Mahanagar Gas Limited (MGL) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Mahanagar Gas Limited Q2 and HY FY '22 Earnings Call, hosted by IIFL Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Harsh Dole from IIFL Securities. Thank you, and over to you, sir.

Thank you. Greetings, everyone. On behalf of IIFL Securities, I welcome you all for the second quarter earnings call of Mahanagar Gas Limited. To discuss the results in detail and share the outlook, we have the entire senior management team of the company. It is my pleasure to introduce you to Mr. Sanjib Datta, Managing Director; Mr. [ Sanjay Shanda, ] Deputy Managing Director; Mr. Sunil Ranade, CFO; Mr. Rajesh Wagle, SVP, Marketing; Mr. Rajesh Patel, VP, Finance. I would first request the management to make opening remarks, subsequent to which we can have the Q&A. Over to you, Jib.

Thank you, Harsh. Before we begin, I would like to mention that some of the statements made in today's discussions 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 relating to these statements include, but are not limited to, the risks and uncertainties regarding fluctuations in sales volume, fluctuations in foreign exchange, other costs and our ability to manage growth. Please note that the quarterly numbers are not a reflection of long-term trends or an indication of full year results, and they should not be attempted to be extrapolated or interpolated into full year numbers. With this, I will hand over the call to the management for their opening remarks. Thank you, and over to you, sir.

Thank you, madam. Good afternoon, and welcome to the earnings conference call of Mahanagar Gas Limited for the second quarter of the financial year 2021-2022. I would like to thank all of you who have connected for our earnings call today. The outbreak of COVID-19 pandemic in 2020 and its second wave in April 2021, resulted in significant disturbances and slowdown of economic activity. The company's operations were impacted due to the lockdown. This has resulted in reduction of sales volume across all categories, except for domestic PNG, where it is used mainly for cooking. Subsequently, the overall COVID-19 pandemic situation has improved considerably and economic activities have returned to normalcy to a large extent. As far as the gas sector is concerned, India's domestic natural gas production in Q2 of FY 2021-'22 was 8.57 BCM, which is an increase of 23%, compared to the same period in last year. However, spot LNG prices also witnessed a steep rise primarily fueled by high demand and shortages in Europe, China and other regions. PNGRB under its 11th bid round has quoted a tender on 17th September 2021, inviting application with documents for grant of authorization for 65 geographical areas across India. The last date for submission of bids is 15th December 2021. Coming to MGL's operations, I may mention that we are continuously expanding our CGD network in the existing license areas. During the quarter, 78, 214 domestic households were connected. Thus, we have established connectivity for nearly 1.71 million households. We have laid 49.36 kilometers of steel and PE pipeline thereby taking the aggregated pipeline length to over 6,000 kilometers. We have added 3 new CNG stations. And with these, we currently have 277 stations. We also added 77 industrial and commercial consumers. And thus, as of quarter end, we have 4,219 industrial and commercial customers. In order to expand the footprints of CNG, where land availability is a serious constraint, we have deployed a mobile refueling unit at Ajivali in Navi Mumbai. Subsequently, MGL issued an advertisement inviting requests for proposals from interested parties to put up more MRUs in Mumbai, Navi Mumbai, Thane and Mira Bhayandar area. Response has been received from 11 parties, which are being evaluated. Additionally, in order to expand the user base in CNG, MGL proactively promoting adoption of CNG in long-haul commercial vehicles. This has been made possible with availability of Type 4 CNG cylinders in the market. MGL is an advanced stage of discussions with MSRTC for retrofitment of buses from HSD to CNG with Type 4 cylinders. Parallelly MGL is also trying to promote retrofitment of few trucks and trailers belonging to prominent fleet owners of Mumbai as a proof-of-concept study. MGL is also exploring the possibility of retrofitment of large-scale commercial vehicles from single fuel that is HSD-only to dual fuel that is HSD and CNG. In respect of our Raigarh GA, we are connected to 45,617 domestic households and 21 CNG stations are currently operational. During the quarter, we have laid 13.12 kilometers of pipeline in Raigarh GA, thereby taking total length of pipeline to 281.93 kilometers. Average sales volume for Q2 FY '21-'22 is at 3.124 mmscmd and is higher than pre-COVID average of 2.951 mmscmd for the financial year 2019-'20. Average sales volume for Q2 FY 2021-2022 of 3.124 mmscmd is consisting of CNG volume of 2.234 mmscmd, domestic PNG volume of 0.451 mmscmd and industrial and commercial volume of 0.439 mmscmd. There is an increase of 30.3% in the overall sales volume compared to previous quarter as April and May 2021 were impacted due to the second wave of COVID-19. Compared to the previous quarter sales volume in case of CNG has increased from 1.551 mmscmd to 2.234 mmscmd, which is an increase of 44.1%. In case of industrial and commercial sales, volume has increased from 0.380 mmscmd to 0.439 mmscmd, an increase of 15.5%. However, sales volume for domestic segment has marginally reduced from 0.468 mmscmd to 0.451 mmscmd, which is a decrease of 3.6%, mainly due to normalcy coming from home has reduced. Current quarter EBITDA is INR 202 crores compared to previous quarter EBITDA of INR 304 crores. EBITDA margin is at 36.35% for Q2 compared to previous quarter EBITDA margin of 49.39%. Reduction in margin is mainly due to increase in spot gas prices observed from July 2021 onwards, whereas alternate fuels linked to Brent did not have similar increase, resulting in drop in industrial and commercial margins. Besides, due to a sudden spurt in gas consumption in the priority segments, due to ease in lockdown post May 2021, the requirement of gas went up more than the domestic gas allocation. The gap was bridged through use of spot gas for priority sales in the interest of consumers, resulting in marginal drop in gross margin for CNG and domestic PNG. Net profit after tax for the quarter is at INR 204 crores, same as the previous quarter. The government notified price of domestic natural gas has been revised from USD 1.79 per MMBTU to USD 2.9 per MMBTU, with effect from 1st October 2021, a rise of 62%. In order to recover full impact of change in priority gas costs, retail prices are increased in 2 tranches, on 5th and then on 14th of October 2021 for CNG and domestic PNG. Mr. Sunil Ranade, our present CFO, is superannuating on 31st October 2021. Post his superannuation, Mr. Rajesh Patel, Vice President Finance, who is working with the company for last 12 years, shall take over as the CFO with effect from 1st of November 2021. Many of you are acquainted with Mr. Ranade and have come across his proactive approach in dealing with the issues, which are important for the investor community. With this, I conclude, and would now like to open the floor for questions. Thank you very much.

