Mahanagar Gas Limited (MGL) Earnings Call Transcript

Ladies and gentlemen, good day and welcome to the Mahanagar Limited -- Mahanagar Gas Limited Q1 FY '20 Earnings Conference Call hosted by Elara Securities Private Limited. [Operator Instructions] I now hand the conference over to Mr. Gagan Dixit from Elara Securities. Thank you, and over to you, sir.

Yes. Thank you. A very warm welcome to everyone. It is our pleasure to be able to bring to you the management of Mahanagar Gas Limited, led by Mr. Sanjib Datta, who is the Managing Director; Mr. Deepak Sawant, who is the Deputy Managing Director; Mr. Sunil Ranade, Chief Financial Officer; and Mr. Rajesh Wagle, who is the Senior VP, Marketing. So with these words, I would now hand over to the conference -- to the Jill from E&Y for the safe harbor statement.

Thank you, Gagan. Good evening, everyone. 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 statements are reasonable. However, the nature involves a number of risks and uncertainties that may lead to different results. The risks and uncertainties relating to the statement includes, but are not limited to, risks and uncertainties regarding fluctuations in sales volume, fluctuations in ForEx and other costs and our ability to manage growth. I urge you to consider the quarterly numbers as not a reflection of long-term trends or an indication of full year results. They should not be attempted to be extrapolated or interpolated in future numbers. With this, I will now hand over the conference to Mr. Datta for his opening comments. Over to you, sir.

Thank you. Good afternoon to all of you, and welcome to the earnings conference call of Mahanagar Gas Limited for the first quarter of the financial year 2020-2021. I would like to thank all of you who have connected for our earnings call today. As you are aware, in March 2020, the World Health Organization characterized the outbreak of a strain of the novel coronavirus, COVID-19, as a pandemic. This outbreak is causing significant disturbances and slowdown of economic activity across the globe. Due to the nationwide lockdown announced by the government of India since last week of March 2020 to combat COVID-19, the company's operations have been impacted for the full quarter resulting in reduction of sales volume, except for gas consumed in household kitchens. However, during the lockdown, the company received its gas supplies and maintained the supply of gas to all types of customers as per their requirement. Now with partial easing of lockdown, daily sales volume has increased from 25% in April 2020 to 55% in July 2020 compared to normal volumes recorded in pre-lockdown period. Sales volume has farther improved to around 65% level in the month of August. It is estimated that sales volumes are likely to pick up farther due to increased vehicular movement, opening up of restaurants, commercial establishments, industries and other businesses that use gas. As the cases of COVID-19 are still rising and the annunciation of responses to it by the statutory authorities may also get modulated from time to time, impact on our operations may turn out to be different as compared to estimates drawn as of today. But the company will continue to closely monitor future changes. In early 2020, the state government launched Mission Begin Again with some easing of restrictions, though a host of restrictions of the lockdown currently stands extended till 31st August 2020. Continued restrictions resulting in limited attendance in government and private offices is having adverse impact on securing and revalidating required permissions for pipeline laying work. Lockdown restrictions also have resulted in adverse impact on availability of contract manpower, much of which has migrated to their native places and are reluctant to come back due to frequent lockdowns. Many societies are also not allowing access to MGL staff to undertake construction work. In July 2020, there was reimposition of strict lockdown in municipal areas of Mira-Bhayandar, Thane, Navi Mumbai, Kalyan-Dombivli, Panvel and Raigad, which impeded construction work. As Mumbai Metropolitan Region is one of the most affected areas due to COVID-19 outbreak, continuation of partial lockdown or reimposition of complete lockdown in parts cannot be ruled out. Considering the possibility of prolonged disturbances and in order to safeguard our human resources, we had enabled IT arrangements to work from home, particularly for service functions like finance, HR, procurement, engineering and planning, CRM, et cetera. For functions like project, O&M, marketing, et cetera, where work on the field is necessary, observation of the prescribed safe practices are being ensured. Gas supply to PNG consumers and all our open CNG stations have been maintained 24/7 during the lockdown. Our emergency control room and customer care services have remained operational, adhering to required safety and social distancing guidelines, providing 100% customer support and meeting the emergency needs. As a responsible corporate citizen, we have continued to pay all our dedicated contractual manpower the minimum wages applicable during the period of lockdown. We have also funded various social initiatives under CSR projects for people impacted due to COVID-19 and prolonged lockdown. As a result of lockdown throughout the quarter, volumes were adversely impacted, resulting in reduction in overall sales volume for the quarter by 60% compared to previous quarters. As a result, current quarter EBITDA is INR 80 crore as compared to previous quarter EBITDA of INR 244 crore. On the margin front, EBITDA was 30.6% for Q1 compared to previous quarter EBITDA of 35.5%. Expenses per SCM of gas sold are high, mainly due to overheads remaining at normal levels with reduced volumes. Net profit after tax was INR 45 crore in the quarter as compared to INR 167 crore in the previous quarter. With this, I conclude, and would now like to open the floor for questions. Thank you very much.

