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Raghuvir Srinivasan

INVESTORS can consider subscribing to the Indraprastha Gas Ltd (IGL) offer being made at the price band of Rs 40-48 per share of Rs 10 each. The price band translates to a price-earnings multiple of 8-10 times the earnings of the June 2003 quarter. Investment can be considered with a short-to-medium term time horizon.

Given the market interest for stocks from the oil sector, the assurance of steady growth in IGL's business and the attractive pricing of the offer, the stock is likely to list at a premium to the offer price. Even an allotment at the higher end of the price band could yield good returns to prospective investors.

Business profile

IGL, promoted by GAIL (India) and Bharat Petroleum, is the monopoly marketer of CNG and piped natural gas for domestic use in the National Capital Region of Delhi. Financial institutions, IDFC, ILFS and Unit Trust of India along with the Delhi Government are co-promoters. The current offer for sale is being made by IDFC, ILFS and UTI who are divesting a part of their holdings in IGL.

Over the last three years, IGL has built up large infrastructure consisting of pipelines, compressing stations and retail outlets. The company also boasts of excellent profitability margins of about 18 per cent at the net level and 38 per cent at the operating level.

Opportunities

IGL has a tremendous first-mover advantage in the national capital region having already established considerable infrastructure and attained monopoly status. Chances of future competition appear small given the huge entry barrier posed by IGL and also the fact that there are other cities waiting to be tapped for gas distribution. IGL is also expanding into adjoining towns such as Gurgaon, Noida and Faridabad.

There is tremendous potential especially in the piped natural gas business given that it is more convenient and economical compared to LPG. This market could expand exponentially if and when the government reduces or abolishes the subsidy on LPG as consumers will find piped natural gas considerably cheaper than LPG.

In the CNG business, though a single customer (Delhi Transport Corporation) accounts for a quarter of total sales, the statutory cover provided by the Supreme Court order ensures that demand will be sustained. Besides, CNG, at today's prices, is economical compared to competing fuels- it is sold at Rs 16.83 a kilogram compared to about Rs 22 for a litre of diesel and about Rs 32 for petrol.

Threats

The deregulation of natural gas prices, which is bound to happen in the near future, could push up input costs for IGL. Presently, IGL gets its gas from GAIL at Rs 5.42 per kg which is the equivalent of $2.6 per million British thermal units. However, market prices are expected to be in the region of $4 per million British thermal units or even more once prices are freed. This is also the price hinted at by Petronet LNG, whose gas is most likely to be supplied to IGL once the facility at Dahej goes on stream early 2004.

IGL can increase its selling prices but there are two points to be noted here. First, there is already a case pending in the Supreme Court contesting an earlier price revision made from Rs 13.11 to Rs 16.83 per kg. An adverse ruling by the Court could limit the freedom of the company to revise prices upwards frequently in future.

Second, at current prices, the differential between diesel and CNG is not very high. In a regime of soft global oil prices, the differential could narrow further limiting the potential for IGL to increase its CNG prices.

The dependence on a sole supplier, GAIL, for gas supplies is also a cause for some discomfort as it may put IGL at the mercy of the former with regard to both, gas supply and transmission charges. In a deregulated environment, transmission charges are likely to be linked to distance over which the gas is transported, and given that IGL's gas travels 1,200 kilometres through GAIL's pipelines, there could be a sharp increase over the current transmission cost of Rs 1,150 per thousand cubic metres. And this will be in addition to the increase in basic gas prices itself. It is impossible to predict the quantum of possible increase in input costs for IGL but assuming that it is unable to pass on the increase either due to statutory limitations or competition, there could be an adverse impact on margins.

That said, deregulation of the natural gas sector appears only a threat in the medium term. With the present government entering the election mode, major policy initiatives are unlikely to be made in the next one year. Besides, IGL enjoys excellent margins that offer enough cushion to absorb small price increases. Given this, investors can consider putting their money on this offer for gains in the short to medium term.

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