Indraprastha Gas

Not too many stocks have held their ground in the meltdown of the last three months. Indraprastha Gas Ltd. (IGL) is one of them. Compared to the 43 per cent erosion in the Sensex since mid-August, the IGL stock has shed just 7 per cent with a low of Rs 98 and a high of Rs 121.

Though FIIs hold about 20 per cent of IGL’s equity, the stock has managed to stay afloat only because there are little concerns over its earnings prospects. Indeed, the stock is seen as a defensive bet during bad times such as these as its revenues and earnings are not directly linked to the economy.

The downside from the current price of Rs 104 appears minimal. Traditionally, the IGL stock has not been a fast mover during an uptrend and, as such, it will be fair to expect an upside of 15-20 per cent in the next one year, which is a reasonable return in the prevailing market. The dividend yield of about 4 per cent on the stock is a plus.

Recession-proof

IGL, which supplies compressed natural gas (CNG) for automobiles and piped natural gas (PNG) to homes and commercial units, is a monopoly in Delhi. Commercial vehicles in the National Capital Region are bound by law to use CNG as fuel. However, it is the private vehicles that are now driving IGL’s growth.

The number of CNG vehicles on Delhi roads rose 71 per cent to 1.21 lakh vehicles in 2007-08 with most of the increase coming from private vehicles and some from buses. CNG sales from its 163 stations accounts for 92 per cent of revenues with the rest coming from PNG.

The high prices of petrol and diesel are behind the rising conversion of private vehicles to CNG. There is a big benefit for vehicle owners even after accounting for costs of conversion, given the wide gulf between the prevailing prices of petrol/diesel and CNG.

IGL sells CNG at Rs 18.90 a kg while petrol costs Rs 50.62 a litre and diesel Rs 34.86 in Delhi. During the second quarter alone, about 15,000 cars and 300 buses were converted to CNG.

IGL has an allocation of 2.2 million standard cubic metres of gas a day (MMSCMD) from its parent Gail. Its average sales were 1.5 MMSCMD by end-March; given the increasing trend in conversion since, IGL must now be averaging about 1.7-1.8 MMSCMD of sales a day. There is still enough room in the allocated supply for IGL to expand its sales.
Growth drivers

IGL plans to build 50 more stations by 2010 in time for the Commonwealth Games which is expected to spur higher demand for CNG. The company is also planning to branch into adjoining territories such as Greater Noida, Ghaziabad and Panipat.

The company has jointly bid with a private player — Siti Energy — for marketing rights in Haryana. Approval from the regulator — Petroleum and Natural Gas Regulatory Board (PNGRB) — is awaited.

Meanwhile, a decision by the Delhi Government to stop registration of diesel-driven small cargo carriers is expected to benefit IGL. Combined with the rising conversion rate of private vehicles and buses, IGL appears to be well-placed in terms of volume growth. There is also tremendous scope in PNG where the penetration rate is estimated to be less than 1 per cent. Though it is a time-consuming process to network residential and commercial units, once done, the business can add significant incremental volumes for IGL.
Growth barriers

The two most formidable barriers that IGL could run into are access to gas and regulatory norms. The company will soon be using up its full allocation of gas. Though new gas from the KG Basin is expected to flow, the price may not be as low as the artificially set APM price that it now pays.

While ordinarily it should be able to pass on the higher price, it needs to also keep an eye on the price of competing fuels. This will be the case especially in the new markets that IGL intends to enter where there will not be any mandate, as in Delhi, for vehicles to use CNG only.

Second, there are regulatory uncertainties with the PNGRB and IGL yet to settle the question of licence for Delhi. While IGL claims that it was formed before the regulator came into existence and, hence, the latter’s norms are not applicable to it, the PNGRB insists that IGL has to secure a licence from it. Meanwhile, the regulator has set till 2010 for IGL’s Delhi monopoly status to end.
Zero-debt company

IGL is well-placed to raise funds for expansion, given its zero-debt status. The company plans to invest Rs 500 crore over the next two years in expanding its network in Delhi. Revenues and earnings have been growing steadily; in the latest quarter, revenues grew by 22 per cent to Rs 243 crore while earnings rose 17 per cent to Rs 50 crore.