[Operator Instructions] We'll take our first question from the line of Probal Sen from Centrum Broking.

I have 2 or 3 questions. One was this problem of domestic -- for the domestic and CNG segments. Has that problem been resolved now? Is it now back to 100%, 110% of requirement as is the policy?

Are you talking with reference to the availability of APM gas for priority sector?

Yes. Yes, sir. Yes, sir.

Yes, I think we have requested through GAIL to the ministry that some consideration should be given because there was obviously some shortage of supply. We are hopeful that some solution should be in sight in short time. Maybe it would be in the month of November, also, we may hear some positive news.

But as of now, sir, how much is it short by? Is it possible to share a percentage or a range of how much you're having to supply from LNG to the priority sector?

Yes. In the second quarter around 5% was supplied through RLNG in the priority segment.

Okay. And the same shortfall has continued as of now, at least?

Maybe it might have marginally increased also.

Okay. As volumes have gone up even more, sir? Is that the reason?

Yes. Rise in the volume has been very sharp in CNG.

Okay. And sir, the second question then was a follow-up given the kind of LNG prices increased and yet keeping the shift as well as the 14 price increase in mind. Is there a further margin softness that you're looking at for Q3. I know it's early days yet, but given that commercial industrial margins a benchmark to LPG, at least for prices, is there still a leeway to pass on this huge impact? Or we might have to take a little bit of a hit given the kind of LNG prices we are seeing right now, at least in Q3?

We'll have to see on both fronts. One is on priority segment and other is, as you rightly said, industrial and commercial category. Priority segment, we have already increased the prices, in fact, to recoup some sale cost. There was first increase in February in order to recoup the cost, which was there in the APM price, it still, we have already taken 2 price rises, which I think MD has already described in his speech in the month of October. There is definitely an ability to pass through even further. But whatever increase was there from $1.79 to $2.90, almost we have passed through already with respect to priority segment. And we can still consider depending upon various factors whether third price hike will be required. This is as regards priority segment. Whereas in case of industrial and commercial categories, yes, it has been our sales price philosophy, selling price philosophy that we have been benchmarking our price index to alternate fuel prices. However, the contract has certain provisions where there will be further flexibility in the pricing also. We will be taking a call in that respect soon, but we'll have to consider both the things. We'll have to balance it out. One is the margin perspective and another is obviously the volumes. So -- but there will be a possibility and flexibility exists in the contract if we wish to do something further.

Got it. Sir, last question, if I may, sir, if you can share like you do the quarter, the industrial and commercial volumes separately for the quarter and the price sales prices on an average for both segments?

Commercial volume was 0.153 MMSCMD for this quarter. Industrial was 0.286 MMSCMD. And price realization in case of recurrent category was INR 46.67 per SCM, whereas industrial, it was INR 42.43 per SCM.

[Operator Instructions] We'll take our next question from the line of [ Somaiah V ] from Spark Capital.

So considering the alternate fuel prices, could you just provide the alternate fuel prices for the last quarter as well as what was your average spot LNG cost this quarter versus the last quarter?

Okay. Right now, readily, we don't have the data, but we believe it should be available on the portals of the oil marketing companies.

