The scrip of Indraprastha Gas, the Delhi-based city gas distributor, has fallen a little over 10 per cent in three months due to overhang such as regulatory action (fixing of marketing margin), surging liquefied natural gas (LNG) prices and a weaker rupee versus the dollar (which increases its outgo towards imported LNG). However, things are changing for the better, with margins expected to stabilise and profit growth picking up in 2012-13.
Expansion of operations in newer regions, as well as rising preference for compressed natural gas (CNG) over much more expensive fuel such as petrol and diesel, point to better growth visibility and provide comfort. While the rupee’s six per cent rise against the dollar in 2012 so far is positive, the company has also been raising prices to offset cost pressure — the latest one of Rs 1.70 per kg (in Delhi) came on Monday night.
Analysts say probable price rises in petrol and diesel after the state elections could enhance the price advantage that CNG enjoys over such fuels, thereby, boosting its demand prospects. Finally, the recent underperformance of the stock has made valuations attractive. At Rs 360, most analysts are bullish on it, with price targets at Rs 400-430.
| MARGIN STABILISING | |||
| Rs crore | FY11 | FY12E | FY13E |
| Sales | 1,751 | 2,550 | 3,096 |
| Y-o-Y change (%) | 62.4 | 45.7 | 21.4 |
| Operating margin (%) | 28.5 | 24.8 | 24.2 |
| Y-o-Y change (bps) | 9 | -370 | -60 |
| Net profit | 259.8 | 297.3 | 350.9 |
| Y-o-Y change (%) | 20.5 | 14.5 | 18.0 |
| P/E (x) | 18.7 | 16.3 | 13.8 |
| E: Estimates Source: India Infoline Research | |||
Price rise: Margin lever
On March 5, IGL raised CNG prices by Rs 1.75 and Rs 1.90 per kg in Delhi and the NCR regions (Ghaziabad, Noida and Greater Noida), respectively. The previous one was in December-end and takes the number of price rises in 2011-12 to six. Rising spot LNG prices and the company’s increasing dependence on this imported gas are key reasons for the price rises. Between April 2011 and December 2012, IGL’s average gas sourcing cost has jumped around 27 per cent (thanks to the decline in gas volumes from Reliance Industries’ K-G basin), as the company had to depend more on the relatively expensive LNG. Notably, while the imported gas costs $13-14 per unit, the price of gas sourced from Reliance Industries is nearly half, at $5.5-6 per unit.
However, with IGL’s price increases, margins should stabilise. Saurabh Handa and Abhishek Sahoo of Citi, in a March 5 report, say, “We believe IGL’s Ebitda margins in the March quarter could revert to the Rs 5 per standard cubic metre levels (from Rs 4.7 in the December quarter), driven by a combination of softening of LNG prices (down from a November peak of $16 to $13), CNG price hikes, and strengthening of the rupee.”
Notably, a rise in petrol prices in India also seems inevitable. After the state elections, prices of diesel and petrol products are expected to be raised by Rs 2-4 per litre, which should increase the discount of CNG over these fuels. This will have two-fold gains for the company. One, the conversion of private cars from petrol and diesel to CNG will rise. Two, it will give more pricing power to the company, if required.
| ATTRACTIVE DESPITE HIKE | |||
| Petrol (Rs/litre) | Diesel (Rs/litre) | CNG (Rs/kg) | |
| Cost | 65.64 | 40.91 | 35.45 |
| Mileage (Km) | 12 | 15 | 18 |
| Cost per Km (Rs) | 5.50 | 2.70 | 2.00 |
| Savings (%) | 67.50 | 34.80 | |
| Expected rise Rs3 in petrol/diesel | 68.64 | 43.91 | 35.45 |
| Cost per Km (Rs) | 5.72 | 2.93 | 1.97 |
| Expected savings (%) | 65.57 | 32.72 | |
| Prices are of Delhi, Savings are for CNG over petrol and diesel CNG prices are post the hike on 5 March Source: Analyst reports | |||
Volume boost
While higher prices would mean an increase in revenue, the good part is volume growth is also expected to be healthy. Prayesh Jain, analyst at IIFL, expects the company to show a strong 19 per cent compounded growth in volumes over FY11-14, wherein CNG and PNG (piped natural gas) volume growth is pegged at 13 per cent and 40 per cent, respectively. Higher number of private car conversions, the new fleet of Delhi Transport Corporation buses and new auto-rikshaw permits will drive volume growth in the CNG division, which accounts for a major part of revenue.
And, IGL’s PNG division will benefit from higher industrial applications. Also, the household segment offers huge untapped potential for PNG, as IGL only supplies to 310,000 households versus about 4.3 million LPG households. Though the difference between PNG and LPG prices is a mere five per cent, higher awareness of the advantages of PNG such as safety, convenience and cost will fuel expansion in this segment. Expansion in newer areas such as Ghaziabad, Noida and Greater Noida will aid volume growth.
Ahead
Most analysts expect IGL’s net profit to grow 16-18 per cent annually in 2012-13 and 2013-14, with margins likely to stay over 24 per cent. IGL’s strong revenue visibility, given underpenetrated markets, along with attractive valuations (14 times 2012-13 estimated earnings) makes it a preferred pick of most brokerages.
While the discontinuation of its marketing monopoly in Delhi (effective January 2012) was a key overhang on the stock, IGL’s network exclusivity remains till 2025, which will enable the company to earn fixed charge (fee) income. This is because all new entrants will have to use IGL’s network for gas transmission.
In the long run, the expansion plans beyond Delhi and also international locations such as Africa will enable it to diversify the revenue stream. On the flip side, any steep rise in gas prices, depreciation in the rupee or delay in expansions could hurt performance.
