Indraprastha Gas

Investors with a medium-term horizon can consider buying the stock of Indraprastha Gas Limited (IGL), the sole supplier of compressed natural gas (CNG) and piped natural gas (PNG) in the national capital territory of Delhi. IGL's growth prospects stem primarily from its monopoly status in Delhi where demand has been growing at a healthy clip, thanks to statutory backing and clear cost and environment advantages of gas over alternative fuels.
The company's CNG network of 187 stations services more than 3 lakh vehicles, while its piped gas network covers around 1,60,000 households and 315 commercial customers.
CNG (almost 88 per cent of sales) is the major contributor to revenues. At the current market price of Rs 203, the stock discounts the trailing 12 month earnings by 14 times.
IGL, a joint venture between GAIL and BPCL (22.5 per cent each), with a 5 per cent stake held by the Delhi Government, is in a sweet spot with rising petrol, diesel and LPG prices driving consumer conversion to gas-based substitutes.
The company now sources the bulk of its gas from GAIL at an administered price of less than $2 per mmbtu, much cheaper than other sources.
However, the agreements with Reliance Industries for KG-gas, and GAIL and BPCL for regassified-LNG to meet incremental gas requirements, are likely to push up costs over the medium term.
While this would lead to pressure on margins, there are a few mitigating factors.
The company's monopoly position results in relative inelasticity in consumer demand. Also, clear economies in using CNG in place of traditional fuels (about 62 per cent cheaper than petrol and 31 per cent cheaper than diesel) may allow leeway in hiking prices.
Healthy financial metrics
IGL has consistently posted healthy financial results, with sales and profits growing at an annual rate of 17.3 per cent and 16.8 per cent during 2005-2009. In 2009, sales grew 20.8 per cent year-on-year to Rs 853 crore while profits declined marginally (1.1 per cent) to Rs 172 crore.
Decline in profits was mainly due to overdrawal charges for gas drawn above allotted limits to meet increased consumer demand.
In response, the company has been able to pass on costs by increasing CNG prices by around 11 per cent in June 2009. In the October-December 2009 quarter, sales and profits grew strongly by around 30 per cent and 54 per cent respectively.
IGL has consistently maintained operating margins in excess of 30 per cent, and net margins above 20 per cent.
While margins may moderate if the blended input costs rise, they will remain at sufficiently healthy levels. Return on equity in excess of 25 per cent and zero debt also buttress the financials.
Good prospects
Low penetration rates, growing vehicular population and regulations that mandate that Delhi's public transport and light commercial vehicles run on CNG, bode well for IGL. The Commonwealth Games to be held in Delhi in October 2010 is expected to boost CNG sales significantly.
Increasing conversion of private vehicles to CNG and introduction of CNG models by auto makers are expected to provide a further fillip to demand. Piped natural gas too is likely to find increasing favour with households and commercial customers due to its cost and operational benefits. IGL plans to ramp up aggressively to meet this demand.
IGL which has expanded its footprint to Noida and Greater Noida, also plans to enter other cities in the national capital region (NCR). With the government planning to roll out city gas networks across the country, IGL as a first mover in this business could benefit.
In the initial two rounds comprising 13 cities, IGL bid for setting up CGD networks in Sonepat, Meerut and Ghaziabad.
Risks
While IGL has been trying to make inroads into other towns and cities, it has had to face regulatory hurdles due to guidelines laid down by Petroleum and Natural Gas Regulatory Board (PNGRB). In a series of run-ins with the regulator, IGL's bids for the Sonepat and Meerut CGD network were rejected on grounds of inadequate net worth. The company has gone on appeal against this order.
IGL had also gone to Court over the PNGRB inviting bids for city gas networks in Ghaziabad and Noida, where it claims exclusive rights.
The latest ruling by the Delhi High Court that PNGRB is not authorised to issue licenses for city gas networks strengthens IGL's case and bolsters its prospects in the NCR.
The CGD space is also witnessing increased competition with the entry of major players, including Reliance Industries and GAIL.
The Delhi CGD market, post December 2011, will also be open to competition and the marketing exclusivity given to IGL will end. However, network exclusivity for IGL in Delhi for 25 years and its ready infrastructure pose a high entry barrier to other players.
PNGRB has proposed caps based on return on capital on transmission and network tariffs for CGD entities. However, marketing margin, not being subject to such restrictions, allows IGL leeway in final pricing.
via BL