Okay, sir. The second question is with respect to the new GAs, the 11th bidding round. So now that 60-odd new GAs have been put in, so what would be your approach? I mean, would it be something different from what we did in the 9th and 10th bidding round? How would we approach this? Your thoughts, sir?

The approach is likely to be similar. We will be selective in our bidding. And we have our benchmark or thresholds with respect to financial aspects as well as nonfinancial aspects. But there is no problem with respect to contiguity. We'll be open on pan-India, which is also fortunately. There are some GAs, which are in the state of Maharashtra also, but that will not be a limitation for MGL, that's one for sure. We try our best to put in whatever we consider as aggressive bid.

Got it, sir. And one last question, if I may. Any update on the margin increase as per the OMCs? Any update?

Yes, there has been discussions even at the ministry level. What has happened is the price -- I mean, discount price or trade discount increase, which has been asked by the OMCs has been pretty steep. So in fact, almost the entire CGD industry has represented with MoPNG. There has been a meeting chaired by secretary of MoPNG as well. He had finally heard both the oil marketing companies as well as CGD industry. And he has also promised that he will look into the issues and try to show some guidelines to OMCs as well as to CGD industry and try to sort out the matter. However, we still await further direction and thereafter, the decisions will be taken.

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

Sir, could you help us understand that -- when we will have some time lines on this MSRTC and this heavy truck retrofitment because I think we have been hearing these things from quite a long time now? Do we have some time lines in mind that when we will have some clarity? Unknown Executive.

The MSRTC has come out with a tender for the retrofitment of those buses. They had done something similar a few months back, but they couldn't go through the tender because probably all the pieces did not fit together. And because you have to have a type 3 or type 4 cylinders supplier. You need to have a person who will do the retrofitment. Good news that as MSRTC has secured funding for these buses, the state government has given grant because the diesel prices are so high. But we believe that if everything falls in place, these buses could get retrofitted in a time frame of about 6 to 8 months.

And sir, how many buses they have come out for tender?

The tender is for 1,000 buses. But all 1,000 are not necessarily in MGL's geographical areas. The 1,000 is spread over 5-6 different locations where now in another areas of Maharashtra also CNG is available. So out of the 1,000, maybe roughly half of them could be in our geographical areas.

And sir, second thing I would like to ask about the allocation of domestic gas for the priority sector. So could you explain us what will be the way out of how and like when you expect the increase in the domestic supplies to the CGD sector? And will that be like any change in formula or allocation from 6 months to 3 months or something like that? What will be the modalities if you have some clarity?

A few weeks back, the CGD industry had a VC with the Secretary of Petroleum, and we have represented our case saying that the normal formula of the ministry is they do a 6 monthly average. And based on your actual sales, they give 110% of your actual sales as the allocation for the coming 6 months. Now this exercise for H1, we have been promised will be completed maybe in the first or second week of November because GAIL is involved in data collection, CGD industry is to give all the data and PPAC is also involved in the analysis. The other requests, which all the CGD companies made was that the second wave of COVID impacted sales volumes in April and May of this year. So industry requested that rather than taking a 6 monthly average, if the government would consider taking the Q2 average sales volumes to formulate the business of allocation for the next half year. And both GAIL and the Secretary Petroleum have at least verbally assured that, yes, they will do all that they can do to make sure that the domestic gas is available in sufficient quantities to meet the demand.

Our next question is from the line of Kirtan Mehta from BOB Capital.

First question is about this -- would you be able to sort of share the quantum of spot LNG that has been used during the quarter and the average price for the same?

Quantum, I think we already answered earlier. It is approximately 5% in this quarter 2, which will require to pushing. And as regard average price, it will be somewhere around [ $3 ] per MMBTU. Kirtan Mehta.

Sir, could you mention 5% within the priority sector? So within the industrial and commercial segment, what would be the sort of the percentage, which would have been used as a spot LNG?

There is no question over there because it is always supplied through RLNG itself, industrial and commercial.

Right. Apart from the 0.1 mmscmd allocation that you have with from Reliance, correct?

Yes, yes, you are right. Absolutely.

The second question was about the sort of the -- could you update on the plan of addition of gas-based buses by BEST basically CNG buses by BEST. There has been a plan for around 500 buses that you have talked previously about. So what's the status and progress of that?

Well, the 500 buses, they have already -- some of them have started coming. And what BEST has told us is, I think, in the coming 2 months or so, all the other buses should be in. We have upgraded our CNG facilities in couple of depots to receive these buses. And 1 or 2 other depots work is going on. Apart from these buses, we are also in active discussions with BEST to retrofit 185 of their diesel buses to CNG. So we are in talk with both BEST and Tata Motors to get this done. So the time frame for that would be around 6 to 8 months. So Tata Motors has already started on the proof of concept, all the design and engineering part of it. And BEST offered to send them some buses, if they want to, do any trials or to get any testing done.

