Ashu Shinghal, MD Of Mahanagar Gas Ltd. Forecast Volume Growth Next year Admist Price Cuts In Past Year
Transcript
00:00 Mr. Ashu Singhal, who is the managing director of the company to try and put into perspective
00:04 all that's happening around the business. Mr. Singhal, good having you. Thanks for taking
00:07 the time out. Good morning. This is Neeraj Shah here. How is the business
00:16 environment looking in light of the fact that there are multiple forces at play?
00:21 One is around pricing, two is around the probability about whether circles will remain
00:29 the bastions of the incumbents or will new competition come in and disrupt?
00:33 And of course, the demand picture looking as solid as ever.
00:36 No, all these things are always at play. It's not that something new has happened in recent market
00:43 or any disruption has happened as such. In fact, the
00:46 indications are that the government has been supportive of the CGD sector. A lot of investment
00:52 is coming up. Almost all of India is covered by the authorization of geographical areas.
00:57 Coming to your point that there has been market play in terms of how we are competitive with
01:02 respect to petrol and diesel. So, CNG in Mumbai or Mahanagar gas is around more than 50% cheaper
01:10 as compared to petrol and around 22% cheaper as compared to diesel. So, we are always a competitive
01:16 market where we are playing and in other industry and commercial also we are competition with other
01:21 liquid fuels. And in domestic PNG we are having competition with LPG. So, all that we are well
01:29 placed in terms of pricing and we expect that the volume growth will continue for the next financial
01:33 year. In a recent investor conference, Mr. Shingle, the company was on record saying that the
01:41 price cuts have happened simply because there has been a reduction in feedstock cost, if I'm not
01:46 wrong, and that created the margin headroom which enabled you to do this. Now, my question is,
01:52 would this mean that the operational metrics for MGL for the current quarter as well as the
01:59 quarters ahead would largely be maintained or similar to the average levels that we've seen in
02:05 the past? Because if you had headroom and you cut it for volume growth, your margin picture should
02:09 look intact. Yeah, it's very flexible. I mean, the LNG is passed through if LNG or the APM gas,
02:18 if the cost goes down, we pass on the benefit to the customer. In the same lines, when the LNG
02:23 prices have fallen down in the last four or five months, so we have cut down and passed down the
02:28 prices benefit to the consumer. Therefore, we expect the margins will not shrink as such. We
02:32 are around 12.5 to 13 rupees margins EBITDA per SCM and we expect similar numbers to come in this
02:39 quarter and the year ahead. Okay, how is demand Mr. Shingle? I mean, you spoke about the competitive
02:45 forces at play, which have always been there, I would presume and you would probably say the same
02:50 thing. So how is the volume growth outlook looking like? Because you have sounded off in recent
02:55 investor conferences again, that you are confident of the volume growth as well. Talk to us a bit
03:00 about demand, sir. Yeah, currently we have, since last nine months, we have a growth of around 4%.
03:06 And this quarter has been better than the Q3. So we expect to end the year around 5% growth year on
03:13 year. Next year, we have already launched several schemes of getting more CNG vehicles on road
03:19 by giving benefits to the purchaser in terms of discounts on the capital cost and running
03:26 costs in fuels, as well as retrofit market. So we expect that next year, we may have a growth
03:33 of around 6% to 7%. And also the prices are very favourable, as we have done several cuts since
03:39 last one year. So they must be attracting more of the volumes on road in terms of CNG as well as
03:45 industrial and commercial, we are connecting new customers. Do you sense, sir, that conversions
03:51 have picked up by virtue of the fact that the discount between the price differential between
03:57 oil and petrol, for example, gas and petrol has presumably widened considerably? Yes, yes.
04:03 Actually, if you see the data also, last year we had 65,000 vehicles which got converted into CNG.
04:09 And this year in nine months, we have already have 57,000. So last quarter, we expect another
04:15 around 20,000 or so, so 20 to 25,000, we will be hitting somewhere 80,000 this financial year.
04:22 So that gives a momentum to the convergence and the same momentum we expect with the schemes and
04:28 the favourable price for CNG to continue for the next year as well. Got it. Mr. Singhal,
04:34 before I move on to the exclusivity conversation, just one more question. Most analysts who track
04:42 this space and your company very closely are pencilling in volume growth of 7% to 8% FY25,
04:49 they are pencilling in that the margins for FY25 and 26 will be at the upper end
04:53 of the guided range as well. There are very few where I'm seeing assumptions to be lower than
05:02 what your guidance would have been. Is it fair to be this optimistic looking at the trends that you
05:08 may be seeing as well? See, we don't want to commit more than what we can deliver. So we are
05:15 a bit conservative on terms of when we are airing our numbers, but you are right, there's no such
05:20 trends as such to the business and we expect the numbers to grow in 6% to 7% on a safe side and it
05:27 can be slightly higher if things are more favourable. As well as since the prices are in
05:32 our, I mean, they are cheapest in the country in terms of CNG and PNG. And the delta is very
05:37 handsome in terms of petrol and diesel vehicles. We expect the volume growth to continue as well
05:43 as momentum to pick up in the next financial year while maintaining the margin also in similar range.
