Indraprastha Gas: Buy

There are few stocks in the oil and gas sector that come without the risk of a significant downside from rising global crude oil prices or government policy. Indraprastha Gas (IGL) is one. The stock is characterised by none of the traditional risks associated with an oil and gas sector investment.

For IGL, high global oil prices are not a threat; they are an opportunity. The Government policy on pricing of petroleum products do not affect IGL; they help the company. There are no subsidies that the company has to bear or share with other oil companies.

The company has a Supreme Court judgement, nothing less, to back its business. It is a monopoly player in the entire Delhi market and presents a huge entry barrier to competition. And, to top it all, the stock comes cheap at a multiple of just 10 times the annualised first quarter earnings.

The market appears to be ignoring the company’s prospects and its low-risk high-growth business model. Investors with a medium-term investment horizon can consider acquiring the stock at the current price of Rs 113.
Statutory backing

IGL supplies compressed natural gas (CNG) through a network of 154 gas stations across Delhi. Following a Supreme Court order, all commercial vehicles and public transport have to use CNG as fuel as it is clean and non-polluting. From last July, all new light commercial vehicles have also been brought under the CNG fold.

IGL now services 1.28 lakh vehicles in Delhi and this number will keep growing. Growth will also come from private vehicles that are increasingly beginning to convert to CNG as the economics are in its favour with petrol prices ruling at Rs 43.52/litre there. IGL sells CNG at Rs 19.20/kg in comparison.

The company also plans to spread out to areas in the National Capital Region (NCR) such as Noida/Greater Noida, Ghaziabad, Ferozabad and Panipat. The Commonwealth Games, scheduled to be hosted by Delhi in 2010, is expected to add significantly to the vehicle population, including public transport and all these vehicles will have to use CNG as fuel.

IGL also sells piped natural gas to domestic households in Delhi; this segment is also growing rapidly with the only limitation being the ability to extend the pipeline network to the residential areas in and around the city.

The company sources natural gas from GAIL (India) at administered prices that are substantially cheaper than the market rates. Given the Supreme Court order, GAIL is obliged to supply the entire natural gas demand of IGL on a preferential basis; gas availability for IGL to grow its business is, therefore, not an issue.
Robust financials

IGL had a very good first quarter 2007-08 immediately following its excellent performance in the fourth quarter of 2006-07 ended March 31. Earnings were up 39 per cent at Rs 3.84 crore while net sales were up 19 per cent at Rs 16.18 crore. CNG sales volume at 89 million kg grew 13 per cent compared to the same quarter last year, while piped natural gas sales grew 16 per cent to 9.6 million standard cubic metres.

IGL also improved its operating margins to 44.9 per cent from 41.5 per cent in the same period last year mainly by controlling costs. The company passes on any increase in natural gas prices to its customers. That it has practically no debt on its balance-sheet helps margins because interest charges are nil.

Rising oil prices and consequent increase in retail prices of transportation fuels will actually help IGL by pushing the conversion rate of private vehicle owners to the considerably cheaper CNG.

The company is also not part of the subsidy-sharing mechanism that is causing so much uncertainty in the oil sector, leading to poor discounting for its stocks.

IGL’s rapid expansion of the CNG/PNG network across Delhi and surrounding areas leaves limited scope for a second player to enter the market.

There are other virgin markets opening up for CNG networks in hinterland cities and towns where other players might be interested.

Given these, IGLs prospects appear bright. Investors can acquire the stock at the current price levels with a medium-term holding perspective.