[Operator Instructions] Our first question is from the line of Vidyadhar Ginde from ICICI Securities.

One, on your last earnings call you had suggested that you have several levers to maintain margins, but margins are down quite significantly, but now they have improved somewhat.

I'm sorry, Mr. Ginde, we can't hear you. Mr. Vidyadhar Ginde, sorry to interrupt. Mr. Vidyadhar Ginde, sorry to interrupt. We're not able to hear you.

Going forward or margins will continue the way it has been compared to what you have done in the past?

Vidyadhar, we're not able to hear you. Can you repeat the question, please? And speak a bit loudly on the handset, please. Thank you. Hello?

There seems to be no response coming in from this line. We'll take our next question that's from the line of Kishan Gupta from CD Equisearch.

Dhagash Shah this side. So my first question is what is the CapEx target for this year? Hello?

Yes. CapEx target, we are still hopeful of anywhere between INR 550 crores to INR 600 crores. But it will be dependent upon the speed at which particularly the permissions are received from various statutory authorities.

Sir, given the lower demand this year, is it not possible to defer this CapEx?

I think we could not take any short-term view. I mean, 1 year here and there is not an important element to consider. Also, there are capital expenditure with reference to security supplier also involved. There are some minimum targets in respect of Raigad area, which CapEx is also required. So while setting the targets or compiling budgets of the company, everything has been taken into consideration. And funding is anyway no issue that you are already aware of possibly.

Sir, can you just give us a brief breakup of this INR 550 crores, INR 600 crores if everything goes according to plan?

What do you mean by breakup?

As in where would this be spent?

Around INR 120-odd crores will be in the area of Raigad, rest in other than Raigad area.

All right. All right. And sir, what has been your capacity utilization for FY '20?

Can you...

Capacity utilization of what?

FY '20.

Capacity utilization of what you are asking? I mean...

Sir, FY '20, last financial year.

You're talking of physical network capacity or you're talking of CNG station capacity? Or...

No, I'm asking, sir, capacity utilization.

Of PNG station or which?

Yes, sir, both CNG and PNG.

No. CNG stations, we have been averaging about 50% capacity utilization on an average, and the individual stations may range between 15%, 20% to right up to 90%, 100% also. And PNG, typically a domestic household consumes 0.5 cubic meter of gas in our estimates over a cumulative period of 4 hours during a 24 hour a day. Maybe you can derive some capacity utilization from there.

Okay. Okay. So sir, again, I might be overstressing this. But in a downturn here, do you think this is a right move to spend INR 550 crores, INR 600 crores on CapEx?

See, infrastructure need to be developed. Because this -- effect of this pandemic may not last very long. And then if infrastructure is not developed, the utilization cannot be done after this. So this all CapEx, which has been mentioned, is for the development of infrastructure.

