The rising demand for CNG and PNG as cleaner and cost efficient fuels, and the Commonwealth Games are positive triggers for Indraprastha Gas.
Indraprastha (old name of Delhi) has seen a lot battles, but in the modern times, a different type of battle is being waged by Delhi citizens. Since the last decade, Delhi-ites have been fighting hard against pollution. Delhi was regarded as one of the world’s ten most polluted cities, with vehicles accounting for 70 per cent of polluting emissions.
In this background, Indraprastha Gas Limited (IGL) was initiated by the government to provide CNG (compressed natural gas) - an environment friendly and cost efficient fuel. As part of these efforts, Delhi won the “Clean Cities International Award” from the US Department of Energy in 2003, after the entire public transport vehicles (PTV) switched to CNG in collaboration with IGL. While there has been no looking back, importantly, the rising acceptance of CNG by newer segments (cars, LCV, etc) and geographical expansion into neighbouring areas indicate robust prospects for IGL in the future as well.
CNG – New emerging segments
Earlier, IGL had primarily focussed on conversion of public transport vehicles driven by the government’s mandate. But now, it is heeding to the increasing demand from the private cars space, too. The total car base, which uses CNG as a fuel, has jumped nearly four times to 140,000 in the last two years (recent conversions have been around 5,000 cars/month).
This leg of growth has been partly fuelled by the rise in gasoline and diesel prices in the last two years (as of now, operational cost of CNG vehicles is 73 per cent lower than those using petrol and 45 per cent lower than diesel vehicles). Punctuating this, automobile manufacturers are also introducing car models with factory fitted CNG-kits, which is bound to accentuate growth in future as well.
To meet this growing demand, the company is planning to set up additional 50 gas stations in the next two years, which would further strengthen its existing network of 163 stations. The company is also looking to expand its network to other neighbouring cities like Panipat, Sonepat and Rohtak apart from Greater Noida. This would benefit the vehicle owners in the region as they are presently required to undertake journey to Delhi to fill up CNG in their vehicles (nearly 20 per cent of total vehicles running on CNG, are from NCR region).
More From This Section
The LCV (Light Commercial Vehicle) segment could also prove to be a trigger, but the dampener is the cost of conversion. After PTV’s, the government is looking at converting diesel LCV’s to CNG in the next phase. The current fuel price dynamics and probable financial incentives to convert to CNG should be a future growth story for IGL in LCV’s.
PNG - greater value
The company is doing well in the fast growing PNG segment as well. In fact, the growth potential in this segment is immense with a huge target market. PNG grew at 21 per cent compared to overall business growth of 18 per cent in Q1 FY09, besides gross realisations for PNG (Rs 17.8/scm) has been greater than CNG (Rs 14.3/scm), thus indicating their respective profitability.
The total connections of LPG in Delhi are more than 40 lakh and the company’s PNG connections stand at only 1.27 lakh, thus indicating the potential market for IGL. Additionally, PNG is 18 per cent cheaper than LPG in cylinders. The cost advantage and under penetration of PNG, will help drive volumes for IGL in the future.
IGL is targeting at increasing the share of PNG in the revenue pie to around 8 per cent from 7 per cent currently. The company is planning to set up 50,000 connections in FY09, and expects to reach one lakh connections per year thereafter, as part of its expansion plans in PNG. In order to achieve its plans, the company is scaling up infrastructure to cater to up to four lakh connections. IGL has well laid out its city gas distribution infrastructure in Delhi, which consists of over 1,500 kms of pipeline network (CNG and PNG).
Souring- not an issue
IGL sources all the natural gas from GAIL (which owns 22.5 per cent in IGL) and as per agreement the company is allocated 2 mmscfd (million standard cubic feet per day) of gas for Delhi. The thing to note is that the supply cushion (allocated supply - actual demand), which the company enjoyed was nearly 40 per cent in 2007 and has reduced to around 20 per cent, which only indicates rising demand. Notably, apart from the buffer (20 per cent) and the additional supply of 1 mmscfd that IGL has sought, the company has also been allocated additional 0.7 mmscfd for the NCR regions, which would be used as it expand into the NCR regions and demand grows, in future.
| STABLE NUMBERS | |||
| Rs crore | FY 08 | FY 09E | FY 10E |
| Net Sales | 706.0 | 852.0 | 995.0 |
| OPM (%) | 42.5 | 40.9 | 38.6 |
| PAT | 174.5 | 180.4 | 203.2 |
| EPS (Rs) | 12.5 | 13.7 | 15.2 |
| P/E (x) | 8.6 | 7.9 | 7.1 |
| E: Estimates | |||
Regulatory issues
The Petroleum and Natural Gas Regulatory Board issued guidelines for working of City gas distribution (CGD) projects in the country. As per these regulations, IGL will have monopoly in its operating market up to 2010. Beyond that, IGL will not enjoy any CNG exclusivity in Delhi and thereafter, others will be free to compete in its space. The other issue pertains to the pricing of gas for customers. Any adverse changes in tariffs by the regulator, if and when it happens, could also pose a challenge for IGL.
Investment rationale
IGL’s first mover advantage, an extensive distribution network and gas sourcing agreement, will make it difficult for any competitor to dent IGL’s prospects in any significant manner for many years to come.
Delhi will host commonwealth games in 2010 and Government will be introducing around 2,000 high capacity buses and 20,000 radio taxis. IGL being the sole provider of CNG to the PTV’s in the city will benefit from this additional demand. As part of its preparations for the games, the company will be setting up 15 CNG stations.
A high growth potential segment is two-wheelers (more than 60 per cent of the total vehicles in Delhi), which could be a future driver as tests on CNG variants of two wheelers have been successful. The launch of CNG-fitted two-wheelers should accelerate the future demand. All these are apart from the growing demand from PTV and PNG and huge potential in the cars and LCV segments.
IGL has delivered consistent operating margins of around 40 per cent and is a debt free company. Considering that it has roughly Rs 200 crore of surplus cash and generates a little over Rs 200 crore of cash from operations annually, funding its capex plans of Rs 500 crore (station network and other infrastructure) should not be an issue. Overall, considering the growth opportunities, expect the company’s financials to grow by an average 12-15 per cent annually over the next few years. At Rs 108.15, the stock trades at 7.9x and 7.1x of its FY09 and FY10, respectively, and can deliver around 20-25 per cent returns in a year’s time.