On the Fast Growth Track - Indraprastha Gas

There are very few scrips that have weathered the current market turmoil and continue to hold their ground indicating their inherent strength thus making them good investment potential. From that list we have selected Indraprastha Gas (IGL), the company based out of Delhi for our Choice Scrip column. A joint venture between Bharat Petroleum and GAIL, IGL is in the business of supplying compressed natural gas (CNG) and piped natural gas (PNG) in the Delhi region.

While the Sensex has fallen by 53 per cent in the last one year, IGL has fallen by just 37 per cent. But this isn't the only reason why we are recommending IGL. It has been a consistent performer and has grown at five year CAGR of 21.42 per cent and 26.44 per cent in the topline and the bottomline. This performance has continued in H1FY09, where its sales have grown at 28 per cent. The reason why IGL is able to maintain this consistent growth is due to the monopoly status it has in Delhi. This status will be in force till 2010 and hence whatever business generated on CNG and PNG front in Delhi IGL would be the sole beneficiary from the same.

What will increase the business for IGL is the increasing rate of conversion to CNG. In FY08 itself CNG vehicles in Delhi alone increased 71 per cent to 2.27 lakh. This is mostly driven by private vehicles, whose conversion has increased 173 per cent to 130149 vehicles (47669 vehicles). In fact Q2FY09 itself saw 15000 cars opting for CNG conversion. We believe this demand would continue despite recent petrol and diesel cuts as CNG is still cheaper at Rs 20 per kg compared to petrol and diesel at Rs 45.62 per litre and Rs 32.86 per litre respectively, thus pushing private vehicles to opt for CNG. Supreme Court's directives in 1998 to switch all public transport to CNG fuel will continue to generate business, while IGL would also benefit from Delhi Government's decision to stop registration of diesel-driven small cargo carriers.

The other driver for IGL is the 2010 Commonwealth Games, which would require high capacity buses and taxis as public transport creating additional demand for CNG. IGL is now looking to expand beyond Delhi as well and has planned capex of Rs 78 crore for its projects in NCR towns of Greater Noida, Panipat and Gaziabad. IGL has also set up joint venture with Siti Energy, a private player for marketing rights in Haryana, a decision pending with the Petroleum and Natural Gas Regulatory Board (PNGRB). On the PNG front IGL has already 1.22 lakh connections, which it expects to increase by 50000 by FY09 for which it has entailed capex of Rs 63.3 crore.

Despite market turmoil mutual funds and FII's continued to stay put in this scrip, with 12.65 per cent and 19.74 per cent stake in IGL as on September 2008 quarter. Apart from that IGL is a zero-debt company. Its profits aren't affected by interest outgo keeping its margins healthy. In fact IGL’s good cash and cash equivalent is worth Rs 357.56 crore compared to its market cap of Rs 1441 crore. On trailing four quarters, IGL is available at PE of just 7.5x, which is quite attractive and hence investors can invest in IGL at CMP of Rs 100 for long term.