Mahanagar Gas Limited (MGL) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Mahanagar Gas Limited Q3 FY '20 Earnings Conference Call hosted by Axis Capital Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Manikantha Garre from Axis Capital Limited. Thank you, and over to you, sir.

Thank you, Faizan. Good evening, everyone. On behalf of Axis Capital, I welcome all participants to the conference call. Today, we have with us Mr. Sanjib Datta, Managing Director; Mr. S.M. Ranade, CFO; and Mr. Rajesh Wagle, SVP Marketing. They will start with brief overview of the company's performance for Q3 FY '20, and then we can switch over to the Q&A session. Thank you, and over to you, [ Richa. ]

Thank you, Mani. Before we begin, I would like to mention that some of the statements made in today's discussion may be forward looking in nature, and we believe that expectations contained in the statement are reasonable. However, the nature involve number of risks and uncertainties that may lead to different results. The risk and uncertainties relating to the statement include, but are not limited to, risks and uncertainties regarding fluctuation in sales volumes, fluctuations in foreign exchange and other costs and our liabilities -- ability to manage growth. I urge you to consider that quarterly numbers are not a reflection of long-term trends or an indication of further -- full year results. They should not be attempted to be explorated or interpolated in future numbers. Over to you, sir.

Thank you, and good afternoon to all of you, and welcome to the earnings conference call of Mahanagar Gas Limited for the third quarter of the financial year 2019-2020. I would like to thank all of you who have connected for our earnings call today. As you are aware, the government of India plans to raise the share of gas in India's primary energy mix from the current level of 6% to 15% by 2030. And consumption in CGD sector will have an important role in that transition. On the supply side, imported gas accounted for 54.3%, while domestic gas accounted for 45.7% of the total gas consumption as reported till end of the third quarter under the current financial year. In the recent union budget, the government's announcement to expand the gas grid to 27,000 kilometers from 16,200 kilometers, and the plan to facilitate transparency in price discovery is likely to strengthen the natural gas market in India. This will also support further expansion of the CGD sector. As far as gas pricing is concerned, the price of domestic gas based on government set formula has been pegged at USD 3.23 per million metric British thermal unit or MMBtu for the period from October 2019 to March 2020 as against the price of USD 3.69 per MMBtu for the period from April to September 2019. Besides, spot gas prices witnessed a downward trend for almost 3 quarters. Beginning February 2020, the pricing for LNG deals in India and bids for cargoes in Northeast Asia have fallen to unusually low levels of about USD 3 per MMBtu. The LNG market has been hit by a dip in Asian demand due to warmer than usual winter temperatures and the coronavirus outbreak, while the market has remained to be very well supplied by projects around the world. Our conscious decision to rely more on spot gas than on midterm or long-term contract has helped us to improve margins in the industrial and commercial categories. In order to further expand CGD network, PNGRB is in the process of finalizing geographical areas or GAs for forthcoming 11th CGD bidding round. In this regard, PNGRB has released a tentative list of 44 GAs for suggestions and views from the stakeholders. We shall be evaluating the offered GAs once the 11th bidding round is formally launched. MGL today is a strong incumbent in the CGD sector with significant strength and core capabilities. MGL has presence in attractive and contiguous GAs of Mumbai, Thane and Raigad, where there are significant opportunities to capture growth in both CNG and PNG segments. Coming to MGL's operations, we are rapidly expanding our CGD networks in the existing license areas. During the recently concluded quarter, 31,006 domestic households were added. Today, we have more than 1.24 million household customers connected with pipe gas. We also had a net addition of 74 industrial and commercial consumers, and thus, as on quarter end, we had 3,997 industrial and commercial customers. Besides, as on quarter end, we had 248 CNG stations, supplying CNG to around 7.42 lakh vehicles, and our aggregate of steel and PE pipeline network stood at 5,513 kilometers. With respect to our Raigad GA, we added more than 6,000 domestic PNG connections in this quarter, 13 CNG stations are currently operational in Raigad. CNG sales in Raigad has touched 32,000 kgs a day and is expected to go up when some more CNG stations become operational in coming months. During the quarter, we have seen a growth of about 3% in overall total sales volume over the corresponding quarter in the previous years. CNG sales volume grew by 2.4%, domestic sales volume grew by 6.6%, while the industrial and commercial sector sales grew by 3%. Overall, the PNG volume grew by 4.8%. Gross margin is higher in value terms in the current quarter as compared to corresponding quarter in the previous year, mainly due to volumes -- due to higher volumes in CNG and domestic PNG sectors with better price realization and lower cost of spot gas used for industrial and commercial segments. EBITDA margin was 34.8% at INR 259 crore in the current quarter as compared to 31.8% at INR 239 crore in the corresponding quarter of the previous year. Net profit after tax grew by 25.4% from INR 148 crore in the corresponding quarter of previous year to INR 186 crore in the current quarter. Compared to immediately preceding quarter, there is a marginal increase in total sales volume in current quarter by 1.8%. CNG volume is higher by 1%. Domestic volume is higher by 8.2%, however, industrial and commercial sector is marginally lower by 0.3%. Gross margin is 52.1% as compared to 51.4% recorded in the immediately preceding quarter. Industrial and commercial price realizations linked to alternate fuels were lower as prices of bulk LPG, LSHS, LDO and 19 kg cylinder dropped in the range of 2% to 17% compared to the previous quarter. As a result, EBITDA for Q3 is INR 258.9 crore compared to previous quarter EBITDA of INR 273.4 crore. Net profit after tax for Q3 is INR 186.1 crore compared to previous quarter figure of INR 270.6 crore, since the reduction in opening deferred tax liability of INR 56.7 crore, an impact of higher provision of tax in Q1 was adjusted in Q2 on account of lower tax rate of 25.17% as introduced by the taxation law amendment ordinance. With this, I conclude, and would now like to open the floor for questions. Thank you very much.

