Mahanagar Gas Limited (MGL) Earnings Call Transcript & Summary

Okay. And sir, what about the current contract with GAIL like you're getting at supply or pay level. Do you see that going up anytime soon in 2023 and '24 because what we hear from GAIL is they're going to bring entire volume of U.S. gas to India in 2023 itself?

So actually, GAIL is trying to -- I mean, whatever we hear from different sources that they're trying to source gas, one of their major supplier has defaulted in this last few months. So if that is happening and also if the gap between spot and the term prices are reduced and -- which is the trend which we have seen in the last few months that the spot gas, which was being traded at maybe $35 per MMBtu has come down to $18 per MMBTu and going forward, since the winters in Europe has also been quite moderate, we expect that the prices will soften up and there will be enough supply of gas. In that case, I mean we don't know what the GAIL is going to do after a few months. But general expectation is that they will increase their supplies from supply or pay level.

Okay. And sir, my second question relates to the new initiatives. So over past 3 to 4 years, we have been hearing a lot of new initiatives taken by us, but when we look at the volumes, when we talk about have they been implemented, actually, we don't see anything on the ground, like we have been talking about buses -- there's long-distance buses getting converted into CNG. We have been hearing about [indiscernible] converting their vehicles into that. We have been hearing about LNG, CNG, conversion, those kind of stations. But -- or upgradation of our own stations. But when you are seeing the volume per station, that is being on a consistent decline now. So what are we doing about addressing the long-term growth, and when do you see any of these things will start to pay us any benefit or they just remain like an initiative on papers?

Amit, you need to look at these initiatives on context. If you look at the last 6 months or a year, it has been a difficult time for the whole industry, the gas prices being where they are, et cetera. So long distance CNG or [indiscernible] or anybody going for LNG for that matter, the timing is not really appropriate. But these are long-term initiatives, which will drive value in the long run for us. So currently, CNG is primarily seen as a local kind of a fuel for intra-city or that kind of transportation. But there is a huge amount of value lying in intra-city or long-distance travel, which we are trying in our own way to get. Now as far as actual movement on the ground, one positive I can tell you is MSRTC has gone ahead with an awarded conversion of 800 of their diesel buses to CNG. And out of those, about 600, 700 are going to come in our [indiscernible]. They have already given us 7 depots, and we have signed lease agreements with them to take land in the depots to set up infrastructure. Now all this will fructify over the next 6 months, 1 year, 2 years, et cetera. And our belief is that in the medium to long term, CNG and natural gas will be competitive vis-a-vis alternate fuels. And that volume growth will come, within the last 6 months, 1 year, et cetera, needs to be seen as an exception. So on the LNG part, I can add is our LNG dispensing facility for the liquid at -- in Raigarh at a place called Savroli that's near the Khalapur Toll Naka on the Expressway, that is now mechanically completed and ready for commissioning. We're just awaiting a few, I think, one last statutory permission or something, and we'll be able to commission that. So we will be having the ability to dispense liquid LNG also. The last point regarding the upgradation of stations, we have been upgrading [indiscernible] stations every year, and they bring us value, but typically, we will see a spot in the throughput of that station once we've upgraded it either by replacing our old compressor with a higher capacity new compressor and maybe adding a dispenser or 2 if there is space there. That partially mitigates the challenge which we have on getting new parcels of land in a city like Mumbai. It's really difficult to get new parcels of land. So whatever you currently have, we're trying to maximize through these upgradations.

The next question we have is from Pinakin Parekh from JPMorgan.

Sir, my first question is on the government notification regarding the reservation of the high pressure field for CGD. Sir, just trying to understand the decision by the recent government notification of the gas for the CNG field. This seems to reverse Government of India cabinet decision of October 2020, which had given marketing freedom to the gas producers in the high-pressure fields and basically, it said they've given affiliates could bid for it. So I'm just trying to understand, sir, that how should we read this? Because this is not a cabinet decision. It reverses the previous cabinet decision. So is it something which is -- could be limbo for some period of time being implemented?

