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| Indraprastha Gas' offer price is valued on a par with that of Gujarat Gas. Still there could be some upside
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| Indraprastha Gas' maiden public offer is exciting for more than one reason.
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| Firstly, it is a reasonably large-sized offer (Rs 160-190 crore) after a series of tiny offers in recent months.
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| Secondly, Indraprastha is only the second gas distribution company to hit the stock markets. Hence, it offers a unique opportunity for stock pickers.
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| Thirdly, and most importantly, Indraprastha is the only gas distributor in Delhi. There are only three other gas distribution companies operating in India - Gujarat Gas, Mahanagar Gas and Baroda Municipal Corporation. And each of them operates in their designated areas. It may not be too bad to invest in Indraprastha which is a monopoly in Delhi.
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| Indraprastha is owned jointly by Gas Authority of India (GAIL), Bharat Petroleum Corporation (BPCL), Infrastructure Development and Finance Corporation (IDFC), Infrastructure Leasing & Financial Services (IL&FS) and Unit Trust of India (UTI).
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| The former two are the main promoters with a stake of 22.5 per cent each. IL&FS and IDFC which hold 20 per cent each have offered 11.43 per cent each for sale through this public offer.
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| UTI which holds 10 per cent has offered 5.71 per cent of its stake. The public holding post-issue will be 28.57 per cent.
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| Indraprastha's main business is production, marketing and distribution of CNG (compressed natural gas). The company is the sole producer and seller of CNG in Delhi and had a network of 115 CNG stations catering to 77,482 CNG vehicles as on August 31, 2003.
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| CNG sales accounted for 97 per cent of Indraprastha's total sales for the year ended March 31, 2003. Since fiscal 2001, its sales have grown manifold from Rs 19.6 crore to Rs 296.3 crore.
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| This was triggered by a Supreme Court directive asking all public transport vehicles, vehicles older than eight years and pre-1990 autos and taxis to convert to CNG-based units in order to reduce pollution levels in the city.
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| The company's main customer currently is the Delhi Transport Corporation (DTC) which contributed 23 per cent to its sales.
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| Besides, Indraprastha also markets and distributes PNG (piped natural gas). Currently, the company has around 10,108 domestic consumers and 95 commercial consumers. This accounted for about 3 per cent of its total sales last fiscal.
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| Indraprastha sources its gas through the Hazira-Bijapur-Jagdishpur (HBJ) pipeline of GAIL. The company pays transportation charges of Rs 1,150 per 1000 SCM (standard cubic metres) to use the HBJ pipeline.
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| It also pays transmission charges of Rs 466.49 per SCM for using GAIL's pipeline within Delhi. Indraprastha's transmission charges have risen 16 per cent since 1999.
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| The company is optimistic about its future growth. It states in its offer document: "Delhi has a large number of private vehicles, almost all of which run on petrol and diesel. We believe these vehicles can be targeted for conversion to CNG due to its lower cost and its contribution in lowering air pollution."
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| However, it is only reasonable to assume that the growth in the last two years will not be replicated in the coming years because the bulk of mandatory conversions is already over.
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| With buses having been converted or replaced, replacement demand will also take a few years to reflect in the company's performance. Indraprastha's sales, thus, will be driven by higher consumption of CNG and a rise in the number of buses plying mainly in Delhi.
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| However, there is one risk - a rise in gas prices. Unlike the oil segment, the gas sector is still regulated by the government because India is still a gas-deficit nation with nearly 80-85 per cent of the gas available in the country being consumed by critical industries like power and fertilisers.
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| Gas price is fixed at Rs 2,850 per 1000 SCM currently and there is a proposal to hike the price by 12 per cent to Rs 3,200 per 1000 SCM.
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| Though the proposal is still in limbo right now, analysts say deregulation will eventually happen.
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| If this happens, there could be some pressure on margins, especially if the company is unable to pass on the hike in prices to consumers. However, this year being the election year, government may not push the proposal forward.
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| Thanks to CNG conversions over the last couple of years, Indraprastha's topline has risen 11 times while the bottomline has gone up 79.5 times. The rise has been on account of the growth in CNG vehicle population and a 28 per cent increase in the price of CNG since April 2002.
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| Due to aggressive growth in the past few years, the company has had to increase its network substantially, leading to a rise of 3.5 times in its net block since FY01. The good thing is that its capex has been financed more out of funds from operations and less from borrowings.
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| Nevertheless, its interest cost has increased 3.8 times since FY01. Going forward, the higher operational cash flows should result in lower interest outgo and higher cash in the company's balance sheet.
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| The bid price range of Rs 40-48 per share on FY03 earnings per share (EPS) of Rs 4.2 translates into a price-earnings (P/E) ratio of 9.5-11.4 times. The only comparable listed company is Gujarat Gas which had earnings of Rs 39 in FY03.
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| At current prices, Gujarat Gas trades at 9.4 times earnings. While the valuation of the two companies seems equal looking at the lower end of the price range for Indraprastha, it is quite possible that Indraprastha gets a better discounting.
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| Currently, Indraprastha has a return on net worth of 30 per cent compared to 37 per cent for Gujarat Gas. But with lower capex in coming years, returns should improve with an increase in profitability. |
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