[Operator Instructions] The first question is from the line of Nitin Tiwari from Antique Stockbroking.

Sir, my question is related to pricing, actually. So as we all know that PMT field is now transferred to ONGC and the gas price, which is applicable over there is the nomination gas price. But I suppose like we haven't taken a price reduction so far in this quarter. So what is like -- consequently, what is the outlook for the margin? Do we see margin expansion from here on going forward? Because general expectation is that overall, domestic gas price might also go down in April. So how do we see this number, like the EBITDA per unit number so to say that in light of all these developments? One is that. And then I'll ask rest later.

You're right. Whatever you talked about PMT, that change in source could be beneficial to the company. However, generally, as you are aware, company takes call on the pricing front generally twice in a year. So we'll wait till the outcome of APM prices are known to us on 1st April and a consolidated decision will be taken.

Right. So no [ indiscernible ] is expected at least in this quarter, that's what it is?

As of now, we have not thought of anything [indiscernible] immediately.

All right, sir. And secondly, sir, just a couple of bookkeeping questions. So if you can bifurcate -- give us the bifurcation of volumes within industrial and commercial, and even between industrial and commercial. And the CapEx number for 9 months so far? And the outlook for next year?

Okay. As regards to volumes, you are talking Q3?

Yes, Q3, sir, industrial and commercial volumes separately.

Okay. Industrial is 0.227 MMSCMD; and commercial is 0.189. CapEx, so far around INR 300 crores we have spent in December, and year-end estimate anywhere between INR 450 crores to INR 500 crores.

And we are going to spend almost a same sort of number in next year as well, INR 450 crores to INR 500 crores?

Depends on the permissions, obviously, which is always an important factor. But, yes, otherwise, it could be in that region.

[Operator Instructions] The next question is from the line of Vijayant Gupta from Edelweiss.

I had a question around open access. So ultimately, how do you see the CGD structure? I mean, given the split of GAIL into transmission and marketing, do you think that we would have -- we would have CGDs as well split into distribution and marketing? And in that event, how do you see the marketing operation faring, given that GAIL and OMCs have tied up gas at the source? And secondly, in terms of promoter shareholding, so GAIL owns 32% in MGL, how do you see that shareholding panning out?

