Our systems, services, cost-effectiveness are difficult to match, says Mahanagar Gas

After a successful public offering of its shares, Mahanagar Gas Ltd (MGL), the sole supplier of CNG and LNG in Mumbai, is looking to expand its operations. Last week, the gas distributors' Rs 1,040 crore issue was subscribed 64 times and buoyed by the response, the company is hoping to list its shares at a premium. MGL's managing director Rajeev Mathur, in an interview to Somendranath Sharma, talks about the expansion plans and how they are well placed to face any competition.

Q. How will the listing on stock exchange help the company?

A: Firstly, it will allow the company to comply with the conditions imposed by the FIPB (Foreign Investment Promotion Board), which had directed it to increase the shareholding of public shareholders to 25%. The listing will also provide a public market for the equity shares of the company in India. It would enhance MGL's brand visibility and will provide liquidity.

Q. How was the investors' response to your IPO?

A:The response has been good and the issue was subscribed by over 64 times.

Q. How much stake will your promoters hold post the IPO?

A: Both GAIL and Shell/BG will hold 32.5% post the IPO.

Q. What is your market share in terms of total supply of natural gas vis-a-vis your competition?

A: At present, MGL is the sole authorised supplier of PNG (piped natural gas) & CNG (compressed natural gas) in Mumbai, its adjoining areas and the Raigad district. MGL's PNG and CNG face competition from widely used alternate fuels such as petrol, diesel, other liquid fuels and LPG. However, PNG and CNG have grown into a sizeable number owing to their advantages over such alternate fuels already available in the market.

Q. Recently the company commenced project activities in Raigad district and proposes to lay, build and develop infrastructure in the area. What is the status of the project?

A: MGL has undertaken pre-project activities in Raigad district and infrastructure would be laid expeditiously in the area. MGL intends to commence gas supply to customers in Raigad area soon.

Q. What measures is the company taking to increase the customer base?

A: We intend to increase penetration in Mumbai and its adjoining areas by reaching out to new customers for CNG, domestic PNG, commercial PNG and industrial PNG use. We have commenced project activities in the Raigad district and propose to lay, build and develop infrastructure in the area. We believe that we are strategically positioned to capture the benefits of the growing demand for CNG and PNG in our areas of operation. We believe that given the cost advantage of using CNG as compared to alternative fuels, increased interest in environment-friendly fuels and the large untapped potential of natural gas can lead to a substantial increase in CNG penetration rate.

We further believe that the existence of significant additional opportunities for the expansion, phasing out of LPG subsidies over a period of time and the convenience of using PNG will help us in increasing the penetration of PNG in the domestic market in Mumbai and its adjoining areas. In addition, Mumbai being a growing commercial and financial hub provides additional opportunities to capture the demand for natural gas from domestic customers and the commercial sector owing to its increasing population and growing number of commercial establishments.

We believe that we are strategically positioned to capture the benefits of this large and growing market given the low penetration in our areas of operation. Further, the adjoining areas of Mumbai and the Raigad district provide significant additional opportunities for the expansion of our CNG and PNG networks. We believe that we will be able to leverage our competitive strengths to increase our customer base by expanding our natural gas distribution network to cater to the increasing demand. As on March 31, 2016, MGL has laid the gas network of 1749 kilometre in and around Mumbai city in order to supply PNG for domestic, commercial and industrial segment.

As on March 31, 2016, we had a supply network of over 4,646 km of pipelines, including approximately 4,231 km of polyethylene pipeline ("PE pipeline") and 415 km of steel pipeline, and 188 CNG filling stations. The present network is capable to provide PNG to over 11 lakh residents in and around Mumbai city. However, for enhancing the number PNG connections in domestic, commercial and industrial segments, MGL has taken several measures. For domestic PNG segment, in year 2015, MGL introduced new business model i.e. Reticulated PNG system wherein builder has been enabled to develop PNG infrastructure while constructing the residential projects.

The said model has helped MGL to add on the resources leading to increase in PNG connections. Apart from the builder segment, MGL has been in touch with various institutions, corporate and various government departments for laying the gas network for their staff quarters. Further, customers have been provided the facility for submitting online registration through MGL website. Presently the said facility is available for the buildings where gas network is available. The said facility is being extended for the customers who are residing in the building where gas network is being laid. With regards to commercial segment, MGL has revised policy in order to avail PNG connection at a competitive rate. Apart from the reduction in connection cost, MGL also made the process of registration very simple by reducing the number of documents required for registration.

Further, MGL has also introduced the new modality for acquiring the customers having chain of hotels/restaurants such as McDonalds, Dominos, etc. In the industrial sector, MGL is making all the efforts to make potential customers aware of benefits of natural gas over conventional fuels being used by them through one-to-one meetings, various advertisements in publications of industrial associations i.e. directories, newsletters, monthly/quarterly magazines, etc. Further, MGL periodically interacts with various industrial associations and its members to make them aware of its natural gas infrastructure availability and to address their queries / issues, if any.

