Mahanagar Gas Limited (MGL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '21 Earnings Conference Call of Mahanagar Gas Limited, 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, Rithija. Good afternoon, everyone, and [indiscernible] to all of you. On behalf of Axis Capital, I welcome all participants to the conference call. Today we have with us Mr. Sanjib Datta, Managing Director; Mr. Deepak Sawant, Deputy Managing Director; Mr. S. M. Ranade, CFO; and Mr. Rajesh Wagle, SVP, Marketing. Let's start with brief order of the company's performance for Q2 FY '21 and then we can have a Q&A session. Thank you. Over to you, Richa.

Thank you, Mani. Good afternoon, everyone. Before we begin, I would like to mention that some of the statements made in today's conference call may be forward-looking in nature, and we believe that expectations contained in the statement are reasonable. However, the nature involves a number of risks and uncertainties that may lead to different results. The 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 this quarterly numbers are not a reflection of long-term trends or any indication for full year results. They should not be attempted for a long-term trend or any indication for full year results. They should not be attempted to be extrapolated or interpolated in future numbers. With this, I would now hand over the conference to MD sir for his opening remarks. Over to you, sir.

Thank you, [indiscernible]. Good afternoon to all of you, and welcome to the Earnings Conference Call of Mahanagar Gas Limited for the Second Quarter of the financial year 2020/2021. I would like to thank all of you who have connected for our earnings call today and wish you all happy new Samvat year 2077. As we overcome the health and economic crisis of very large proportion, let us hope that things get back to normalcy at the earliest. Nationwide lockdown implemented since last week of March 2020 to combat COVID-19 adversely impacted the company's operations from the first quarter of 2020/2021. Internally, MGL has successfully faced the challenges by safeguarding our human resources, shifting all support services to function through the company's IT backbone to undertake work from home and by observing the precise safe practices. Though there have been easing of lockdown restrictions, even today, presence in our office establishments is to the extent of 30%. Issues with regard to restricted work environment and compliance requirements in respect of pandemic continue. As a responsible corporate citizen, we have continued to pay all our dedicated contractual manpower the minimum wages applicable during this period of lockdown. This has enabled better productivity from all service providers. We have also provided monetary incentives to bring back migrant contract labor. Though reasonable number of contract labors are available, mobility within the city is constrained as local trains are not fully operational. Besides, access to societies and prompt grant of permissions by statutory authorities still remain a practical constraint. Gas supplies to all our PNG customers and to the CNG stations have remained operational 24/7 during the lockdown. Our emergency control room and customer services has also remained operational for meeting all emergency needs and for ensuring 100% customer support while adhering to the required safety and social distancing guidelines. We also continue to fund various social initiatives under [indiscernible] projects for people impacted due to COVID-19 and the prolonged lockdown. Now coming to MGL's operations. We are rapidly expanding our CGD network in the existing licensed areas. During the quarter, 16,223 domestic households were connected, thus we have established connectivity for nearly 1.5 million households. We have laid 18.56 kilometers of steel and sea pipelines, thereby taking the aggregated pipeline length to more than 5,650 kilometers. We have added 3 new CNG stations. And with these, we have 259 CNG stations. We also added 28 industrial and commercial consumers. And thus, as in quarter end, we have 4,046 industrial and commercial customers. With respect to our Raigarh geographical area or GA, we have connected to more than 26,500 domestic households and 15 CNG stations are operational. CNG sales in Raigarh reached their average level of 30,900 kg per day in the month of September 2020 in spite the movement with restrictions. It is expected to go up when some more CNG stations become operational in coming months. In Raigad GA, we have laid 7.82 kilometers of pipeline during the quarter, thereby taking the total length of pipeline in Raigarh to 109.82 kilometer. Despite the impact of COVID-19, during the quarter, we achieved overall sales volume of 2.073 mmscmd, consisting of CNG volume of 1.276 mmscmd, domestic volume of 0.463 mmscmd and 0.334 mmscmd supplied to the industry and commercial segments. Significant volume recovery trend is seen with an increase of 86% in overall sales volume compared to previous quarter. In case of CNG, sales volume has reached from 0.48 mmscmd to 1.276 mmscmd, which is an increase of 166%. In case of domestic sales, volume has increased from 0.429 mmscmd to 0.463 mmscmd, which is an increase of 8%. While in case of industry and commercial segments, sales volume has increased from 0.204 mmscmd to 0.334 mmscmd, an increase of 64% compared to the previous quarter. As a result, current quarter EBITDA is INR 221 crore, which is 176% higher as compared to previous quarter EBITDA of INR 80 crores. Our new high is reached on the margin front, with EBITDA being at 43.6% for Q2 compared to previous quarter EBITDA of 30.6%. Net profit after tax has been INR 144 crores in the quarter as compared to INR 45 crores in the previous quarter, representing a 220% increase. Now let us look at some retail development and implications thereof. Firstly, the company had requested PNGRB to extend the time line for achieving the minimum work program or MWP in respect of inch kilometer on account of slowdown due to COVID-19. PNGRB has issued public notice dated November 5, 2020, extending the MWP time line due to COVID-19 lockdown for various geographical areas. An extension of 251 days for Raigarh GA has been granted [indiscernible] regulatory board guiding principles for city or local gas distribution network as common carrier or contract carrier regulations 2020 [ wide ] notification dated September 30, 2020. Access code and tariff regulations await notification. However, we believe that many clarities will have to emerge before these principles and regulations are finally implemented on the ground. Thirdly, the oil marketing companies [indiscernible] have raised the demand for a steep hike in trade discounts while selling CNG from their retail outlets. We hope to settle the matter through negotiation and involvement of other stakeholders. In Raigarh GA, we have recently received permission to lay pipeline of 8.5 kilometers from PWD at Rasayani to Panvel. Further, permissions to lay 23 kilometers of pipeline on NH 166D, that is Khopoli-Pen road and 5.5 kilometers on NH 17 that is Goa road from [indiscernible] to [indiscernible] petroleum [indiscernible]. We have procured land for setting up a City Gate Station or CGS for receiving gas from [indiscernible] pipeline at Savroli in Raigarh GA and are likely to complete the CGS connectivity in a year time from now. MGL seems to be at the take off point for rapid progress in the next 3 to 4 quarters in view of new hike -- new highs in margins, sales volume reaching 3 mmscmd in November and infrastructure getting ready in Raigarh to tap industrial load. If factors like spot gas prices, Brent level and rupee-dollar exchange rate remain favorable, we can look for -- forward to steady or even improved EBITDA margin per unit. 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 Amit Rustagi from UBS Securities.

