Indraprastha Gas – BUY- Operationally strong:: IIFL

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IGL’s 2QFY11 profit growth of 17% YoY has been slightly ahead of
our estimate. Gas volumes rose 22% YoY in 2QFY11, while realisation
was up 34% YoY, which offset the 70% YoY increase in gas costs,
and improved spread/scm by 5% YoY. IGL is progressing well with its
network expansion programme in Delhi and adjoining areas, and has
spent Rs4bn so far in FY11; this will start paying off through FY11-13,
as volumes increase. We maintain our earnings CAGR estimate of
17% through FY10-13ii, and reiterate BUY on IGL. The recent
weakness in the stock offers a good entry point.


Volumes up 22% YoY: IGL’s volumes rose 22% YoY in 2QFY11 (after
netting out trading sales of 11.2mscmd). This volume growth was backed
by both CNG and PNG sales. CNG volumes rose 19% YoY on increasing
conversion of private cars. PNG volumes rose 38% YoY on: 1) higher
penetration in industrial segment in Delhi and geographical expansion to
Noida and Greater Noida (up almost 100% YoY); and 2) pick-up in domestic
PNG sales. CNG’s share in sales remained YoY flat at 95%.

Margins up 5% YoY: To meet the growing demand, IGL has resorted to
purchases of R-LNG through term contracts and has recently signed a threeyear
deal with GAIL for procuring 0.25mscmd gas. This, clubbed with revision
in APM prices by 100%, has resulted in a 69% YoY increase in gas costs.
Thanks to strong underlying demand and IGL’s pricing power, the company
was able not only to pass on the entire price increase (34% YoY increase in
realisations), but also registered a 5% YoY increase in gross margin to
Rs8.1/scm in 2QFY11. Even on QoQ basis, margins improved 2.5%.

Earnings outlook remains robust; we retain BUY: IGL has so far
invested Rs4bn on expanding its network in Delhi, Noida and Greater
Noida, and Ghaziabad, and borrowed Rs2bn to part-fund this capex.
Associated interest cost (IGL was debt-free until this borrowing), and
lower treasury income (down 55% YoY) kept earnings growth low at 17%
YoY, as against EBITDA growth of 23% YoY. This capex would pay off
through FY11-13 as volumes increase, and hence we maintain our
earnings forecast. We maintain our view that IGL is the best play on
growing CNG penetration in Delhi and adjoining areas, and retain BUY.