Well, as regards to the distribution between infrastructure and marketing, the regulations for transmission are a bit different from distribution. In the transmission segment, there is some language around separation of these 2 functions clearly, whereas in CGD gas distribution regulations that requirement doesn't come up. So what we understand, the government and the regulator are trying to do in this is, yes, they are definitely talking of opening up the networks, especially of the older CGD players, which would mean providing access to our customers at a tariff, which are decided by the regulator. However, there is still some work to be done on that because the tariff determination regulations have not yet been framed and notified by the PNGRB. So it would take a little bit of time before that finally fructifies. Okay?

But isn't there a conflict of interest? I mean, one entity owning both the infrastructure as well as marketing. I mean, it's a similar issue as GAIL, right?

So as regards city gas distribution is concerned, there is a concept of network tariff, which will, of course, not yet fixed for MGL for its existing areas, but that will take care of transportation, rest will be the marketing margin, whatever we get it over here. So it is very clear in case of city gas distribution, whereas as regards GAIL, I think Mr. Wagle has already explained.

And as regards conflict of interest as such, and if the regulations and everything are framed in a robust manner, I mean, competition can happen. There is no -- I mean, it can always be made a level playing field.

Internationally, sir, how are you seeing, I mean, for example, in Europe and U.S., how is the CGD structure? And I mean, is it a bifurcation? Or there is some capacity reservation for third-party players?

See, usually, once the whole network matures and substantial penetration has been achieved, then they open up the network. And the trend is in the initial period of development in [ U.S. ] they give some marketing exclusivity also so that development can happen in a proper planned manner.

The next question is from the line of Amit Rustagi from UBS.

Sir, could you give us a breakup of the new vehicle addition in the 9 months, like how many cars, buses and the 3-wheelers have been added in Mumbai and our geographical areas?

On an average, if you look at, about 6,000 vehicle additions every month, roughly 3,500-odd would come from your private cars and taxis, et cetera. And 2,500-plus would come from autorickshaws, very, very few come from heavy commercial segment. And recently, we have seen the addition of a couple of hundred buses from BEST. And this ratio more or less has remained constant between maybe a year back or so there were more rickshaws converting, but now it is stabilized to about 3,500-odd cars and about 2,500-odd rickshaws.

Okay. And sir, with respect to the margins, we have seen that with domestic gas prices going down, we have been able to expand our margins quite well and to a significant -- nearly doubling in last 5 years. So where do you see further margin expansions from here? Because the domestic gas prices are going down further from April 1, 2020. And so how long we could see this margin expansion continuing? And if we remain like a monopoly, then this power, can we keep on exploiting in the coming years as well?

First of all, we'll have to wait till 1st April until the formal announcements are made, and thereafter, the decisions will be taken. You are aware that we have been sharing benefits with the customers in the past as well. So it's not that the entire benefit was accruing to the company. But we also need to take care of the cost increase which takes place for us, be it OpEx or for a ForEx-related changes or ultimately depreciation element from CapEx point of view. So all points will be taken into consideration and the final decision will be taken post 1st April.

Yes, sir, that's why actually for cost consideration, we are considering the EBITDA margin versus -- so if we look at last 5 years, so our EBITDA margin, which used to be like around INR 6 to INR 7 per SCM is now around INR 9.5 to INR 10 per SCM.

Right.

Yes. So like given the trajectory of domestic gas prices going down, can we expect further expansion in the margins from here in the coming quarters? Or we think that we have reached a sufficient margin level, which can take care of our CapEx requirements?

I think anyway current level of margins can take care of CapEx requirement because cash generation is good. We have treasury surplus also. What we can leave on the record is scene on the margin front is positive, that much definitely a statement can be made.

The next question is from the line of Anubhav Aggarwal from Crédit Suisse. The line for the current participant got disconnected. We'll move to the next question. The next question is from the line of Roshan Raghavan from ithought.

Sir, am I audible?