And sir, congratulations for recovering the volumes and performing in such a tough environment. Sir, I have 2 questions. First question relates to the volume recovery in the third quarter. So could you help us in understanding how has been the volume in the month of October and November? And which segments are doing well? Or which segments are still lagging behind?

If the volume recovery continues into the third quarter and the domestic segment has always been taking a bit more than average because of less eating out and more cooking at home. Industrial segment has also more than fully recovered. So they are going [indiscernible]. CNG is also showing an increase in trend. And it is the commercial segment, which comprises of these [indiscernible] 5-star hotels plus restaurants, which is related to other 3 segments that showing a slower volume. But in November, we have -- there have been days when we have crossed 3 million sales. That shows an improving trend. So pre COVID also we are averaging slightly above [indiscernible].

Sir, did you say that the CNG is on a recovering trend, but are we like around 90% of CNG volumes? Or we have already recovered the past year levels? If you can help us with some numbers.

We are between 90% and 95% of our legacy CNG volumes.

In spite of CNG volume is between 90% and 95%, our overall volume is more than what we were having pre COVID. So recovery in other sector is also very impressive. So CNG volume is also poised to grow. So definitely, the growth will be on the much positive side.

Okay, great. And sir, my second question relates to this OMCs negotiation. So where you think that the matter can be settled? And since we have not made any provisions, is this amount likely to be significant? And is this amount coming because of open access regulations are underproposed or [indiscernible] at the regulatory from the regulatory side.

