Assured Growth - Indraprastha Gas

It is said that during uncertain times it is better to stick to stocks which have consistently performed well in the past. Based on this theory, we are recommending Indraprastha Gas (IGL) as our choice scrip. IGL comes from the government stable and has historically been a consistently dividend paying company. The other compelling factors include healthy volume growth which is expected to drive profitability, a huge capex cycle to strengthen its position and a further hike expected in the price of CNG in the near future. On the valuation front its P/E of 20x seems to be on the higher side as for 9MFY11 the company has reported earnings growth of 17 per cent. But higher user base, spread across newer cities, for which the company is bidding is expected to drive the earnings’ growth for IGL in the near future. As regards the company’s business, IGL is the sole supplier of compressed natural gas (CNG) and piped natural gas (PNG) in Delhi. It is involved in the business of retail gas distribution and supplies CNG to automotive customers and PNG to the domestic and commercial sectors.

Currently the company has CNG compression capacity of 34.43 lakh kg / day and 241 CNG stations. Further, in the PNG segment it has over 2 lakh domestic consumers and 405 commercial clients, including 61 large commercial clients. As regards growth, IGL has chalked out a huge capex programme for the rest of FY11 and FY12. While Rs 650 crore was planned for the whole of FY11, another Rs 700 crore will be spent in FY12. This includes the expansion of CNG stations to 321 by FY12, an increased compression capacity to 44 lakh kg / day and a better network for PNG distribution. Expansion will be carried out from its internal accruals.

Apart from this, volume growth is expected to be better primarily because despite the recent hike in CNG prices it is still cheaper by 63 per cent than petrol, 45 per cent than diesel, and 51 per cent than LPG (vehicles). If crude prices rise further, it will only be favourable for IGL. This may result in a higher inclination towards CNG-based vehicles. Currently the penetration in Delhi is just 14 per cent and hence there is plenty of untapped potential for the company.

With an increased network in PNG, the company intends to hike its retail customer base to around 3 lakh by FY12. Further, the company is also tapping new territories to improve on the volume front. In terms of pricing, the company has been able to pass on the increase in cost to its customers. When the government raised the APM gas prices from USD 1.8 to 4.2 / mmBtu, IGL hiked prices by Rs 5.59 in June 2010, increasing the CNG prices to Rs 27.50 in order to mitigate the increase in cost.  On the financial front, as mentioned earlier, the company’s performance has been consistent. After putting in a strong show in FY10 the company has also carried over the momentum into 9MFY11. Here it posted a topline of Rs 1,240 crore and bottomline of Rs 191 crore as against Rs 794 crore and Rs 164 crore in 9MFY10. Going ahead, with the increased network and volume growth we expect the company to do much better and hence our recommendation is that investors should buy the scrip at its current levels with a target price of Rs 425.