better than expectations, as the firm performed well on the Ebitda margin front helped by price hikes.
Ebitda is earnings before interest, tax, depreciation and amortization.
One of the reasons for the muted stock performance is that valuations were perceived as pricey to begin with. Sure, current valuations aren’t overtly demanding. MGL shares trade at about 15 times estimated earnings for FY20, according to Bloomberg.
However, going ahead, outlook on volumes is not as encouraging. SBICAP Securities Ltd believes that volume growth potential will be capped as the key Mumbai market is nearing saturation and compressed natural gas infrastructure is witnessing slow growth. These factors, along with Shell India’s potential stake sale, could well limit near-term upsides in MGL shares.
In the 10th round of bidding for city gas distribution licences, winners of which were recently announced, the company did not win any licence in new geographical areas. The ninth bidding round was muted, too, for MGL. These factors may weigh on its long-term growth.