[Operator Instructions] Our next question, we would take from Vidyadhar Ginde from ICICI Securities.

Yes. Can you hear me?

Yes, sir. We can.

So my question was in that the last earnings call, you had suggested that you had several levers to maintain margins, but margins are down quite significantly in Q1, but now volumes have been significantly recovered from the lows of April. Do you now expect margins to improve significantly going forward, going back closer to the kind of margins we were making last year?

Yes. It will be dependent on 2 things. One is, even with current, this Q1 EBITDA margin very low, you will observe that gross margin has, in fact, improved. It is all the downturn which we have seen is because of the OpEx per SCM going up. In fact, if we just compare OpEx per SCM, say, Q4, it was INR 5.69 per SCM. It has shot up to INR 8.19. Whereas, similarly, if you see gross margin, in fact, it has improved to INR 15.91 from INR 15.10 in the Q4. So there is nothing which is going to drastically change with respect to expenses. So the moment the volume picks up, particularly in PNG customer category, I think per SCM expenses will definitely drop down.

So what is your PNG now? In the sense, you gave us a total that you are 65% of normal in August. Can you give us some color on -- in terms of CNG where you are right now?

Yes. CNG, around 50%-odd we have reached.

Okay. Okay. And last question is on what is your spare capacity in your pipeline network in -- the safety pipeline network which you have built in? What is the spare capacity there? It is supposed to be I think at least 20%? So are you there, less than that, more than that?

No, I think 20% should be available, spare capacity.

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

My question is, one, that we are hearing some changes in the APM gas price mechanism. Whether it is true and if you are able to provide any color? Then, I will ask another question.

No. We are not aware of any such development.

Okay. And the second is about allowing the entry of other operators in the mature markets. So do you anticipate in the Mumbai market any of the operator coming along because of the change in policy that is coming up now?

That will be a function of in what manner and when the network will open. So there are still some gray areas around it, which I think the PNGRB is trying to address. So we'll only come to know once the final regulations are notified. Yet to see in what manner and shape and what method new entrants are allowed in. So without that, it is very difficult to say right now.

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

I have 2 questions. One, of -- what is the number of CNG stations in total that we are operating today? And of that, what percentage today is being operated out of OMCs? And what sort of commission are we paying them, if it's possible to share, as of now?

We are operating about 256 stations, out of which 184 will be with oil marketing companies.

Right. And sir, the commission is in the range of INR 3 to INR 3.50 as it used to be or has it gone up, sir?

It's about INR 3.50 to INR 4. The higher amount is payable in the main city and immediately adjacent areas. And for further out areas, it's closer to INR 3.50.

And this is per kg, right, sir?

Yes. Per kg.

Okay. Okay. And just a hypothetical question. Now obviously, open access, as you said, modalities and timing and all are yet to be decided. But as a very simplistic measure, if, let's say, 20% or whatever volumes have to -- are booked by a third party, given our net worth, capital employed today and if assuming it's 14% post tax, transportation cost has to be paid. What sort of per SCM charge will you be able to take from the third-parties accessing your network?

It's difficult to answer now. Again, tariff regulations are not yet notified.

Yes. Sir, I said if I assume a very simplistic -- the earlier normative levels just used to be, a 14% post-tax ROCE, if that is to be the norm, let's say. Any rough area -- rough idea you can give us?

I mean we haven't calculated any such rough number. If you look at it in such a simplistic way, then, of course, you can look at our asset base, our volume, 14% return, you should arrive at a number.

Okay. And any time lines you have heard from the peer or regulator in terms of when the notifications can actually come?

Nothing formally, but we have come across a few newspaper reports, which say that they are going to do this soon. Now we don't know how soon is soon.

We'll take our next question from the line of Amit Rustagi from UBS.

My question pertains to the regulations itself. Do we get an opportunity to present before the government? Because the government on one hand wants infrastructure development on the CGDs. And on the other hand, if this regulation comes, so how they're going to strike the balance? So if you have any thoughts here, if you can add something.