I think the answer to that, the government is in the best position to give, but what we are seeing on the ground is, yes, in the auction, which happened in the beginning of this month, the CGD got first priority in auctioning of that HPHT gas. But actually for the seller or the producer, there is no difference. What was initially happening was everybody was bidding at the ceiling and because the volumes were limited, everybody was getting maybe 2% or 5% of whatever volume they had quoted. So the seller will land up selling...

Very high number of buyers, okay? Now the buyers' number will reduce and it will help even the producers.

And it will -- I mean, help reduce the seller overheads also. They won't have to deal with hundreds of...

Financially, it was going at the same price, which is the ceiling of HPHT. So the suppliers are not losing in that respect.

Yes. But basically, the suppliers will be losing if the affiliates were bidding for it. And so now in this scenario, the affiliate [indiscernible] system of auctioning?

Yes. But that is their internal matter. It doesn't impact us as a CGD company. What it brings out is that because some of that gas was being resold in the exchange, that was the concern of the Ministry that if it's gas, which is being sold at a cap price, should not go to the nonpriority sector. That's the correction which the government has done by bringing in that but the first HPHT gas, if it is being sold on the ceiling, should go to the priority sector. And that's a very well-appreciated step by the Government of India.

Sure, sir. So my second question is that -- so IGL in last week's call highlighted that the supply of CNG is at 20 mmscmd. And going forward, it will not increase, and hence, any incremental volume growth for the CNG would have to rely on non-APM gas. Now the government has basically, to an extent, reserved CNG in the high-pressure field? So going forward, sir, is it fair to say that the incremental growth will not be from APM gas and there is also a risk that if the government is now effectively potentially migrating CNG from an APM gas structure to the high-pressure gas structure, if the first priority is being given over there?

No, no. I think there are 2 things which are getting mixed up. First that APM gas, whatever quantity is there, the efforts are being made by ONGC to increase it also, although we can't say whether it will increase or segment or come down. So whatever APM gas is being consumed mostly into a priority sector, there are certain unconnected pipelines, which cannot be connected. So therefore, that gap is being sold to some other sectors. So basically, APM gas is allocated to CGD, fertilizer and some power companies. Now as and when CGD consumption grows up and if APM doesn't go up, that means earlier it was that the allocation was coming down to CGD companies. Now to arrest that, the new HPHT gas, which is going to be sufficiently available to meet whatever growth is expected from the CGD company. So your assumption is right. One that we don't know what will be the future of APM gas, and it is fair to expect that not much APM gas will be allocated to the priority sector, except that the efforts are being made by other companies to connect unconnected fields to the main grid. If that happens, then more APM quantity will be available for CGD allocation. So there are efforts being made to connect some isolated fields to the main grid, and that will bring some more gas to APM. The second part is that even HPHT has got a ceiling, which is an evolving formula and it keeps -- which is a fair formula and it will be giving fair prices going forward.

The next question we have is from S. Ramesh from Nirmal Bang Equities.

So the first thought is in terms of your depreciation as far as 9 months, is it fair to assume that you capitalize something of the order of INR 800 crores? And how would this capitalization help in terms of generating further revenue and profit, say, over the next 1 or 2 years?

So whatever new CNG stations you are seeing, and -- so we have commissioned those and CapEx about that has been added, and it starts immediately giving incremental volumes or at least the compression capacity is available and depending on the vehicles and the turnaround of the vehicle, it will have better impact on volumes going forward. As far as some of the steel lines and medium pressure line or low-pressure lines are concerned, so basically, that will not immediately be able to add to volumes. As and when the customers get converted on these pipeline network, it will add surely. So it's a long-drawn process. Once a steel line or a medium pressure line is laid, immediately, maybe 40%, 50% of the customers in a building or in that area gets hooked up. And later on, that process continues over a longer period of time, so that is how this CapEx will help in the long run. And the City Gate Station which we are likely to commission soon awaiting for some statutory approvals. Once that gets commissioned immediately, sale in the GA-3 through that station as well as some other station will be able to cater to the daughter booster station within that geography. So it will reduce the transportation cost, which is being currently incurred from GA-2 to GA-3 and will also help slowly going forward, connecting a few more industrial, commercial customer in that region. And few more daughter booster stations to be converted on online, that's how it has been.