05:50 Okay, I get your point. Now the point around the infra-exclusivity and across various geographies,
05:59 what are your thoughts here? I know there is a legal challenge. I'm not asking you to comment
06:02 on anything which may be sub judice, Mr. Singhal, but just on the broad concept,
06:06 because the thoughts are divided there. I'd love your opening thoughts and then I'll have a couple
06:10 of other questions on this. See, there are two concepts as per the Act. One is that contract
06:17 carrier pipeline should be allowed for other companies to use those pipelines and deliver
06:22 the gases to the consumer. The other is, this is called marketing exclusivity, which was in the
06:28 court in 2015 and stay was granted by the Honourable High Court to not take any coercive action against
06:35 the CGD companies. That is one part of it. The other part is when a specified period is over,
06:41 the infrastructure exclusivity also gets expired. But again, that matter is again under sub judice.
06:48 It's being deliberated and discussions are yet to conclude. But there is a precedence
06:53 under the regulation that 10-year block extension can be given and which has been granted to some
06:58 other companies like Gujarat Gas. So, post that notice which has come up recently, we have also
07:04 applied to PNJRB, the regulator, to get a 10-year block extension and we are very hopeful that it
07:10 will be granted to us. One of the beliefs, Mr. Shingle, is that even if infra-exclusivity
07:21 was opened up and was not exclusive in that sense, it will be difficult for a company A
07:28 to go out and compete with the same ROEs, so on and so forth, in something which has been the
07:34 bastion of company B and vice versa for B to C and C to A, so to say. Hypothetically, I'm just
07:40 using these as an example. Would you, as somebody who is heading this business, concur that even if
07:46 some other circle's exclusivity was no longer there, it will be difficult for a company like
07:53 you to go out and compete there and vice versa for any company to come in and compete
07:58 with the right return ratios and the right margins in the domains that you have operated
08:03 for such a long time? That's really logical because see,
08:07 Mahanagar has been operating since last 25-26 years in Mumbai and other areas.
08:12 Mumbai has developed over the years. Now the roads have been concretized and our assets are
08:17 depreciated. So, any company to enter into a new geography will be a challenge. The overheads will
08:22 be high. To create that infrastructure and to also deliver the same competent rates will be very
08:27 difficult. So, across globe, it is seen that infrastructure exclusivity is typically extended
08:33 for a longer period and marketing exclusivity is wherein the pipeline or infrastructure is allowed
08:40 by other companies to use is granted by the regulators across the globe.
08:44 Even if it was not, sir, my final question, even if it was not, would it be impractical? I mean,
08:51 let's assume that in all fairness, things are opened up, let's say. Sorry, not using the term
08:56 fairness, but let's assume that things are opened up for whatever reason, whatever the reason may
09:00 be. It will be difficult for an MGL to go out and compete with somebody else in their areas and
09:04 therefore, it's not from a business decision perspective, even if the option was available,
09:09 maybe it will not be taken up in all probability? No, we can't say like that because see,
09:16 the modular concept is also coming in CNG. There are different models wherein LNG can be brought
09:22 to that station and a modular station can be set up. So, you don't need a big infrastructure to
09:28 start working in other areas. So, the earlier things were more conventional when the pipeline
09:34 infrastructure was required and others, things were required. Now, things are changing a bit.
09:38 So, if the market open up, it's an opportunity for both the parties, either MGL to go out and
09:44 work in other areas and vice versa. But the fact remains that the person who has entered into the
09:50 market has 25 years on the line and created the infrastructure. For anybody else to compete with
09:56 the rates will be a bit of a challenge. But if the marketing exclusivity is gone and the same
10:02 pipeline infrastructure is given to, access is given to other parties, then it can be done easily.
10:08 Okay. And on that, sorry, my last question therefore is this, on that, you are saying that
10:15 as has happened globally, that these periods of exclusivity ideally should be much longer
10:22 than what they are right now? See, infrastructure exclusivity is a term
10:29 wherein if the market is monopolistic in nature, but here there is no monopoly as such. One that
10:36 the GAs have been bidded and the parties or the entities who have got the best rates have got the
10:42 GAs. Secondly, we have got three segments. One is petrol, diesel, we are competing with CNG,
10:47 LPG we are competing with PNG and liquid fuels and solid fuels are being competed with
10:53 industrial PNG. So, there is no monopoly as such in that respect. And if the marketing exclusivity
10:59 also goes away, the infrastructure available can be used by paying certain use charges,
11:05 the other parties can use it. So, as such, there is no thing which we can say as a infrastructure
11:11 exclusivity in strict terms. There is no monopoly in that respect because multiple
11:16 forces and their price determination is done as per the market price.
11:21 Your point. Okay, Mr. Singhal, we will leave it at that. Thank you so much for taking the
11:26 time out and speaking to us today. Have a great holy weekend.
11:29 Thank you so much.