Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Stocks

Mahanagar IPO Subscribed 64 times; Rs. 63,800 crore blocked from market

Mahanagar-Gas-Logo.png

Mahanagar Gas IPO is over in a big way. The IPO subscription had been mind blowing at 64.48 times. But whats the impact of over subscription on the market? Before discussing that, we will have a brief look up Mahanagar Gas IPO.

Mahanagar-Gas Logo

Mahanagar Gas Limited is a Mumbai based city gas distribution company with operations mainly centered at Mumbai and spread across Navi Mumbai, Thane, Raighad etc. The IPO is entirely an offer for sale by the shareholding companies in the MGL. GAIL and BG Asia Pacific hold 45% of the shares each. They are selling apart (12,347,250 each) of their holdings in the MGL. The shares are allotted at Rs 38 discount to the employees.

IPO Details:

IPO share Price  Rs 380 – 421
Number of shares Offered 24,694,500
Minimum bidding lot quantity 35 Shares
IPO Size  938.4 – 1039.6 Crs
Start Date and End Date 21st – 23 rd June 2016
IPO Purpose Offer By Sale
Book Running Lead Managers Kotak Mahindra Capital and Citigroup Global Markets

 

Highlights:

  • MGL is mainly into distribution of Compressed Natural gas (CNG) and Piped Natural gas (PNG). They hold monopoly in Maharashtra over distribution of Natural Gas. 66% of their revenue is by the sale of CNG.
  • The company operates on similar lines of Indraprastha Gas Limited, which has a monopoly in Delhi in terms supply of PNG and CNG.
  • They supply PNG to 0.86 million households in Mumbai out of the total 2.7 million.
  • The company doesn’t have any debt on its balance sheet and has Rs 550 Cr as cash.  MGL has a steady pay of dividends, which has always been more than 50% since its inception.
  • Their revenues from CNG has was not as expected due to lower oil prices which prompted consumers to go for oil rather than CNG. But the oil bouncing back from $30 a barrel to $50 a barrel, CNG might see a good boost.
  • They have high operating margin for the segment. Though the operating margin has been declining from FY15. But its mainly because of the expansion they have undertaken.
  • The IPO pricing has also been decent seeing their stable cash flows, debt free balance sheet and constant 50% dividend payout.

Subscription at the End of Day 3:

The IPO subscription had been mind blowing. The IPO has been subscribed 64.48 times on all exchanges. Out of which 4.43% are at cut off price.

Mahanagar Gas IPO subscription All exchanges

The BSE data (where the subscription activity has been more) shows Non Institutional investors have subscribed astoundingly 135.61 times. The QIB’s have also descent numbers with subscription at 17.08 times.

Mahanagar Gas IPO subscription BSE

The retail Investors (less than Rs 2 lakh bidding) have been comparatively less at 4.44 times.

Impact on Market

Since every investor has to pay out money to bid, that money is blocked in their bank accounts till the time the allocation happens. The IPO has blocked the subscribed amount for at least a week until the allotment details are out. If we take the average bidding price ((low price+high price)/2) i.e Rs 400.5, then The net amount stuck at IPO subscription is roughly Rs 63800 Crs !.

This means the IPO subscription has blocked out Rs 63800 Crs until it releases the allotment of share details. (The IPO was for 1040 cr) In case of Brexit happening and the markets crash, investors have that much less to invest.

Even if you consider IPO lending (where people borrow to buy more in order to leverage a higher chance of entry into the IPO) it stands to reason that 60,000+ cr. is a big amount. Even 10,000 cr. would, in this low volume market, hurt liquidity. Big falls in the market have happened in such situations – when money was blocked in big IPOs. The Jan 2008 fall came after two mega IPOs (Reliance Power and Future), the April 2006 fall was after a mega IPO of RPL. While this is a tiny IPO (only 1,060 cr.) the 60x subscription might actually make it a mega IPO just because of the oversubscription. Watch out!

Disclosure: No major opinion on the IPO. The company’s good, it has cash flows, the price at 15 P/E is okay but the company as a utility will not have mega growth. No holding.

  • Karthikraja says:

    Utility companies are best defensive in turbulent market and Smart city pushing by govt can expand new horizon for Company. Growth with Defensive is good combination for conservative investors. Thank you for the insight.

  • Karthikraja says:

    You just missed crores in title….LOL

  • Bhaskar says:

    “Big falls in the market have happened in such situations – when money was blocked in big IPOs. The Jan 2008 fall came after two mega IPOs (Reliance Power and Future), the April 2006 fall was after a mega IPO of RPL. ”
    I think you are missing the point here. Mega IPOs happen during the fag end of the bull markets and public euphoria coupled with excess expectations result in crashes. Its not just absence of liquidity in the system. This time I did not hear my next door neighbour talking about how great the IPO is and how he is borrowing to invest.

    • No this wasn’t really the case in 2006 either.
      The paanwala recommending stocks is probably one harbinger of excess, but it’s not the only one. This is not about mega euphoria, it’s about a liquidity squeeze on markets – which tends to happen in large IPOs during euphoria, but also tends to happen in markets when there is no euphoria. Example, 2006 April. 2008 October (when Lehman went bust, the problem was liquidity though it was global liquidity).
      India is anyhow subject to excess expectations that have not been met in the last three years. Our EPS growth is terribly low, and P/E is very very big (TTM is 21+). This excess expectation can easily result in a crash just by itself 🙂