So if you can share your thoughts on how much will be the cost savings on what you just mentioned? And what is the kind of incremental volume that you can expect in GA-3, Raigarh, over the next 1 or 2 years?

GA-3 volume growth will be quite high next year. It should be 20% plus compared to current growth, which is there, okay, current volume, which is there, okay? And as far as cost is concerned, let's say, even if the [indiscernible] was on an average 40 kilometers, 50 kilometers, okay? If that gets eliminated, so costs for KG of gas transportation straight away goes away and that depreciation takes a replacement of that cost, okay? And depreciation is a very small amount, whereas recurring transportation cost is pretty high in these stations, which will also be a saving. And also logistics, manpower management, all that gets eliminated.

The next question we have is from [indiscernible] from Nomura.

Just wanted to get a sense of what is our current volumes, say, Jan or what we're currently doing versus 3.4% that we did in the third quarter? And the second question or a continuation with that, is that, say, we've -- in the month of Jan, you would have to have procured some amount of spot LNG to meet priority sector demand. But is it fair to say that from Feb onwards, you will not be having any incremental spot LNG purchases at least for the priority sector?

No. I think some amount of spot may remain because of the -- to cater to the peak, we may need. So completely, you can't say that no spot will be required for priority sector.

As far as volumes go, I mean, Jan also volumes, we expect to be flattish because of the high selling prices we are prevailing, but hopefully now that we have started getting some -- getting and giving some relief on the high prices, we are hoping volumes should pick up.

That costs will be very, very minimal just to balance requirement. Otherwise, we expect that APM plus HPHT should be able to meet the priority sector requirement.

Got it. Got that. And just to get a sense on the pricing, given the price cut that we've taken in Feb, is there any view to further bring down the pricing and improve the cost advantage versus liquid fuels?

One we have already done, that INR 2.5 per kg of CNG prices have been reduced with effect of 1st of February. Next, we will have a wait and watch for Kirit Parikh Committee to be accepted by the government. And as and when that comes, we'll have a relook at total cost of procurement and also what is the total cost -- average weighted cost. And then we'll take a call on that.

[Operator Instructions] The next question we have is from Kirtan Mehta from BOB Capital Markets.

I would want to sort of understand when I look through the data, I understand that your focus of implementation of infrastructure seems to be sort of emphasized on GA-2 and GA-3 development. So I wanted to understand in terms of the breakup, is it translating into a higher growth in GA-2, particularly versus GA-1? And what is currently the mix of GA-1, GA-2 and GA-3 to in your total volumes?

So let's say, on an average, if we were selling around 3.5%, GA-1 should be contributing around 1.8% to 1.85%, GA-2 roughly 1.5% to 1.55% and around 0.12% is being sold currently in GA3. Going forward, our expectation is somewhere between -- at least next year, GA-2, we see a growth of 10% in those volumes, whereas in GA-3 at least 20% plus volumes we are seeing, whereas GA-1 will remain in the range of around 5% to 6%. This is I'm talking about immediate 1 or 2 years. Okay, still GA-3 and GA-2 peaks out in terms of the potential available [indiscernible] geographical areas.

Yes. With respect to your question, why we are giving more focus on GA-2 and GA-3? It is primarily because GA-2 and GA-3 are more nascent areas where -- like especially GA-3, where the network is being laid. As far as GA-1 is concerned, there is hardly any space for putting our CNG station. And already, this steel and MDP network is very robust in GA-1, whereas in GA-2, there are still some scope to increase some network and MDP lines and also some CNG stations. So if you see our CapEx plan for the next few years, we will be focusing more on GA-2 and GA-3. The main constraint in G1 is there is hardly any land which is available and whatever area is there is already covered with a very integrated network of steel and PE pipelines in GA-1.

