Indraprastha Gas

Rising global oil prices are not necessarily a threat to all companies. To some, they are an opportunity. Like, Indraprastha Gas (IGL), for instance. The prospect of a steep rise in the prices of transportation fuels and cooking gas presents IGL with a tremendous opportunity to grow its business — that of selling an alternative fuel, compressed natural gas (CNG) for automobiles and piped natural gas (PNG) for households. IGL is the monopoly supplier of CNG and PNG in Delhi.

The IGL stock, since our last recommendation at Rs 113 almost a year ago, shot up to a high of Rs 178 last January before retracing its steps. It now trades at Rs 123 and looks attractive for acquisition with a medium-term perspective. The stock has been range-bound at Rs 120-130 in the last two months and investors can use weakness in the broad market to accumulate the stock at lower levels.
Robust model

IGL has a strong business wherein it supplies CNG for vehicles in Delhi, backed by a Supreme Court order aimed at reducing pollution in the capital city. CNG is an environmentally-friendly fuel that controls vehicle emission to manageable levels. IGL, a joint venture of Bharat Petroleum and GAIL India, has gradually expanded its network of CNG stations and is now spread all over the city.

With conversion of commercial vehicles in the capital slowing down as it nears saturation point, IGL has turned its focus on private vehicles where it has tasted big success. In the first nine months of 2007-08, the number of private vehicles shifting to CNG grew by 48 per cent even as new additions in buses and autorickshaws slowed down.

An increase in the price of petrol/diesel, which seems inevitable now, could drive more private car owners to CNG, which retails at around Rs 20/kg in Delhi compared to petrol at Rs 45.52 and diesel at Rs 31.76 a litre each. Even assuming a small increase in CNG prices, the gap between it and the other transportation fuels will be attractive enough to convert existing car owners.

Meanwhile, IGL is also aggressively expanding its PNG network to deliver cooking gas by pipelines at homes. The number of PNG connections increased by 41 per cent in the first nine months of 2007-08 to 1.10 lakh households. This is yet a small number given the size of Delhi and there is tremendous scope for IGL to increase this customer base.

An increase in cooking gas cylinder prices by the government will probably push more households into the PNG net. IGL prices its gas lower than LPG cylinders to make conversion attractive.
Gas sourcing

Presently, IGL gets two million metric standard cubic metres a day (mmscmd) of gas from its parent, GAIL India, at subsidised prices. Its sales in 2007-08 must have been close to this mark as in the first nine months ended December 2007, it had touched 1.47 mmscmd. IGL also has another 0.2 mmscmd allocated for its foray into the Noida market, which is now held up due to legal issues and the entry of a competitor.

The company has a monopoly in the Delhi region for three years till end-2010 as per the recent regulations of the Petroleum and Natural Gas Regulatory Board.

Given the capital intensive nature of the business, IGL, which is well spread across the city, presents a huge entry barrier to competition. Therefore, it is unlikely that there could be a serious competitive threat to its business at the end of the monopoly period.
Strong financials

The company boasts of a debt-free balance-sheet and a steady growth in revenues and profits. In the first nine months of 2007-08 (the company has yet to declare its 2007-08 full year results), IGL’s revenues grew 15 per cent to Rs 596 crore but post-tax earnings by an impressive 29 per cent to Rs 126 crore. The current market price discounts the annualised EPS of Rs 12 by 10 times, which appears low, given the promise in IGL’s business.