Yes. And one correction with respect prices, it's not $12, it is around $14.5 per MMBTU for this quarter.

If I can add one more question just to understand from the industrial and commercial space, what proportion of the volume has an ability to switch to an alternate fuel at this point of time?

Well, roughly about 70% to 80% of the volumes, they have the ability to switch.

Just going back to my first question about was -- is it a 0.1 mmscmd allocation? Just one follow-up on the -- or is it 0.3 mmscmd allocation for the RIL gas?

Slightly less than 0.1.

We'll take our next question from the line of Aishwarya Agarwal from Nippon India.

Sir, I just want to understand the second quarter was a bit weaker when we talk about our margins. So the gross margin itself was far lower versus quarter 1. So how we should look at the margin trajectory going forward? So when I'm asking margin, it is -- my focus is on the gross margin. And plus, how we'll be able -- how do you see the recovery of the margins which have -- we have lost in the [ 6 ] quarters? Where we'll be able to recoup that?

Yes, gross margin will comprise of gross margin from priority sector and gross margin from industrial and commercial sector. As regard to gross margin for priority sector, I think we have already taken price rise twice in October itself. That should help us to tide over the cost increase in the APM gas purchase, what we have done. Also, there is an ability to pass through even for the equities required. And on the -- so in case of priority segment, I think the margins can be steady or slight improvement can also be seen with respect to gross margin. And in case of industrial commercial, we are trying over multiple ways to improve the margins. One is, definitely, we are looking for some midterm gas. I mean, no doubt it will take some amount of time but we are thinking of or exploring the possibility of signing some midterm contracts for RLNG. That is point number one. Also, there are some possibilities of flexibilities which we earlier mentioned that we will contract with industry and commercial customer. There are flexibilities available in exceptional circumstances. We can further consider some different pricing scenarios than the normal pricing scenario of benchmarking or indexing to alternate fuel prices. So we try to do our best in case of industrial commercial also to take care of the margin. But right now, a lot is going to depend on the scene on the front of prices of RLNG, both in terms of -- definitely in terms of spot gas and also to some extent on long term or middle term prices. The scene which will prevail in Asia as well as particularly in India.

Sir, I directionally understand, but my question was more with the reference to the gross margin, which we have posted in the quarter 1 where the number was posted in quarter 2. So that's why I understand it will move up, but what I want to understand at what level to see these margins? Or what is your goal in terms of setting the margin so that you take the adequate price hike, manage the gas contract and come back targeted volume, which probably would be on to margin or maybe slightly lower than that?

Specifying number is a bit difficult because probably nobody will be able to exactly predict the prices of spot gas. And what has happened not only in case of industrial commercial prices of RLNG are important, but you must have heard earlier discussion that some amount of RLNG we are required to feed into priority segment also. So we are hoping with the ministry granting some concessions to us or being consider on the formula for APM gas pricing, the situation will improve definitely in priority segment. And please note that the priority segment accounts for nearly 86% of our total volumes. Industrial commercial, no doubt has bit of challenge. But 86% of our volumes will be coming through domestic and CNG put together. So that I think gives some definitely good chances for us to improve the margin at the overall level as compared to whatever margins are prevalent right now. On EBITDA front, there will be an advantage. No doubt we are asking questions on gross margin point of view. But on -- as far as EBITDA level is concerned, I think as volumes ramp up per unit, OpEx will also go down. And the improvement in margin at EBITDA level will obviously a bit higher than the rise, which we can see in the gross margin level.

Sure, sir. One more question I have, if you allow, how do you see the volume growth from here? We are already back to pre-COVID volume at this point of time. So how do you see the volumes ramping up, say, in the next 1 year or so?

Volume recovery has been pretty strong, and we have exceeded our pre-COVID volumes also. In the Q2 numbers we already stated by the Managing Director, but if we look at the beginning of this month, the volumes are either -- I mean they have increased a bit. Maybe 7% to 8%, I think, will be rough approximate increase in sales volume.

In fact, at current level, I mean, just the latest information, which is available. Yesterday, we had the volume of 3.44 mmscmd, which is pretty an encouraging sight for us, and CNG has improved. In fact, overall, we have seen the improvement in almost all customer categories except the probably domestic category, rise is there, but relatively, it was late. But all other categories have increased, and I think 3.44 is a pretty good level as compared to 3.10 level, which was prevalent in February 2020.

For that 3.44 will be week day sale level. So if you factor in the holidays and weekends, et cetera, our average sales volumes was roughly about 3.35 also.

So that's very good sir -- so that when people are -- the volume has a very good traction. But this is the current one, but how do you see going forward? I mean do you see this trend to continue going forward also, in terms of very good growth coming in?

Yes, there is some movement we are seeing, especially on the commercial vehicle front within Maruthi and other, we have started tapping this small commercial and medium commercial segment. And the prices of diesel almost touching INR 105 per liter in Mumbai, a lot of these transporters are looking to induct CNG.