Mr. Mehta, in GA-1, most of the trunk line, the steel pipeline is already laid. Whatever CapEx we are doing as far as GA-1 is concerned, it is more of a security supply kind of a thing. So we are doing multiple looping so that if there are any disruption, et cetera, GA-1 area and the older area doesn't get affected. However, the last-mile connectivity and the customer conversion keeps on going, and we do incur a sizable amount of CapEx even in GA-1 for further branching reaching out to the customers. Okay.

The next question we have is from Maulik Patel from Equirus.

Just continuing the earlier question, you mentioned that 1.8% to 1.85% comes from the GA-1 and you expect around 5% growth in GA-1 and GA-2, you expect around 15% growth. So the GA-2 growth is more driven by, as you mentioned, there is -- the network is yet to be laid down. How do you see this 1 along with -- do you have only part GA-2 with you -- [indiscernible] is within Gujarat Gas. Do you see that the Gujarat Gas [indiscernible] will enable you to grow more faster? Or is it going to be getting some volume from our side?

So the growth rate in GA-2 is a bit higher than GA-1, but is relatively easier to lay infrastructure, there is more land available in GA-2 for opening CNG stations. And so it's a much bigger area compared to GA-1. GA-1 is a very mature market that where we have been for more than 27 years now. GA-2 is relatively new. So we started off in about 2005, 18 years or so.

And what is the potential for the GA-3? In 5 years, where do we see this 0.1%, 0.12% heading to what number?

GA-3 our demand estimation shows about 0.6% mmscmd is the addressable market size there.

Okay. Got it. And one more question. This -- recently this Metro has started in Mumbai, have you seen any drop in your numbers related to the past because the general perception is that once the Metro starts, your congestion will come down, the traffic will come down, and the cars -- the taxies will spend less time on the roads relatively, so then there is less fuel consumption. Is that thinking right?

No. Look, first Metro corridor opened quite a few years back, [indiscernible] October 1, that didn't have any impact on our volumes. The new one has just opened a couple of weeks back. It was inaugurated by the Prime Minister. Now we haven't seen any material change in CNG volumes of anything for that matter, but we will watch and see what we -- our expectation is even with so many Metro lines opening, the demand for transportation services is so high that CNG will or even liquid fuels for that matter will retain their share because the number of people traveling has increased.

Some of [indiscernible] from local to metro also. And when people see less congestion on the road, some people will bring on the CNG cars to commute also. Today, they will not be doing that because it is taking them 2 hours to commute from home to work. So there are a lot of factors that play here. So it's not necessary that Metros can potentially hit your -- if you look at IGL, for an example, Delhi is among best Metro networks, but IGL's volumes have been consistently growing.

So what is understood is that there is a space for almost several fuels because the commuting will start to increase as Mr. Rajesh mentioned.

The next question we have is from Somaiah V. from Spark.

Yes, the question pertains to HPHT gas. So you did mention you had 0.3 mmscmd -- close to 0.3 mmscmd. What was the total available gas at the exchange, the addressable market that was there, that's 1? And how do you see this kind of going up in the next 1 or 2 years in terms of HPHT volume available for CGD?

I think the last bidding was for 3 mmscmd in the exchange. Out of that, we got some 0.27 or close to 0.3. So I mean, what I said earlier was that the CGD companies are not expected to grow demand. In tandem, we've got the gases expected to come from HPHT, both from Reliance and ONGC. Primarily, Reliance has earlier come up with [ $6 million ] and there were news -- unconfirmed news that they will come up with another tender of [ $6 million ]. So -- and also there were news that ONGC will also come out with some more gas on their bidding. So what our estimate is that CGD demand growth for priority sector will be a gradual one. It cannot be a sudden thing. As of now, if we see the 10% around 2.5 mmscmd, we took a level of whole all-India basis. So that will be available straight away in the first bidding or a second bidding around itself. So post that, once CGD companies start considering more gas, then only HPHT will be required. So our assessment is that for MGL also, whatever shortfall is there will be met through HPHT.