OMC trade discount increase, number one, okay, it may have something to do with access core or something that can be better answered by them. But it's a part of normal negotiation, everyday [indiscernible] or these negotiations do take place, and there also [indiscernible] negotiations have taken place. Right now, the basis based on which this increase has been requested by OMC, he is not yet with us. So it will be a bit unfair to comment upon the justification of the increase. But once we receive more details, how they are calculated, how they have gone about, we'll definitely be negotiating with them. And we hope the matter will be amicably settled the way it has been in the past also. You will recollect earlier also, 2015, 2018, the kind of negotiations were there. And ultimately at a properly [indiscernible] because the settlement has -- so we are positive this time as well. And all [indiscernible] we would also -- cognizant of the fact that what the increase is coming because MGL has the headroom and ability to pass to the [indiscernible] if the need to arises.

The next question is from the line of Nafeesa Gupta from BofA Securities.

Hello. Sir, question from me is that in the current quarter, the company took a CNG price hike of INR 1. But when you compare the price realization, the average realization in the quarter, it is flat on a sequential basis. Sir, any reason why?

[indiscernible] CNG [indiscernible] OMC [indiscernible] direct sales through which MGL prices [indiscernible] also...

Sorry to interrupt you, sir. Your voice is breaking. Can you please check?

Okay. I'll just repeat. CNG prices [indiscernible] not be a time [indiscernible] there are [indiscernible] CNG prices that was [indiscernible] OMC [indiscernible].

Sir, apologies. It's still very noisy, can't make out.

Is it now better?

No, sir. There is still a disturbance.

Is it clear?

No. There is a disturbance from that line.

Disturbance from the line?

What sort of sound you are able to hear?

Like there's something which is breaking when you are speaking.

Breaking, speaking type of thing.

[indiscernible]

Sorry?

We are hearing you clearly, but is the voice still breaking?

There is a static disturbance from the line, sir. Sir, I will call you back.

Okay.

Ladies and gentlemen, please give us a moment while we check the line of the management. Ladies and gentlemen, thank you for holding. We have the management line connected back. Please go ahead.

Can you repeat?

The last question was from the line of Nafeesa Gupta.

So my question, sir, was that in the quarter we see that the CNG realization was kind of flattish sequentially Q-o-Q basis. But even though we took a price hike of INR 1 in the quarter in July. So just wanted to know how.

Okay. There are couple of reasons for that. First of all, this price rise, which we had taken was done almost in the back end of July. So it is only effect of August and September will be there. That's point number one. Secondly, there are 3, 4 channels through which we sell our CNG, there will be OMCs, one through our direct outlets another through STUs, with all different categories the net sales realization differs. So depending upon which channel has sold more as compared to other quarters, sometimes we will find such kind of changes in the net realization.

Okay, sir. And sir, my next question is that previously when you've taken -- when we revised the discount to OMCs, have we done any kind of pass-through to customers? Or has it directly impacted our sales?

No, we have passed through the cost.

Okay, okay. Entirely, sir, or part of it?

Entirely.

Entirely passed on to customers. Any kind of hike?

At times, there could be slight time lag, that possibility could be there. But otherwise, after the conclusions are there, on a prospective basis, all these prices are taken clear.

Sir, any trade discount that you increase to the NPs will be passed on to the customers?

We believe so.

Okay. And sir, any guidance on your EBITDA margin for the full year and maybe next year, given that last quarter was kind of -- like 2Q, very, very high. But any overall full year guidance?

Yes. I think guidance is pretty positive, and there are reasons that you have seen already the levels of current EBITDA margin plus with increase in volume over quarter 3 and quarter 4, as the volume increases, the cost per unit, particularly administrative and other fixed costs, will drop on per unit basis. So that is also going to help us. So margins could be steady or even improvement can be thought about. A lot will also depend on what are going to be the oil price level or maybe the spot gas costs and rupee-dollar exchange rate. Now no doubt, the spot gas cost has been hardening a bit, but I think some similar changes have been seen in oil price levels also. In fact, in quarter 2, the sales realization in industrial and commercial was quite impressive as compared to quarter 1. So assuming such scene continues at Brent level, spot gas level and even rupee-dollar exchange rate, I think all these things [indiscernible] well for the company, coupled with volume increase also we'll soon now see. In fact, we have already reached, I think, [indiscernible] covered any speed that 3 million level SCM basis on an SCM basis, we are already reached in the month of November.

The next question is from the line of [indiscernible] from Bharti AXA Life.

Sir, [indiscernible] on OMC trade market. So currently, how much margin are you [indiscernible]?

The voice is not clear.

