The stock of city gas distributor Indraprastha Gas (IGL), which supplies compressed and piped natural gas in and around Delhi, has been shackled for the past year-and-a-half.
This is mainly due to the ongoing legal dispute with the downstream regulator PNGRB. Slowing volume growth in recent quarters has also taken a toll. But the weakness in the stock presents a buying opportunity for investors with a high risk appetite.
At the current price of Rs 284, the stock discounts its trailing 12-month earnings by around 11 times, lower than the average valuation over the last five years (14 times). The regulatory overhang and volume concerns should ease over the next year.
LEGAL END-GAME
Following an order from the downstream regulator to sharply cut transmission tariff and compression charge, the IGL stock had tanked more than 40 per cent in April 2012. Relief from the Delhi High Court, which quashed the regulator’s order, saw the stock recoup some of its losses over the last year. PNGRB has taken the fight to the Supreme Court.
IGL’s case seems strong with the government supporting its contention that the regulator does not have the authority to fix the company’s tariffs. The Supreme Court’s decision, if it goes in IGL’s favour, could give a leg-up to the stock. Even otherwise, the company may have the leeway to adjust marketing margins to mitigate the impact.
ROBUST BUSINESS
On the business front, IGL, the sole city gas distributor in the Delhi region, has managed to maintain its margins in the face of rising cost of sourced gas. This is thanks to its strong pricing power which enables pass-through of costs to customers at regular intervals.
With domestic gas supplies shrinking, IGL depends on costlier imported gas to meet incremental supplies. The latest price rise, a fortnight back, was to offset increase in cost of imported gas due to a weak rupee. It helps that compressed natural gas (CNG) for automobiles supplied by the company (around 75 per cent of its sales) has a wide cost advantage over petrol.
Also, there is a court mandate that public road transport in Delhi run on environmentally-friendly CNG. This places IGL in a strong position and has enabled it to grow volumes over the years (see table).
Over the last few quarters though, the economic slowdown, low rate of conversion of private vehicles to CNG, and slow ramp-up of Delhi’s public transport fleet have slowed the company’s volume growth.
But growth should pick up in the latter half of the fiscal with significant addition to the bus and auto-rickshaw fleet planned by transport agencies in Delhi.
IGL’s piped natural gas (PNG) supply (around 25 per cent of sales) caters to households, and commercial and industrial units.
PNG to households serves an alternative to costlier liquefied petroleum gas (LPG) cylinders, while for business units, it substitutes fuels such as furnace oil.
A chunk of the company’s PNG supplies to businesses is in areas such as Ghaziabad on the outskirts of Delhi, where high local taxes are impacting volumes.
But in the household segment, with PNG penetration in the company’s market area less than 10 per cent, there is good scope to grow. To strengthen its presence in the Delhi region, IGL plans to spend Rs 400 crore on infrastructure development in 2014, higher than the Rs 368 crore capital expenditure last fiscal.
The company is also expanding outside Delhi. In June this year, it acquired 50 per cent stake in Central U.P. Gas Limited, which is in the city gas distribution business in Kanpur and Bareilly in Uttar Pradesh. These initiatives should aid pick-up in volume growth.
FINANCIAL STRENGTH
IGL is well-positioned to fund its expansion program with a low debt-to-equity of 0.23 times as on March 2013. The company has been consistently profitable with net profit growing around 16 per cent in FY-13 to Rs 354 crore.
In the June quarter, net profit grew just 3 per cent year-on-year, due to slow volume growth, higher sourcing costs and a delayed price hike towards the end of the quarter. Yet, profitability remained healthy with operating margin above 20 per cent and net margin close to 10 per cent.
RISKS
The Government’s proposal to hike price of domestically produced gas from next April will increase the sourcing cost of city gas distributors such as IGL. But given its track record on pricing, the company should be able to pass the higher costs to customers.
Margins may decline, if costs are not passed on to the full extent. Also, an adverse judgment by the Supreme Court on the dispute with PNGRB could be a drag on the IGL stock.
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