Indraprastha gas

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   Indraprastha gas – This “gas”  is solid.

Indraprastha gas (CMP Rs 117) has been promoted by GAIL, BPCL and the Delhi government, is a monopoly player for supplying Compressed Natural Gas (CNG) in the National Capital region (NCR)of Delhi.

CNG is a substitute for  petrol or diesel. It is environment friendly and is and is considered as a cleaner alternative to other fuels. CNG is made by compressing purified natural gas, and is typically stored and distributed in hard containers. 

The company caters to over 90,000 vehicles through its outlets in Delhi and supplies CNG to the entire public network of public transport in the capital. Compressed Natural Gas (CNG) contributes around 96% of Indraprastha’s total revenues while PNG segment is still largely untapped

The conversion from diesel and petrol into CNG implies a one time cost. This is being facilitated by a substantial price differential with between the conventional and the alternative fuel. The consumer therefore saves on running cost.

Financial Synopsis

CMP

Rs 117

Market capitalization

Rs 1642

Book Value

Rs 27.05

Sales FY 06

Rs 530.32 crores

EPS FY 06

Rs 7.23

PE 

16.32 times

Sales FY 07 Q!

Rs 135.77 crores (+19%y-o-y)

Net Profit FY 07 Q1

Rs 27.63 crores (+35.5%y-o-y)

EPS FY 07 (E)

Rs 9.40

RoE

26%

The company's financials appear healthy and robust. In the June quarter sales went up by 19% (YoY) while net profit was up by 35.5% (YoY). The company maintains a very high RoE at close to 26%. Over the next few years the company should grow its bottom line at over 20%. In case favourable legislatins are introduced the growth mommentum can be significantly increased  from these levels also.

The recent Supreme Court order shall boost IGL’s expansion plans. The order from the Apex court directs the state governments of Haryana and Uttar Pradesh to facilitate IGL’s proposal to set up CNG stations in Gurgaon, Faridabad and Greater Noida. This new project to develop CNG and PNG distribution networks in the above cities would cost Rs 163 crores. This should increase volume growth over the next few years.. 
 The company is attempting to tap some key market segments within the NCR of Delhi. The private vehicle segment consists of more than 6 lakh private cars out of these less then 2% run on CNG. The second segment is the light commercial vehicles (LCVs) which should generate significant growth. 
The rising cost of LPG creates another huge opportunity for piped natural gas segment. PNG is priced at 10% discount to retail prices of bottled LPG and this segment is expected to gain favour and also show significant growth. 

IGL remains unaffected from gas price volatility as gas requirements are sourced from GAIL at regulated prices. Additionally the company retains the freedom of free pricing. CNG is 70% cheaper than petrol and 40% cheaper than diesel which gives the company enough leverage with prices.

Since the cost of financing a conversion is a prohibiting factor the Govt. could introduce a scheme where converters recover 60% of the conversion cost through 'free-CNG' vouchers. This scheme could give a big push to the CNG market. It was carried out in Santa Cruz, Bolivia and the result was a 100% growth in CNG users over one year.

Recommendation: While the stock does not look value the visibility is very strong. As crude prices become dearer market forces will compel consumers to shift towards CNG. I was told that globally similar companies trade at multiple valuations and if what happens globally is to happen in India Indraprastha could be in big demand. The stock looks fit for initial exposure and then investors could add on declines.
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