Yes, you are audible.

My question was on the potential for CNG going forward with automobiles. So we -- so we've already seen Maruti Suzuki move out of diesel, and even more recently, the Volkswagen Group is also considering moving out of diesel, if I'm right. So I just wanted to know your opinion on the potential for CNG in private vehicles.

The potential is -- you can say looking good because diesel -- with the BS VI kicking in, the vehicle cost, the fuel cost can become a barrier in a cost-conscious market like India. So it is a positive for CGD or CNG.

The next question is from the line of Anubhav Aggarwal from Crédit Suisse.

I hope I am audible?

Yes.

Great. So the question was on the CNG realization this quarter. We are -- CNG realizations are down almost like INR 1.5 per SCM. I'm talking September to December quarter, whereas the APM gas cost reduction was much lower. So certainly, our CNG margins took a -- are a little lower per unit margins. Can you just throw some light here that why did you choose to, let's say, cut prices more than -- this quarter than the APM cost reduction?

So one is that you are -- which are the quarters you are trying to compare?

September versus December quarter.

Okay. One is, you must be aware that there was a cut in APM prices, so accordingly, we have passed on the benefit to the customer, the APM price had dropped down from, I think, $3.36 to $3.23 per MMBtu. So the benefit was passed on to the customer, that is the primary reason. And also, it could be a combination of different channels through which we sell depending upon combination which emerges for a particular order, the [ price realization ] can sometimes change a bit.

Okay. So can the mix impact be so much is it that almost half -- INR 0.5 per SCM can just be attributed to mix impact?

No, the primary reason, as we said, it was the benefit of decrease in APM price was passed on to the customer.

That I get it completely.

Yes.

Okay. So maybe I can understand this mix impact later. Second question on the industrial segment growth -- volume growth I'm talking about. You've been mentioning that some of the industries moving out of the -- your geographical areas. But if you look at the outlook over next 12 months, let's say, how do you see the segment growing? Past 2 quarters, we're growing at about 2%, 3% volume growth.

In the coming quarters, we would expect the volume growth to be slightly higher than this, but maybe not significantly higher. Because the fact continues that whatever few industries are remaining in the city of Mumbai, they are closing down and moving out and we are managing to compensate for that by connecting new customers in our other geographies. And of course, once the pipeline infrastructure in Raigad we manage to gasify, then there will be further addition in industrial volumes.

The next question is from the line of Sujit Lodha from Birla Sun Life Insurance.

Sir, the NGT order, which was implemented in Morbi, and the [ indiscernible ] if such an order is implemented in our area, what would be the potential growth in volumes, in industrial volumes?

Mr. Sujit, your audio is not clear, so we cannot hear you.

Is it audible now?

Yes, sir.

Yes. Sir, so the NGT order, which is implemented in Morbi, and [ indiscernible ] also stated there are some similar areas in Maharashtra also polluting. So if such similar order is implemented to our area, what would be the potential growth in the volumes in the industrial side, like we are currently at 0.2, where can we go to?

I think we've mentioned this in the past also, if similar orders are passed in our geographical areas, I think in a relatively short span of time we can go up to 3x our current industrial volume.

So from 0.2 to 0.6 is something which we can go to.

Yes.

And sir, second question, in terms of total volumes, how much volume would be roughly contributed by cab aggregators? And how much of the cab aggregators would be on CNG out of the total cab aggregated population in the city?

That's also a very difficult question to answer because...

Sir, any ballpark number?

Aggregators don't come out with these numbers. So it's very difficult for us to differentiate. But...

Sir, but how -- any percentage, like over 50% of the cab aggregators would be on CNG or 60%, any number?

If I'm forced to take a guess, I would say it's about 50%. But really very, very difficult to accurately answer this question.

The next question is from the line of Probal Sen from Centrum Broking.

Sir, am I audible?

Yes, you are audible.

