February 25, 2007

Indraprastha Gas

Indraprastha gas ltd (IGL) is currently the sole provider of CNG and PNG in the NCR region. IGL was promoted by GAIL and BPCL ltd in 1998. It currently operates 146 CNG stations in the NCR region. In addition the company is setting up PNG infrastructure to supply Natural gas to commercial and residential consumers.

As per the Supreme Court directive all buses, commercial vehicles and Light good vehicles have to run on CNG. In addition there is a substantial cost advantage of running cars and 3 wheelers on CNG. As a result there is now a trend of private cars converting to CNG. These factors ensure a high level of demand stability for IGL and reasonable growth prospects due to continuing conversion of cars to CNG and due to growth in PNG consumers.

In addition IGL is now expanding into the adjacent areas of noida and ghaziabad. It is also doing a feasibility study in haryana.

IGL’s CNG sales is less than 50% of its compression capacity. As a result IGL has substantial operating leverage and would be able to grow revenues with low capital expenditure.

Competetive advantage
IGL is currently the sole provider of NG to the transportation sector and to commercial and residential consumers. The gas industry all over the world is characterised by local monopolies. Typically there is a single company supplying gas to the final consumers, as it is not viable to have two competing pipelines in a given geographic area. As a result IGL would likely remain a monopoly in the NCR region. In addition GAIL which can be a strong competitor is actually a promoter of the company.
The company is one of those rare cases where there is a substantial monopoly and a government/ court mandated requirement of its product. This gives the company a substantial visibility of demand.

Financials
The company has had a ROC of 25%+ since inception. In addition like other gas companies it has a very low working capital requirement. The NPM margins at 19% are twice that of other gas companies such as gujarat gas. Also the company has zero debt and a small amount of cash on the balance sheet which will grow due to strong free cash flows. The main investment of the company is mainly fixed assets which is mainly the gas infrastructure.

Valuation
The company has an EPS of around 9.5 and the FCF (free cash flow) is around the same amount. As a result at the current price it sells at around 11-12 times free cash flow. A company with such strong competitive advantage, high ROC and good growth prospects of 8-9 % per annum , can conservatively be valued at 16-18 times PE. As a result the company is selling at 30-35% discount of conservatively calculated intrinsic value

Risk
The key risk for the company is the supply risk. IGL gets 50% of gas at APM rates. On checking I found that the APM price for gas are around 40-50% lower than market rates. As the government plans to bring market based pricing for gas in due course of time, the gas cost for IGL would increase in the next few years. The net margins for the company, which are at 20%, would reduce when this happens if the company is not able to pass the complete increase to the consumer.


Additional points
The current price seems to discount the above scenario. I personally feel that IGL would be able to pass some of the price increase, although there would definitely be some impact to the net margins. This would not necessarily impact the absolute profits, but could result in slow down of the growth in net profits.
Assuming that 3-5 years later IGL starts paying market price as per govt policy, the gross and net margins will drop for IGL. Taking GGCL NPM of 11% as the base line ,IGL can have a NPM of 13-14 % due to better retail mix and higher pricing strength. Also some amount of cushioning will happen as volumes increase.

Comparitive valuation
In comparison with guj gas, IGL has higher margins and better ROC. Also IGL is 20% cheaper than Guj gas. Against a NP of 90Cr for Guj gas, IGL will have rough profit of 130 Cr. Also mcap for both companies is same. By comparitive valuation IGL should be valued same as Guj gas , if not more.

3 comments:

Anonymous said...

Hi Rohit very nice analysis of Indraprastha Gas. Was wondering if you've taken a look at another company in this space: Petronet LNG. It currently seems to be priced pretty attractively especially on the Price/sales ratio.

Do let me know your opinions on Petronet. Thanks and keep up the great work!

Rohit said...

hi
i have not looked at petronet LNG ...will have a look and post

Anonymous said...

Hi
rohit,

IGL was able to pass on the price rise to the consumers. Apart from CNG, PNG appears to be another avenue of growth.PNG is cheatper than LPG.

However, Warren Buufet always warns that one should consider the industry which will have regulatory interventions. If PNGRB (Petroleum Natural Gas Regulatory Board) allows another player in the NCR region , then IGL will have problem? What's your call?.

Moreover, companies in utility business are the ideal ones that fits in DCF valuation model ( As per Warren).

Could you pleas advise whether I can hold IGL for another 2 decades?.

Regards

Sivakumar