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Raghuvir Srinivasan

There are demands to migrate other classes of vehicles such as mini-trucks and inter-city buses to CNG. That could give a boost to IGL's business and inject momentum into its revenues.

SHAREHOLDERS in Indraprastha Gas Ltd (IGL) can stay invested for further returns. While the downside appears minimal from current levels of Rs 75 per share (PEM of 12 based on first-half earnings), there is scope for appreciation, though the pace itself may be slower compared to the past. Investors expecting rapid appreciation would be better off exiting the stock.

Growth pangs

The company had a relatively sober second quarter with earnings and revenues up 5 and 7 per cent respectively, while in the first quarter, they had risen by 12 per cent and 16 per cent respectively. The main reasons for the drop in growth rate during the second quarter is a fall in the number of commercial vehicles on the road.

Almost 500 buses belonging to the Delhi Transport Corporation — IGL's biggest CNG customer — were off the road during this period. This was also when the authorities decided to crack down and impound unlicensed mini-buses or RTVs (rural transportation vehicle) plying on Delhi roads.

These vehicles were also running on CNG. The fall in vehicles on the road resulted in a corresponding fall in the offtake of CNG during the second quarter.

However, the long-term trend has been one of increase in the vehicle population converting to CNG, with the first six months of this fiscal seeing an addition of 2,000 vehicles to the existing 90,000 on the road.

The basic growth drivers for the CNG business are two — an increase in the vehicle population and higher prices for CNG. In the case of the latter, IGL has held on to prices in the last one year — the price of CNG per kilo has inched up marginally from Rs 16.83 to Rs 16.88. This is despite the prices of competing fuels such as diesel and petrol rising sharply in the same period. Similarly, in the piped natural gas (PNG) business also, the company has resisted from increasing prices and stuck to its policy of pricing it 10 per cent lower than LPG, the competing fuel. These have had an impact on the revenue and earnings growth of IGL. The company is aggressively expanding in the PNG business by venturing into highly populated areas of Delhi to add domestic users.

IGL now depends on its promoter GAIL for gas supplies. Currently the company uses about 60 per cent of its allocation of two million standard cubic metres a day of gas and has also secured extra allocation for its forays into other areas surrounding the national capital.

However, a possible increase in the administered price of natural gas along with a rise in transportation tariff on the HBJ pipeline, which looks a strong possibility in the near term, could throw a spanner into IGL's works. The company may then have to increase its CNG prices to protect margins.

But that is not a business threat because IGL's customer base is captive — neither can the vehicles plying in Delhi shift to alternative fuel, nor do they have an alternative to IGL as a CNG supplier.

There are demands from environmentalists to migrate other classes of vehicles such as mini-trucks and inter-city buses plying in the national capital region to CNG, and expectations are that the former could be in the net by April 2005. That could give a boost to IGL's business and inject momentum into its revenues and earnings. Until that happens, however, it would be realistic to expect only a sedate growth in revenues and earnings.

Background

IGL made an IPO a year ago at a price band of Rs 40-48 per share that received tremendous response from the market. The company, a joint-venture between GAIL India and Bharat Petroleum, supplies compressed natural gas (CNG) for automotive use in the National Capital Territory (Delhi and surrounding areas). It also markets piped natural gas (PNG) for domestic consumption in the same area. IGL is the sole supplier of CNG and PNG in the national capital where buses, autorickshaws and taxis were compulsorily converted to plying on CNG, following a Supreme Court order.

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