That's fairly good, sir. And sir, one more question, just how do you see the threat of EV vehicle, especially on your bus segment? Because that is something, which is generally being talked a lot, but I don't know how meaningfully it is going to impact on your PNG volume or the growth in the bus segment?

Look, I mean if you look at the buses, the biggest operator is BEST. And in the last 1 or 2 months, they have been making some noises about inducting a lot of electric buses. But I think the key point there is they are talking of an expansion in their overall bus fleet. So the incremental -- when new buses will be induct, it would be EV, but we see a bit of an issue there because the scale at which they're talking about, they don't have that kind of charging infrastructure. Whereas our CNG infrastructure, which is there is currently utilized at only about 25%. So we can easily double the number of CNG buses and supply them with the same infrastructure. And we are encouraging them to move to CNG because EVs, end of the day, they'll have to depend on -- the money will have to come from somewhere. You need -- initial funding required is huge. BEST has cash trap. So we have been trying to explain to them that CNG makes more sense.

[Operator Instructions] We'll take a next question from the line of [ Rakesh Sethia ] from HDFC AMC.

So my question is regarding the APM gas price, which probably would be increased significantly in the upcoming revision, which probably would be in the month of April. So just trying to understand how will you manage your CNG pricing in preparation for that. Would you take -- would you wait for the actual price increase to happen and then take a large price increase? Or are you thinking of taking any preemptive price hikes?

I think price rise goes back in April. Right now, maybe a bit early to talk about because the initial price rise, which we may take very soon will be targeting this reallocation of domestic gas and at what level will it come in and will we be able to fully mitigate -- I mean get full volumes for our CNG growth, which is happening quite rapidly. So that is something, which we will be looking at in the near future.

Sir, the reason I'm asking this is the 10 months of data is available to us and it is -- I mean, even if one assume there's going to be significant price correction in the global gas prices for the remaining 2 months, we are talking about gas prices probably going up to $5, maybe even higher if the gas prices not corrected. And that would require a significant price hike just from the CNG perspective. And on top of that, you have already mentioned about the cost pressure on LNG side. So I'm just trying to understand that should we expect the margins for the next few quarters would be lower before they start to normalize and as you take the gradual price increase? Or you think that the margin in the near term will be maintained or probably would improve as you were alluding in the earlier remarks?

To answer your first question, I mean, there is nothing which forces us to wait till 1st April to increase any price. So we could take -- I mean especially if we estimate that the jump is going to be significant, we could do then steps to avoid any kind of a price shock to customers. But again, that call will be taking maybe somewhere a month or 2 down the line. It's not something which is immediately on the radar.

Understood, sir. And sir, if I heard it correctly, about the impact of LNG on your priority volumes, did you say that 5% of your priority volumes were met through the spot LNG prices. Is that the correct understanding?

Yes, right.

We'll take the next question from the line of Pranav Tendulkar from Rare Enterprises. There seems to be no response from this line. In the meanwhile, we move to our next question that's from the line of Vivekanand S. from AMBIT.

Can you give us a sense of what are the current conversions that are happening to CNG on a monthly basis and little bit more on the segment level trends? I think we'll discuss a little bit about the commercial vehicles. But if you could give a broad overview with some numbers, that would help.

I think in this quarter, roughly about 16,800 CNG vehicles have been added into the system. And majority of them were private cars, about 12,600 odd. Now commercial vehicles, about 2,500 of them added in the quarter. Then a couple of hundred trucks shall come on to CNG. Yes, that's the majority. About 1,500 3-wheelers also added.

Okay. And if you could give a sense on the base of the commercial vehicles and possibly some sort of understanding of the opportunity for convergence in FY '23, that would also be helpful.

Look, what we are hearing from the OEs is that the CNG variants of commercial vehicles wherever they are available are basically the models which are selling. The diesel models are not selling anymore because of price of diesel. And we are also launching some incentive schemes to promote conversion of existing diesel commercial vehicles on to CNG. So we are planning to give a preloaded fuel cards kind of thing, which will -- we're also trying to arrange for financing for the conversion of these vehicles because these are already preowned diesel vehicles. And so we have already spoken to 2, 3 of vehicle finance companies, encourage them and to make use of the opportunity because the diesel prices are putting a lot of pressure on these fleet operators and commercial vehicle operators to switch and save money.

Our next question is from the line of Rahul Agrawal from L&T Mutual Fund.

Yes, sorry. Can you hear me now?

Yes, sir.

Okay. So my question again is with respect to the gas cost increase. So this quarter, we've seen the cost increase from 8.5 to around 13. And the next quarter with the spot LNG where it is, we might be seeing this number move to somewhere around 20, 21 kind of a number. So this kind of increase and your comment about that the margins should be healthy and staying upwards in the near term. So I'm just trying to understand that this kind of increase are we planning to pass on? Because the priority sector increase, I understand has been to the extent of 4.5 around. So how should we look at this?

