Hyderabad-based Megha Engineering and Infrastructures (MEIL), the second-largest purchaser of electoral bonds at ₹966 crore and currently facing corruption allegations, has put its city gas distribution business up for sale, according to four industry executives familiar with the matter.

Megha City Gas Distribution (MCGDPL, a wholly-owned subsidiary) has decided to streamline its operations and has approached state-run entities like Indian Oil Corp, Hindustan Petroleum Corp, Bharat Petroleum Corp, and Indraprastha Gas, among others, regarding the sale. 

“The companies are evaluating the proposal and analyzing the numbers. No decision has been made yet,” said an informed executive. A senior industry executive from a company that assessed Megha City Gas’ assets mentioned that the company had minimal on-ground activity, estimating its valuation at ₹1,000-2,000 crore.

MEIL, a $5-billion infrastructure firm, operates in various sectors, including hydrocarbons, electric buses, defence, power, transport, and manufacturing. In 2015, it entered the city gas distribution market under the brand name Megha Gas and continued under the MEIL banner until FY22.

In September 2022, MEIL transferred its city gas distribution business to MCGDPL, which holds licenses to establish city gas distribution networks in 62 districts across 10 states.

“Encouraged by the potential of the city gas distribution sector, many companies submitted aggressive bids,” said a senior executive at an energy company that evaluated the Megha City Gas proposal. 

“MCGDPL was one of them. However, they are now finding it very capital-intensive to meet their minimum work program,” the executive added. “Therefore, they are planning to sell the business.”

Revisiting Electoral Bonds And Megha Engineering’s Strategic Investments

Hyderabad-based Megha Engineering and Infrastructure Ltd (MEIL) has been scrutinized for its significant purchases of electoral bonds, which have coincided with the acquisition of major projects. 

According to data released by the Election Commission of India (ECI), MEIL emerged as the second-largest buyer of electoral bonds, purchasing bonds worth Rs 966 crore. 

Among its contributions, the unlisted firm donated Rs 585 crore to the BJP, Rs 195 crore to BRS, and Rs 85 crore to the DMK.

However, MEIL’s bond purchases appeared strategically timed; for instance the company bought bonds worth Rs 20 crore in October 2020, shortly before securing the contract for constructing the all-weather Zojila tunnel in Jammu and Kashmir, estimated at Rs 4,500 crore.

Similarly, in March 2023, MEIL was awarded a Rs 3,681 crore project to build a bullet train station at the Bandra Kurla Complex (BKC) in Mumbai 

and according to the ECI report MEIL made its largest bond purchase, totalling Rs 140 crore, in April 2023, the month following the award.

Previously, MEIL had secured the Rs 4,358 crore Polavaram project in Andhra Pradesh through a reverse tendering process initiated by the state government in November 2019. 

ECI data showed that MEIL bought bonds worth Rs 5 crore in October 2019, just before winning the project.

MEIL’s projects span various states, including Uttar Pradesh, Uttarakhand, Gujarat, and Madhya Pradesh. 

In addition to its extensive project portfolio, MEIL also made notable donations to several political parties. 

The BRS, previously known as Telangana Rashtra Samithi, received Rs 195 crore from MEIL. 

Likewise, the DMK, ruling in Tamil Nadu, received Rs 85 crore, while the Jagan Mohan Reddy-led YSR Congress Party in Andhra Pradesh was given Rs 37 crore. 

The TDP received Rs 25 crore, and the Congress got Rs 17 crore. Smaller donations ranging from Rs 5 crore to Rs 10 crore were made to the JD(S), Jana Sena Party, and the JD(U).

Founded in 1989 by industrialist Pamireddy Pitchi Reddy, MEIL began as Megha Engineering Enterprises, focusing on manufacturing pipes for municipalities. 

It rebranded to Megha Engineering and Infrastructure in 2006, subsequently undertaking large-scale infrastructure projects such as dams, natural gas distribution networks, power plants, and roads.

Beyond Ambition

The Petroleum and Natural Gas Regulatory Board conducts auctions for geographical areas in various rounds, allowing companies to transport or distribute natural gas to domestic, commercial, industrial, and transport consumers through a network of pipelines.

According to regulatory requirements, city gas distribution companies must complete the minimum work program in their designated GAs within a specified timeframe.

By the end of December 2023, Megha City Gas had established 98,920 domestic piped natural gas (PNG) connections, 146 compressed natural gas (CNG) stations, and a pipeline network spanning 9,514 km.

The company is tasked with achieving a cumulative work program of 12.4 million domestic PNG connections, 2,144 CNG stations, and 54,926 inch-km of pipelines across 22 GAs by FY32; failure to meet these targets will result in penalties.

In a February 2024 report, India Ratings and Research showed that any penalties would affect the company’s EBITDA and would thus be a critical factor for monitoring cash flows and leverage at Megha City Gas.

Megha City Gas provided bank guarantees worth ₹750 crore to the PNGRB upon winning the GAs.

“In the seven GAs won under the fifth and ninth rounds, the company is falling behind its minimum work program targets. However, so far, no bank guarantees have been encashed for any of the GAs won under these rounds,” Ind-Ra noted.

The rating agency stated that MCGDPL plans to incur a cumulative capital expenditure of ₹6,400 crore by FY30 to meet the minimum work program targets for the 11th city gas distribution round. 

“Of this, MEIL is expected to inject ₹4,600 crore as equity/subordinated loans into MCGDPL, with ₹1,300 crore being financed through debt, and the remaining ₹900 crore generated from MCGDPL’s internal accruals,” the agency said.

Ind-Ra added that in the first nine months of FY24, MCGDPL incurred a capital expenditure of ₹5,500 crore, supported by its parent company, MEIL.

Allegations

“We studied Megha Gas’ proposal. If we acquire it, we would also inherit the penalties,” said an executive from an oil and gas company who wished to remain anonymous. “However, due to their recent issues with the CBI, we have decided not to pursue it further.”

As mentioned earlier, MEIL has been identified as the second-largest buyer of electoral bonds, donating a total of approximately ₹966 crore to various political parties, according to data released by the Election Commission on March 21.

In february, the Supreme Court declared electoral bonds unconstitutional.

Additionally, last month, the CBI registered a corruption case against MEIL, eight officials from NMDC and NMDC Iron and Steel Plant (NISP), and two officials from Mecon, related to a work contract valued at over ₹314.57 crore.

An executive director of another oil and gas company commented on the broader industry trend, noting that many companies, despite their ambitious bids, have failed to meet their targets. 

“As a result, they are putting their licenses and geographical areas up for sale. This is leading to consolidation in the city gas sector, and we anticipate more such consolidations,” he said.

He also noted that city gas distribution typically takes around seven years to break even.