Indraprastha Gas: BUY. Indraprastha Gas: Clearing the air

After the verdict from the Supreme Court last July, essentially upholding the company’s right to fix tariffs, the major legal overhang on Delhi-based city gas distributor Indraprastha Gas (IGL) was finally removed.

The focus shifted back to its business operations, which had been facing challenges. Volume growth had been tepid — just about 1 per cent in 2014-15 from double-digit until 2013.

Delays in new vehicle additions, slow pace of vehicle conversions to compressed natural gas (CNG) and competition to piped natural gas (PNG) from cheaper substitutes, such as fuel oil, hurt. In the last September quarter too, while there was a pick-up in volume growth, it remained in the low single-digits.

Recent developments though could see IGL’s volumes pick up strongly. To combat Delhi’s severe pollution problem, many authorities have directed several steps to be taken — these should translate to increased demand for CNG, a clean fuel, of which the company is the near-monopoly supplier in Delhi.

One, the Government of Delhi has introduced the odd-even formula under which cars, based on their registration numbers, can ply in the city only on alternate days. This formula is being run on an experimental basis for a fortnight until January 15, after which a decision will be taken on the future course of action.

If the scheme is extended for the long term, the demand for CNG-run cars — which are exempt from the rule — could spike.

Besides, the Government of Delhi has ambitious plans to augment the fleet of CNG-run buses in the city. This is not just in the short term to cater to traffic affected by the odd-even formula, but also in the long term to provide public transport. Next, a decision by the Supreme Court has made it mandatory for all taxis in Delhi to shift to CNG by March end. Also, the apex Court has put a stop to registrations of diesel passenger vehicles with engine capacity of 2000 cc and more in Delhi till March end.

Meanwhile, the National Green Tribunal has banned registration of all diesel vehicles in Delhi until January 6.

While some of the directions issued by the various authorities could be relaxed after review, the multiple actions suggest that CNG-run vehicles will likely be preferred over those run by diesel and petrol even in the long run. This bodes well for Indraprastha Gas which already has spare capacity to meet additional demand of about 50 per cent of the current demand levels. CNG accounts for more than three-fourth of IGL’s revenue.

Besides, IGL’s 50 per cent stake in Central UP Gas and Maharashtra Natural Gas (operations in Pune) should also translate into volume growth in the long run. A strong balance sheet with negligible debt should aid expansion.

On the cost front too, the company stands to benefit from the sharp dip in the price of domestic natural gas.

City gas distributors supplying CNG to vehicles and PNG for households have been given priority in the allocation of domestic gas.

Besides, Petronet’s recently renegotiated deal with Qatar’s RasGas, which has halved the price of long-term imported gas, will also reduce IGL’s sourcing cost for the fuel used to supply industrial customers. This should improve its cost-competitiveness vis-à-vis alternative fuels, such as fuel oil.

The flurry of positive news, mostly in December, has seen the IGL stock rally about 15 per cent last month. At ₹526, it trades at 18 times its trailing 12-month earnings, higher than its five-year average of 14 times.

A dip in earnings over the past two quarters has been a drag. But with good growth prospects in volumes and earnings, the valuation can moderate. Investors with a long-term perspective can buy the stock.

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