Can you hear me?

Yes, better.

Yes. I'm asking, sir, with respect to the OMC trade market, how many rupees per kg are you paying right now to them?

It's a range. It depends on which geography we are talking about, particularly in Mumbai and outside Mumbai. The range from approximately INR 3.70 per kg to INR 4 per kg. That's the range in which we are paying.

And sir, [indiscernible] in July 2018, so the rate, which you are mentioning INR 3.7 to INR 4 is basically after adjusting the inflation and regulated indexation that is how the current rate has been come up pay, right? Which [indiscernible] in our P&L?

Currently, these are the rates which are currently prevalent, which actually we pay in cash on the basis to OMCs.

Yes. Yes. Okay. But this would have increased in terms of the inflation, which is based on the formula post your presettlement [indiscernible] settlement in July 2018, right?

See, this will be one of the factors which will be taken into consideration, by settling the prices.

Okay. And sir, my last question is basically, is there any time lines like when we can see you guys come into end of negotiation with respect to this with [indiscernible]?

It's a bit premature to predict right now. Number one -- there are 3 [indiscernible] marketing companies, which we need to deal with. But more importantly than that, whatever increase they are expecting, we are yet to receive the full details of it. I think the progress in negotiation will be much better once we receive the details from these OMCs.

Okay. And if I can just add, sir, in 2017, it is also the trade margin [indiscernible] you are paying would be in the range of this INR 3 to INR 3.5 [indiscernible]

It was a step-by-step increase.

On an average, the increase over the last 5, 6 years was about 9% per annum.

The next question is from the line of Vishnu Kumar from Spark Capital.

Sir, in your opening remarks, you mentioned that if certain parameters play out will increase on the current margins that we had kind of reported this quarter. If you could broadly elaborate to us what are those -- we understand LNG price is currency. And just wanted to understand the broad trajectory of margins which we will continue to maintain over the next couple of years. So will we breach the INR 10 range going forward? If you could just give some idea and guidance on that. If not a guidance, at least a color on how we should see this.

See, obviously, it's very difficult and may not be right also by being price-sensitive information to predict some figures and those kind of things. But what we can always look at is what are the factors which help us and, at times, sometimes do not even help us. So like if you compare Q2 versus Q1, I think our margins improved considerably in case of industrial sales. One of the primary reasons was the alternate fuel prices. For example, a majority of our industrial customers use LSHS as alternate fuel. On an average basis, let us say, for Q1 LSHS was in the region of around INR 24,000 per ton, which increased to nearly INR 32,000 per ton in the -- on an average, this is in quarter 2. And with the kind of pricing philosophy which we have built in, it helps us get a substantially higher sales realization in industrial customer category. No doubt spot gas cost did increase a little bit. But I think increase in net sales realization was proportionately much more higher. Similar was the case in case of restaurant category or commercial, what we call it. One of the important alternates fuel over there, particularly with restaurant category, 19 kg LPG cylinders. There, also price of alternate fuel had increased a bit, and that helped us to get us better sales realization and ultimately better macro margin also. So this number one, I'm saying the level of oil price level is very important for us from the pricing point of view. So equally, it's important is spot gas cost. Now you have seen over last 2, 3 years, there have been a substantial drop in spot gas price levels, which has definitely helped us. And we now need to see how going forward the spot gas prices are going to reflect. And it is also important to see the proportionate increases in oil price levels and spot. Like currently, the situation is no doubt spot gas is slightly hardening. But as long as your general price, oil price level is also moving, and assuming the proportion of increase in IPAC level is higher, you may see to gain in industrial commercial sector. So that's point number one. If we are talking about, let us say, rupee-dollar exchange rate, I believe, right now, it's reasonably at settled level, assuming the pandemic situation over the world remains reasonably static or improves further, then whatever other geopolitical factors are also there. Depending upon that, the rupee-dollar exchange rate stability will be known to us, and that will be very important to us for the simple reason we buy entire gas in dollar terms, whereas paying in rupee terms. Hence, rupee dollar exchange rate is also another important factor for us. And finally, if we are talking about EBITDA margin, I think whatever even right now we have actually seen much lesser volume. As the volume increases, advantage leveraging fixed cost and all that. Rupee -- I mean rupee per SCM basis, fixed costs will definitely drop down. That will further help us to improve the margin. So we are quite hopeful that the things are quite good in the days to come. Hoping for steady margins unless whatever macro factors we talked about go altogether wrong. Otherwise, things are looking quite positive now.