I think we touched upon this aspect. One is that ability to pass through gas cost in case of priority sector that is CNG and domestic is pretty good. Also, there will be most probably some good news to be heard by entire CGD industry with respect to suppliers, APM for CNG domestic to the extent it is required from, say, mid-November onwards. So I think margin front on PNG and domestic, there should be a reasonably comfortable scenario prevailing. And at least with respect to MGL, CNG and domestic accounts for nearly 6% of volumes. Now industrial and commercial will be only 14%. Yes, there is a concern about the rising spot prices. And in case of industry and commercial 100% quantity through spot prices except that RIL source, which we have, which could be around 25% of the total industrial commercial requirements. There are some flexibilities available with us, as we mentioned earlier, in the contract with industrial and commercial customers. So we will be taking a judicious call with respect to some price increase vis-a-vis the retention of volume, which will also be of our primary motos.

So should we take that this level of gross margin is something should be the base? And below this shouldn't be the -- in the coming quarters or years going ahead?

It is difficult to specify the number that I said earlier, but I think the scene could be quite good or encouraging on domestic and CNG front. There could be some challenge on industrial commercial. This is with respect to gross margins. But as volumes will ramp up further, the operating costs are going to drop per need basis. So while gross margin, it could be steady or only some improvement, which we will see, definitely the -- proportionately higher improvement we'll see in EBITDA margins on per SCM basis.

We'll take the next question from the line of Anubhav Aggarwal from Credit Suisse.

Sir, one question on the industrial segment only. So are you profitable right now in October when you are servicing them currently?

October, we obviously right now can't talk. This call is basically for quarter 2. And on an average basis, yes, we were in profit.

We'll take a next question from the line of Vikash Jain from CLSA. As there is no response, we'll move to our next question. [Operator Instructions] Our next question is from the line of Vidyadhar Ginde from ICICI Securities.

So my question was on -- so in September, there is PNG, I guess, come out with a public notice on the declaration of common carrier, contract carrier for Mumbai GA. So how do you see this thing moving forward?

Currently, the whole exclusivity thing is subjudice in Delhi High Court, I think. Some entities have challenged including us. It will be our drawn-out battle, I think legal battle will be there. Of course, the PNGRB currently doesn't have forum, doesn't have member legal. So they don't really have the ability to do anything. But assuming that difficulty goes away in coming weeks and months. There is still that legal challenge to be surmounted.

So how do you see -- what is the possibility that allowing competition seen by the government and the petrol ministry as a way to protect the consumer as gas prices move up, APM is also going to go up sharply next year. So one of the best ways to take care of the consumer would probably their most important concern, would be to allow competition, probably if that playing -- pardon me?

Opening up will definitely be the case in the medium and long term. However, I mean, what will be the outcome of that and if you have seen the November 2020 regulations excess core, they have given CGD companies protection up till that date. So whatever CNG stations, et cetera, we open until November 21, there are about 260-odd of them, they will continue to remain with us. So it is only the new incremental volume in station, which could be at risk, biggest volume segment of CNG almost 74% of our volume. Domestic, we see relatively less risk because it is a very painstaking job to supply 0.4 CMD to a few million customers. Industrial and commercial, yes, there could be some competition where the large industries may choose to buy from other supplier or to buy gas on the exchange. But then we will address that when it happens.

Sir, the CNG, whatever the PNGRB regulations, they are not etched stone. You've seen them change their own regulations in the past. Like, for example, in case of the gas pipeline, for old pipelines, they were using 100% utilization as the volume revised or when changed, not as if what they have said last November is etched stone, especially -- because we are heading towards an extraordinary situation in the next few months. And we are not aware that in fact, things are somewhat worth right now only because of the spot LNG, which will be used for domestic. So we are getting into a very sales where the government itself will have to take a very tough -- some tough decisions. And next year, we have several elections in important states. So the consumer interest will again be something which will be topmost. And you guys are sitting on -- if you go back, look at over the last 7, 8 years, since you started getting APM gas has complete, your margins -- all of your margins have gone up very sharply.

Well, our understanding is, at least as of now, the government is very supportive of CNG because they understand that this gas allocation and whatever they are doing is an essential ingredient if they want more infrastructure to come in place. A lot of people who invested in CNG bidding around an upcoming 11th round. It is all anchored on the assumption that some relatively cheaper rate gas would be available for the priority segments.

But they will get...

Have to balance out as priorities of...

No, no. I think you will get APM gas. You will get APM gas, but the point is that next year, the APM gas itself will be at a much higher price. That's the problem, which is probably a 1-year problem. It's probably -- year thereafter, probably prices are going to go down again, maybe not to the levels we had in the past, but significantly lower is the possibility in FY '24. And unfortunate decision on this issue might get taken next year?