The next question we have is from Nitin Tiwari from Yes Securities.

Sir, my question is related to CapEx. Can you have a breakup of the CapEx spend in terms of GA-1, GA-2 and GA-3 and also in terms of what heads they've gone into broadly, whether the investment has been in stations or basically in the pipeline. So if we can give that sort of a breakup?

I don't have the numbers readily available. If you get in touch with me offline, I will give you these numbers.

Yes, you can contact our CFO, Mr. Rajesh Patel, and he will be able to help you on that.

Right, sir. I'll do that. And the reason I ask that, sir, perhaps you can help me understand this better because I suppose your CapEx intensity would be rationally highest historically. And whereas like we are not adding as many stations or kilometers in terms of pipeline. So I just wanted to understand that, I mean, INR 600 crores, INR 700 crores of CapEx in a year, how is that getting spent? That was my primary query. So I will certainly take it up later and one-on-one.

To give you an idea, around for 25, 30 new stations and equal amount of upgradations, we spend around INR 150 crores to INR 180 crores in CNG, okay? Then, let's say, roughly around INR 300 crores odd is mainly in this medium pressure line, the last mile connectivity, GI, inside kitchen, inside customer, et cetera.

This is all in GA-1 and GA-2, sir?

So GA-1 will have a maximum of this last mile connectivity and medium pressure line, whereas steel will be minimum in GA-1, steel will be highest in GA-2, followed by GA-3, okay? Currently, GA-3 as [indiscernible] mainly on the CGS and the CNG stations. And next year, there will be -- once the City Gate Station starts, we have planned to lay steel lines and also some more City Gate Stations we are scouting land for. So cost of land also will be there in the range of around INR 50 crores, INR 60 crores for CNG as well as new City Gate Stations.

Okay. I'll circle back for more details. And secondly, sir, if you can help me understand the gas sourcing completely, like because I'm slightly confused over there. So you have about 91% of your priority sales as APM. I suppose you also had an allocation of 0.3 mmscmd or HPHT gas, right, which you had bid for. So does that -- yes, that gas gets used in priority or it gets used in I&C segment?

It is allowed to be used only in priority that is CNG and domestic HPHT gas. Nothing is allowed to be used in industrial and commercial.

Right, sir. So if I sum up your APM allocation and that 0.3 higher gas that you have, you would not, I think, require any spot gas. But you said that you source spot gas as well as and plus HPHT gas from the exchange so, yes?

The demand doesn't remain same on all days. So for thinking you do need some amount of spot gas sometimes. So if the demand goes up suddenly, you may have to put in the spot gas, okay? So let us say, around 2.8 is available through APM and 0.3 is available through HPHT, that makes to, let's say, 3.10 or so. But suppose my demand picks up on some days to even 3.15 to 3.2, then I will have to have some tie up for spot gas. Otherwise, the stations will be starved out of the gas, and they will -- pressure will fall.

The final question that we have is from Iqbal Khan from Nuvama.

Sir, it is a follow-up question on the HPHT gas itself. You mentioned that around 0.3 mmscmd HPHT gas allocation was done in the previous quarter, right? I mean by Q3...

This month, February.

Okay. So in the previous quarter, was there any allocation of HPHT gas? I mean, I got a little confused over here.

It might be a very small amount through APM only. We did have 1 HPHT RIL gas, which is a term contract of around 0.1 mmscmd. But we did not have anything what has come under the new guidelines of Government of India.

All right. So my understanding is 0.3 mmscmd is from first February of 2022, right?

That's right.

Thank you, sir. Ladies and gentlemen, there are no further questions. I would now like to hand the call back over to Mr. Varatharajan for closing comments. Please go ahead, sir.

Thank you, Rico. It was a pleasure having you all on this call, and thanks a lot to the management for giving us this opportunity to host it. This closes the call. Have a nice day. I will ask Mr. Rajesh Patel, if you have anything to add?

Nothing. Thank you so much.

Thank you so much. And if any investor has any more further questions, they can contact directly. Thank you.

Thank you, everyone. Have a nice day.