Q. There are a lot of issues related to inadequate supply and lack of facilities. Are you expanding your base?

A: As on March 31, 2016, we supplied CNG to over 0.47 million vehicles through our network of 188 CNG filling stations, and provided PNG connection to approximately 0.86 million domestic households, over 2,866 commercial and 60 industrial consumers in Mumbai and its adjoining areas. Of these stations, 13 stations are owned and operated by us, 136 stations are owned and operated by OMCs oil marketing companies), 22 stations are owned and operated by other private parties and 17 stations are situated at the bus depots of the state transport undertakings, such as NMMT, BEST and TMT and operated by them.

As on March 31, 2016, our CNG filling stations cumulatively had online compression capacity of 3.14 million kg per day and catered to approximately 0.47 million CNG customers in Mumbai and its adjoining areas. At present, MGL has a network of 192 CNG stations having compression capacity of 26.54 lakh kg a day which caters the CNG requirement (around13 lakh kg/day) of around 4.8 lakh CNG vehicles. There are approximately 10 more stations under construction. However, considering the growing demand of CNG, various measures are being taken to enhance the number of CNG filling stations.

MGL recently introduced new modality of CNG station i.e. company-leased dealer-operated (CLDO) that will incentivise the plot owner apart from the regular income towards lease rent. We are in continuous engagement with our stakeholders, mainly oil marketing companies (OMCs), private franchisees, state transport corporations and provide them best possible business growth by way of enhancing the gas volumes at their stations and revision of service charges/trade margins so that they remain attracted in development of CNG stations, particularly in outlying areas of Mumbai.

MGL has also been in discussion with government authorities for allotting plots exclusively for CNG stations. MGL has also worked out the proposition for setting up CNG stations within the depots premises of transport undertakings such as BEST, NMMT etc. Apart from enhancing number of CNG stations, MGL is working on enhancing the compression and dispensing capacity of existing CNG stations. MGL is also exploring the feasibility of non- conventional mode of CNG filling such as CNG dispensing through pole dispenser, mobile CNG cascade by using PNG network in society premises, etc. In this regard, a research agency has been appointed to study the feasibility of all such options in the Indian context.

Q. Delhi High Court verdict is awaited with regards to ending the marketing exclusivity. An unfavourable ruling would mean that you have to distribute other competing companies' gas through your own pipeline network, at a pre-determined rate. Will it result in losing customers and margins to new competitors while emerging as common carriers or contract carriers earning income from the gas transmission and distribution services?

A: MGL is a matured organisation having robust systems and processes in place. It is best placed to source and secure gas supplies in the most competitive manner to its customers. Further, MGL is determined to provide its customers unmatched convenience and services through its CRM, emergency response and safety systems. Any third party shipper is likely to have an uphill task of matching systems, cost-effectiveness and economies of scale of MGL before venturing into it.

In the event the PNGRB notifies any regulations for determination of payment of tariff and in the event of an adverse determination by the High Court, our natural gas pipeline network would be open for use as a common carrier or contract carrier, which would enable any entity to distribute natural gas in Mumbai and its adjoining areas by payment of transportation tariff. In case of such an event, we would no longer be a sole distributor in Mumbai and its adjoining areas.

Q. Has the company worked out any strategies, in case the verdict is not favourable to you?

A: As stated above, MGL's robust systems and processes have put it in the best place to source and secure gas supplies in the most competitive manner. MGL's pro-consumer services like MGL Connect (App based services), 24x7 customer care centre and its state-of-the-art safety systems and emergency response systems provide unmatched convenience and services to its customers. MGL is determined to have an edge over any third party shipper venturing into its areas of operation.

Q. Do you expect any government help to give a boost to your business?

A: Like any other business, government policies have a significant bearing on the city gas distribution (CGD) business as a whole as well as on MGL's operations. The government's support on gas allocation to priority segments of CGD entities has boosted the growth in the CGD sector. The government's Mission PNG programme to connect 1 crore households by 2019 is likely to boost growth in the CGD business and allied industries. The government's plans to equip Smart Cities with PNG and CNG is a potential growth opportunity for CGD companies. Further, the government's move to set up green corridor will help develop CNG outlets on highways. This could serve as a potential growth opportunity for CGD business.

Q. What are the other cities you look to expand?

A: MGL seeks to enter into new markets by participating in the bidding process for new CGD areas as well as through inorganic growth. MGL had participated in the past in PNGRB CGD Bid Round 4, wherein MGL won the bid for laying, building and operating a CGD network in the Raigad district. MGL proposes to continue to explore economically viable opportunities to expand its CGD business across India. MGL believes that its experience of over 20 years coupled with strong promoter support provides it with a competitive advantage, allowing it to expand and grow its business.

Q. Can you spell out your future investment plans?

A: We cannot comment on our future plans as per the listing guidelines.