Prices will go up and down. I mean there is no prediction for that, but there were times when spot was available for $2. There were times when APM was there for more than $5 per MMBTU.

Margins were very high even it was -- you should take lower margins when the spot is at higher levels?

Mr. Ginde, I'm sorry, but you'll have to return to the...

I'm not asking questions, ma'am. This is a discussion going on. If they don't want to talk further, I'm fine.

Sir, there are several participants waiting for the turn to ask a question. Maybe you can take this question off-line with the management team. We'll take our next question from the line of Manikantha Garre from Franklin Templeton.

So I understand from your earlier commentary that you are having a discussion with the ministry on the relocation of APM gas, maybe from midterm or otherwise. So on the clients, I wanted to check with you if there are any discussions with the ministry on the APM, the upcoming sharp price in APM gas prices and the kind of price hikes, not just you, but the entire CGD industry will have to take in priority sector be it PNG or domestic PNG. So would there be -- first of all, were there any discussion with respect to that? And would you think that the ministry would be okay with such sharp price hike you may end up taking finally?

I think the government has gone on record saying that pricing in CGD, full freedom is available to the operator to decide on pricing. So there is nothing like what you're saying on the cards. It is not that we are aware of.

Okay. And what about the discussion part? Was there any discussion with respect to this sharp pricing in APM gas prices that is going to happen? Were there any discussions at all on this?

Are you referring to the APM price going forward in the month of April?

Yes.

The formula. There is no discussion as such of changing the formula as of now, nothing on...

We'll take a next question from the line of Vikash Jain from CLSA.

So I wanted to understand this 5% that you're talking about. Firstly, the $14.5 per MMBTU that you talked about that is the average for the quarter, but a large part of the volume jump that you would have seen might have happened only in September. So the 5% blended number that you're talking about could actually mean a higher number than 14.5 also. Is that understanding correct, firstly?

Can you repeat? I am not very clear. The figures are right, around 5% RLNG required in priority in quarter 2. $14.5 price is also correct. But what is that you're exactly asking?

Okay. Fine. Sir, so -- even with 5% at $14.5, essentially, that would itself means that your overall raw material cost for priority sector would be 35% or so higher than what the APM price was. So I mean, that's a pretty big hit. And if you say that this 5% has increased even more in October, I think the proportion will increase a little bit. And more than anything, the price would, if anything, we nearly double of that $14.5 because October LNG spot energy prices are almost double of the average of last quarter. So if that's the case, then that itself will mean price, your raw material cost would be higher by almost about something like 65% plus. Is that broadly correct? I mean, if that is the case, then the October margins could take a pretty big hit, right?

Yes. But I think when it comes to margin, we suggest we should not take a very short-term views like monthly margins and that sort of thing. Plus, as we already discussed, the requests have already been lodged with the ministry. And hopefully, in November itself we should hear something good, say, almost 100% quota for -- I mean, 100% APM quota being made available to CNG and domestic that news should be forthcoming anytime according to us.

I understand that. But sir, but with October and at least half of November hitting it so badly, the quarter could be a pretty bad one for in terms of overall margins, even if you get it by middle of November...

We have taken price rise, also October, twice we have taken. We are not ruling out a possibility that we will not take further price raise. That also exists. And we are obviously keeping interest of the customers and also mine and not just short-term interest, but the long-term interest of the customers also. But there are pricing -- I mean, ability to pass through cost is definitely exists with the company. Only thing we are taking a little cautious call because you might have seen now which has never happened probably in the history of MGL that in this quarter, the light commercial vehicles number are 2,500 LCVs are added. When such good movements are happening and, as you know, the potential is pretty high in LCV. We are a bit cautious, I mean, raising prices is -- could be matter of just a few seconds for us. But where such kind of things are happening that even LCV segment is looking at coming to CNG in a full-fledged manner. Both definitely OEM sales have gone up and with some incentives which we are likely to offer or even financing scheme. A good volume jump could be seen in CNG to at least some extent, whatever could be reduced on per unit basis, we should be able to garner from volume increase point of view. That is what we could say right now.

Sir, I mean, I'm pretty much with you that it should be longer term, and I'm not denying that. But from a shorter-term perspective, since you requested the ministry to take 2Q as the average, if there is a bigger volume jump then and even if ministry agrees to the request by middle of November, what it will mean is that beyond the 10%, there will be significant negative operating leverage in terms of integrity margins, at least for the second half of the fiscal. Yes, you're correct. Your approach is absolutely right, but you're thinking about it over the longer term. But that could really be a near-term pain point, if my understanding is correct. Is that right?

Yes. I mean short term, if we are specifically talking about October month, for example, or maybe initial November also, then your understanding calculation is right, no doubt about that.