Yes. Sir, 2 -- couple of questions. One, was there any discussion on dividend decision in this quarter? And would you be looking at then dividend by the fourth quarter? I mean, I was just wondering because it -- the release mentioned that there would be a dividend decision ahead of the Board meeting, that was my first question. And second was, out of the total 248 CNG stations, can we get a sense of how many are now on -- are being run by the OMCs? And how much commission on a per SCM or per kg basis we are paying to them right now?

As regards dividend, yes, it was considered at Board meeting which was held 2 days back. But as you are aware, the dividend has not been declared.

So just any reason, sir? Because obviously, as you just mentioned yourself that the cash situation remains fairly comfortable, given our profitability and our CapEx. So was it just something that we should just wait for Q4 for the full year dividend to come?

Yes, it was a board decision, basically. Future, let us see what happens.

Okay. And on the -- second question, sir, on the CNG front?

CNG, out of the 248 stations, 175 are with OMCs.

Okay. And is it possible to share the commission right now that we are paying them, sir?

Slightly more than INR 4 per kg.

The next question is from the line of Jigar Shah from Maybank.

My first question is pertaining to the volume during the third quarter and 9 months. As you have mentioned, there is a decent addition in terms of the vehicles per month, which is a fairly consistent trend over the years, but we have seen a slight decline in the volume in CNG, which is surprising, considering that the prices have also been dropping and the vehicle addition is good. Most of the vehicle manufacturers are trying to push for the gas. So all of this is a little bit puzzling. So any color on what is ailing the volume growth in CNG, in particular?

When the -- what we have seem to be able to gather till now is there probably is a small reduction in the per capita consumption of vehicles. Now what is causing that? We are not very sure. But 1 or 2 things could be there, as you know, traffic situation and all the infrastructure work which is going on. I don't know whether it's deincentivizing people to use vehicles or something, so lesser vehicles on the roads, and we're not really sure. But the vehicle addition is happening. And again, these are transients. This time, we might have had 2% or 3% growth, there have been times when it's better. But again, very difficult to give detailed reasons for just a few percentage points of change in volumes.

Sorry to interrupt you. This is the operator. The line for the current participant got disconnected. We'll move to the next question. The next question is from the line of Nilesh from HDFC Securities.

Sir, what is current sourcing mix between APM, non-APM and other sources and spot, in 4Q, particularly?

Any other question? Hold on. We will tell you the thing. Any other question?

Just [Foreign Language] only 3Q and 4Q comparison I want, that's it, sir.

Q4 of last year, you are talking?

No, no, no. 3Q FY '20 and the current, in 4Q.

Okay. We can tell you right now for the month of December, for example, not that quarter-wise figures are readily available. We can take it off-line. But say, as at December, the purchases were something like this: APM quantity was 1.539 and non-APM priority was 0.872, PMT portion was 0.308 and spot was 0.441. This was December, which has, of course, slightly undergone a change because of PMT. Other details, I think we can give you offline.

The next question is from the line of Saurabh Handa from Citigroup.

Sir, my first question was just on industrial and commercial realizations, if you could share those numbers for the quarter?

Volumes of industrial/commercial?

The realizations?

Realizations, okay. Industrial is INR 26.21 per SCM for this quarter. And commercial, all categories put together was INR 32.97 per SCM.

Okay. Okay. So both these were down quite sharply quarter-on-quarter because of the alternative fuel prices, right?

Right. You are right.

And sir, is there any indication of the trends currently or in Jan, how these are trending?

Realizations could be lower, but what you must note is the scene on the spot LNG front is pretty good for us. So margin point of view, nothing to worry on industrial/commercial right now.

Okay, fair enough. Sir, and the second question on CNG. I mean, anything in terms of outlook in the near term, any drivers of improvement in your volume growth beyond sort of 2%, 3% level?

One positive development is that BEST has ordered about 500 new CNG buses, out of which 100-plus have already come onstream. The remaining buses will be coming up by the end of March in this current quarter. BEST is also exploring ordering of additional buses beyond that in the coming financial year, for which we are discussions.

Hello?

Yes, we can hear you, sir. Go ahead.

Yes, okay. So that's the main driver, right, just on BEST buses?