Would it be possible to give the industrial gross margin for the last 2 quarters, at least, which has gone down? And if, let's say, MRP also for this segment.

This margin we don't even customer category wise. But your second question, probably I can answer

At least, if you can give us.

Yes. Realization for industrial, for example, in quarter 2, this is, I think, net basis, it is INR 29.23 per SCM.

Industrial category?

Yes, industrial category. As against quarter 1, it was 22.80. Whereas in case of predominant restaurant category, current quarter was in the region of INR 32 per SCM, whereas earlier part, that is quarter 1, was around INR 28 odd. Okay.

This is net number, not with the taxes?

These are net realizations, yes.

Got it. And between these 2 quarters, at least on the gross margin level for your CMB, is it more or less flat? I mean you don't have to disclose the number, but at least on that basis, CNB is more or less flat?

Can't say flat as such because there is some price rise also we had taken, no doubt. It was a bit late and net realization was late because we implemented in July and almost. So only August, September, we have seen the benefit. But I think quarter 3 onwards, we should see some improvement in there as well.

Sorry, just if I to add just one thing. Have we increased the commercial/industrial prices in 3Q?

Commercial industrial prices in?

Third quarter. This quarter, is there any increase?

There is a pricing philosophy, which we follow, and there are contracts signed with the customers. So the price movements take place in line with the contract. Generally, very simply explained, it moves in line with the oil price level. That is alternate fuel prices.

Which means code is more or less at the same level and we have not taken any more -- I mean, more or less the price should, whatever you mentioned in 2Q

High price levels, the alternate fuel prices. I mean, and there could be some slight time lag of, say, 1 month or so. But otherwise, broadly in line with oil prices. If oil prices drop, then it can drop also.

[Operator Instructions] The next question is from the line of [ Bhavin Nandi from BNK Securities ].

Just wanted the exact quantum of volumes that we are doing from OMC outlets today, I mean, on a steady basis.

Yes. It may not be right to see at current level.

Last year -- of course, if you can give us the last year's number?

Yes, something like that.

Between 60% and 65%.

50 and 65. All right.

Between 50% and 65% of the total CNG [indiscernible]

Sure. Got it, sir. Sir, also, you in the initial remarks, it was mentioned that the access code notification is pending. But even after the notification, some clarifications would be required. If you can elaborate on what clarification is NDA speaking?

Some of them are legal in nature. Some of them are technical in nature. Just to give you an example, the drop export regulations depilate that of operated entity does not connect the SIBOR in time or is not new connectivity, et cetera, then the shipper can lay alone infrastructure to connect with customers, which is going totally against the concept of authorization. If I just to lay any common carrier or any set related infrastructure in the city, in a geographical area, they actually have to go through a whole loan process some authorization. Just because we were shipped he's got role of some imaginary customer getting connected, that doesn't automatically give authorization to lay infrastructure. There are some technical points regarding the percentage of open ex, how exactly that is to be calculated, how exactly the capacity will be determined again. The regulations are saying something on it, but none of it has happened on the ground. Some big order capacity, determination assessment group, which was reformed by regulator. Many places the regulator Astec entities to do themselves, things which the regulator or somebody has a supposed to ask for the regulation. Even if the tariff regulations, for example, current draft says that the operator entity it should recover its own tariff. At least there is a challenge or a dispute, then the regulator will step in, but that is totally against the scheme of the act. There are challenges around the open exposition.

Got it, sir. And just one last thing. Any update on the interactivity extension?

Can you repeat that, please?

The extension, any progress?

Or tension of infrastructure.

No, this whole thing will get clear only after the legal of partner on reserve. That's by regulated also for subsides. So unless that was resolved, it a state of scope.

The next question is from the line of Vidyadhar Ginde from ICICI Securities.

So my question was on -- just wondered some clarification in future as and when there is a refine when there is competition when it comes in, and let's say, th OMCs are the competitor. So as per your current arrangement with them, can -- is there anything which prevents them from just booking their own change dispense for CNG station where they have your dispenser currently?