Okay. And sir just one more thing, the way this allocation work, if you can remind us on it, would you also gain when volumes were falling, I think would you get extra gas, which you were able to use for the industrial commission during those periods, that is the last 3, 4 quarters. And you don't really -- it's just the limit of 10% extra. But in other quarter you don't really gain in terms of extra gas, just -- yes.

If I understand your question correctly, you're saying that when we get extra gas, can we divert it to I&C, right?

I'm saying that, for example, 1Q, 2Q when volumes also dramatically -- so one could -- last year or even this year. Did you manage to get some extra gas which you've allocated based on the earlier quarters and then that balance you were able to use beyond CNG and residential PNG for that quarter, is that something...

That's not allowed.

[Operator Instructions] We'll take the next question from the line of Varatharajan Sivasankaran from Antique Limited.

Can you hear me?

Yes, sir.

So like the last one you had mentioned about this outlet upgradation, new outlets in MRUs, in combination of all 3, a plan for the current year. Can you just update us again, let me know as to where you stand on the outlet upgradation and...

Sorry, your voice is muffled. [Operator Instructions]

Yes, is this better? Hello?

Yes, you may go ahead.

Yes. Just outlet upgradation and this entire plan of outlet upgradation plus new outlets and MRUs. Where do you stand in the current year as to what you had planned in the beginning of the year as well as any extension of this plan into the next year?

Currently, we have opened 9 new stations in this financial year, and we upgraded about 12 stations. And that's a total of 21, and we are looking at least a score of somewhere between 50 and 60, hopefully.

For the current year? And should we take a similar number for next year?

Yes, for the full financial year. MRUs, as we mentioned earlier, we have received 11 applications, and those are under evaluation and processing.

So this 50 to 60 , can we take the same kind of a number next year as well?

Yes, that will be our endeavor because of the kind of demand, which is coming up now, especially from commercial vehicles, et cetera. If you want to cater to that demand, yes, we will need to open stations. We'll need to upgrade more stations.

If I may request for a breakup between the new GA as well as the old GA sir, any breakup available?

Breakup in what?

GA wise.

In the outlets.

21 is in GA-3. The total, if you -- hold a sec. In GA-3, we have 21. In the city of Mumbai, we have 141 and a total of 277. I mean, the remaining are in GA-2. 141 on GA-1, 21 in GA-3 and total 277.

I was talking about the new outlet, sir, any breakup?

New outlets will -- the majority will probably with GA-2 and Raigarh. Mumbai may be a slightly smaller number.

Ladies and gentlemen, due to time constraints, we'll taking the last question. That's from Yogesh Patil from Reliance Securities.

Sir, my question related to electric vehicle charging stations or battery swapping station. Are you planning to enter into the same business? And if answer is yes, then what would be the CapEx lineup for the same and how many charging stations you are planning to come up in the next 1 to 2 years?

Well, we have done 1 pilot installation along with Tata Power, just to get a feel of the business. But as of now, there is no concrete plan as such because the demand for CNG is so high. There is a limitation of space in our stations. As it is, most of our stations were co-located in OMC promises. So there, we won't be able to put up any EV charging. But in the 50, 60 stations, which we have effective control, our endeavor is -- if there is any additional space there, we want to upgrade that capacity. We want to put more compressor, more dispensers because the demand for CNG is huge.

Okay. And my second question is related to your CapEx plans for financial year '22 and financial year '23 period. So how many station addition is expected in the second half of current fiscal?

You are talking about this financial year and next financial year?

Yes, yes, yes. CapEx plans for the financial year FY '22 and FY '23 and station additions, if you could give us any ballpark number for the second half of the current fiscal.

I think station additions earlier was already mentioned, I think, but total CapEx be in the region of INR 600 crores each -- this year as well as next year also. However, significantly, it will be dependent upon the approvals, which we get from different, different authorities. I mean even as of today, though, lockdown has -- is there definitely, as you know, these permissions, which we get from different authorities are paper-based. There is no electronic approval basis approvals are received. So assuming the approvals we receive at much faster pace than what was the scenario for last, nearly almost a year or more than that, our aim is definitely to spend INR 600 crores each at least. Fund is not an issue. And it is not only just CNG outlets, there will be some from security point of view -- security of supply point of view, there will be steel grid pipeline also will be layered in, obviously, medium-pressure pipelines will also be there. We are looking at some additional office spaces also. So funds are available, definitely. Budgets have been approved by the Board of Directors for all kinds of CapEx. The question will more range on the amount point of view, how fast we receive the approvals.

I would now like to hand the floor back to Mr. Harsh Dole for closing comments. Over to you, sir.

Thank you. On behalf of IIFL Securities, I'd like to sincerely thank the management for giving us the opportunity to host the call. Thank you very much. And season's greetings to everyone. Operator, would you be kind enough to pass the line to management for the final remarks.

Sure, sir. And over to you, management, for closing comments.

Thank you, and happy Diwali to everybody. Thank you.

Thank you very much. Ladies and gentlemen, on behalf of ICICI Securities Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.