As of now, we don't have any formal plans to go before the government because there is a sector regulator in place. And whatever is to be done on this front will be done by the regulator through regulations and consonance with that. The center can only probably -- if at all they want to issue any policy directives under that, yes, they have that power. But as of now, we haven't heard anything in this direction.

Okay. And sir, my second question relates to last year BEST had a plan to add around 500 buses. So if you can give us some color how many buses have been added, and what's their plan now? Are they going to add more buses? Or it's just like they're done with it?

No, no, no. Out of those 500, I mean there were some complications because of the lockdown, but even then about 300-odd have been inducted and the remaining 150 will be hitting the road in this month and next month.

Okay. But sir, are they adding after this? Or this is just...

Yes. They have plans for adding on another 800 to 1,000 CNG buses, for which we have had 2 or 3 meetings at the highest levels in BEST. We have identified in which depots these buses will be deployed. We have given our plan for creating the infrastructure required there. And we are synchronizing our time lines. Only thing is, again, this lockdown and COVID has put a slight pause on those initiatives, but they are still on.

Okay. And sir, how many total buses they would have now after adding this 300 buses? And how much volume they would be consuming, if any rough idea?

With these additional buses in the couple of months, they will reach about 2,350. And whatever 800 to 1,000 more after that, but for that -- those tenders are yet to come out.

Okay, sir. And so total volumes, they are consuming?

They are consuming their normal, about 1 lakh kgs a day.

Our next question is from the line of Lokesh Manik from Vallum Capital.

Just a couple of questions. One is a clarification. You mentioned the CNG stations are operating at 50% capacity in FY '20. These would include both owned and OMCs, that is total 266?

Yes. This is an average across all the stations.

Okay. And if you can just share some color on the underlying growth drivers, if you can share the trend in conversion to private vehicles to CNG over the past 4, 5 years, what has been the growth and other private buses and BEST buses, mainly in the CNG category? Just trying to understand the growth drivers and the growth rate for the last 3, 4 years.

For 3, 4 years, if you look at, there have been 3 main growth drivers. One is the autorickshaw segment. So about 3 years back or so, government had lifted the cap on number of permits, which they issue for autorickshaws. So that has led to a sustained growth in the autorickshaw numbers for a period of about 1 or 2 years. The second one was the advent of these aggregators, Uber, Ola, et cetera. They were offering very, very competitive rates. And with diesel becoming more and more expensive, they found that CNG is the preferred choice, unless they were deploying these big sedans, which travel outside the city, et cetera. So a lot of the aggregator's load is actually intracity. So that predominantly came on CNG. The third one was in the private car segment, where over the last 2 years or so, a lot of OEs are now coming up with new CNG variants, with factory-fitted CNG. So helping develop confidence among the customers that this is not any workshop or garage level retrofit, which is happening. This is right from the manufacturer. These are the 3 main segments where -- which feature growth in CNG. If you look at the state transport undertakings and municipal transport undertakings, last 3, 4 years, actually, there has been a pretty strong decline in volumes because -- for various reasons. But last 6 months or so, we have seen that trend reverse in the case of BEST, which is the largest fleet operator of buses. They inducted at least 500 more buses, and they'll be doing 800 to 1,000 more.

Okay. Okay. So sir, from an addressable market size, where would we be standing -- say, out of 100%, where would we be today from our potential?

You're talking of the CNG segment?

Yes, yes. On a very broad basis. An approximate number would do.

It would be somewhere between 30% and 35%.

Okay. So today it's 30% to 35% of what potential we can get?

Yes. That is the level of penetration today.

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

My first question will be, sir, what is -- is there any discount which you offer to BEST or is it at market price?

We do offer them a small trade discount.

And what would that amount be?

It is lesser than OMC, much lesser than OMCs.

