 "IGL's earnings to remain robust on healthy volumes")
Strong double digit volume growth in both Compressed Natural Gas (CNG) and Piped Natural Gas (PNG) aided Indraprastha Gas (IGL)'s results for the September 2016 quarter (Q2). The gas distribution company's total volumes grew 12 per cent over the year ago quarter as it continued to benefit from rising awareness and government's efforts to reduce pollution in New Delhi and the NCR region. As more vehicles converted to gas-based fuel, it aided IGL's CNG volumes which form about three-fourth to its total volumes.
What's more, this momentum is likely to continue going forward as well. "Revival in CNG car conversion (led by odd-even scheme in Delhi) and likely bus addition should result in elevated volume growth in the near-medium term," says Harshad Borawake, oil and gas analyst at Motilal Oswal Securities. In fact, some brokerages such as Elara Capital have even raised their volume growth estimate for the company from 7 per cent to 9 per cent for this fiscal, following the results. Softness in natural gas prices was reflected in falling realisations of the company in both segments.
IGL's net profit grew at a robust 42 per cent year-on-year to Rs 144 crore though a one-time lease provisioning of Rs 17 crore meant that this number missed street's estimates of about Rs 160 crore. IGL's consolidated earnings were boosted by a 60 per cent jump in net profit from its acquisitions of Central UP Gas and Maharashtra Natural Gas to Rs 21 crore. IGL plans to start operations in Rewari district of Haryana by the end of this financial year. All these diversifications will reduce IGL's dependence on New Delhi and NCR regions going forward apart from being additional growth engines for the company.
Given that IGL is a play on rising regulatory thrust on green fuels and also stands to gain from conversion of taxi aggregators' vehicles as well as addition of new buses going forward, most analysts remain positive on IGL. At current levels, the IGL scrip trades at 18 times FY18 estimated earnings — way ahead of its historical average one-year forward price to earnings ratio of 11 per cent. Expectations of continued traction in its volumes, earnings as well as addition of new growth cities other than New Delhi are a few reasons why these valuations could sustain going forward.
On the flip side, a key potential downside risk would be any step from the regulators to restrict the company's return ratios. While the high pricing difference between CNG and other auto fuels such as petrol and diesel is a positive, some analysts are concerned on any potential pricing regulations. "We expect the government to start influencing prices in FY19 in the run up to the next parliamentary election," believes Kumar Manish, analyst, HSBC.