Slightly lesser than OMCs?

Lesser than INR 1, actually.

Okay. Okay. Okay. Lesser than INR 1. Sir and second, so theoretically, if the open access comes, they could also be a threat to MGL volumes, right? And they can -- because most of the depots would be on their land, most of the CNG bus depots.

Yes. But we'll have to see in what shape and manner the actual regulations are notified. There is still this confusion about 20% capacity, et cetera, which we need to see how it plays out.

Okay. Sir, my second question is regarding the commercial volumes, where are we and what proportion -- I mean, what -- where are we in terms of percentage of normal volumes? And how do you see that segment because they would seem to be more worse impacted and probably will not come back to fore, at least for the foreseeable future? So what is your thought on that, on the commercial side?

This restaurant category, we have reached around 55% level. I mean if you compare let us say with earlier, say, February month volume, so somewhere around 55% we are. And in case of 5-star hotels or bigger commercial thing, somewhere around 40% level we have reached.

Okay. Okay. So sir, and what is your thoughts on that? I mean this segment would -- and what is the total consumption? I mean, what is the volumes if you will split it between restaurants and the 5-star hotels?

It is, say, around 0.098 for restaurant categories, mmscmd, whereas 0.050 for these 5-star hotels and these type of things.

So this is the current, which would be like 50% of the normal numbers, right?

No, no. This is the normal pattern which I had talked about. If you want current...

Okay. No, no. That's fine. That's fine. I'll calculate.

Okay.

We'll take our next question from the line of Manikantha Garre from Axis Capital.

Yes. Sir, I wanted to check from you, if there are any insights that you get -- that you are getting from discussions with OEMs on CNG vehicles, especially from the LCV or MCV side? I'm asking this because I hear that in Delhi, for example, Tata Motors and Eicher are talking about more than 20% growths in LCV segment. So are you hearing -- are you seeing such kind of growths in Mumbai also? That's my first question.

Well, that kind of growth is not there in Mumbai. And basic reason probably is in Delhi, LCVs are not allowed to play on diesel, whereas in Mumbai that is not the case. Having said that, Maruti is pushing their small commercial vehicle, CNG fuel, quite aggressively in our market also. And that is slowly picking up a bit of traction.

Understood. So related to this, only, I've actually discussed with an MCV -- CNG MCV, I think it is owned by -- it is of a Eicher make. That driver was telling me that beyond Borivali -- from Borivali till South only CNG MCVs are allowed. Is that the case? So that means there are regulations in place in Mumbai also, right?

Well, our understanding is if the commercial vehicle is less than 8 years old, it is allowed to run on diesel. So -- but if it is older than 8 years old, then it cannot run in Mumbai. It either has to convert to CNG or has to -- either the transporter buys a new diesel vehicle or moves it out of -- the older vehicle moves it out of Mumbai.

Understood. So this is applicable for both LCVs and MCVs or only MCVs?

No. This rule is applicable for all commercial vehicles. It is a rule in Mumbai.

Sure. And last question, if I can squeeze in, if you can provide us the status of the autorickshaws. Last quarter, you mentioned that 3 lakh autorickshaws are plying. And after the lockdown many of them actually have -- if there is an [ exact ] number if you could give, right? So how is the situation now? How much of autorickshaws have come back from the pre-COVID levels?

Well, our reading is approximately half of them are back.

Our next question is from the line of S. Ramesh from Nirmal Bang.

The first thought is in terms of your gas sourcing. How much of your gas is on spot? How much on contract?

Currently, we don't have any long-term take-or-pay contracts. So it is predominantly from the spot markets, which we are going.

Okay. So that's pretty much reflected in your gross margins? And second thought is, in terms of your CapEx plan, do you anticipate any need for borrowings to fund it? And any plans to get into electric vehicle chargers?

No. We don't anticipate any need for borrowings as of now.

And any thought on getting into electric chargers?

Electric chargers?

Yes.