Indraprastha Gas: Piping up

For the third quarter in a row, Delhi-based city gas distributor Indraprastha Gas put up a stellar show. The company’s profit in the recent December 2016 quarter grew about 37 per cent year-on-year, after 42 per cent in the September quarter and 44 per cent in the June quarter. This was on the back of healthy volumes and benign costs.

The stock has been on a roll, nearly doubling over the past year. At ₹1,021, it now trades at about 26 times the trailing 12-month earnings, compared with the average of about 17 times over the last three years. While its valuation seems pricey relative to the past, the stock seems to have been re-rated. This is thanks to the company’s robust fundamentals and strong growth drivers that should sustain healthy performance. Investors with a long-term perspective can buy the stock.

Indraprastha Gas is the near-monopoly supplier of compressed natural gas (CNG) to vehicles and piped natural gas (PNG) to households and businesses in and around Delhi. Natural gas is considered a clean fuel. The company has benefitted immensely from the pollution control measures by the authorities and the courts such as the crackdown on diesel vehicles and the experimental odd-even rule from which CNG-run vehicles were exempted. Volume growth that had slowed down in 2014-15 and much of 2015-16 has picked up strongly in recent times. Total volumes grew 13 per cent year-on-year in the June quarter, 12 per cent in the September quarter and 15 per cent in the December quarter.

Besides, costs have fallen sharply with the government prioritising supply of domestic gas (much cheaper than imported gas) to companies supplying CNG to vehicles and PNG to households. These segments account for more than 80 per cent of business for Indraprastha Gas.

Volume growth should remain strong, given the significant price differential between CNG and competing fuels such as petrol and diesel, and between PNG and domestic LPG. This should mean continued vehicle conversion to CNG and shift of households to PNG. There is still much untapped opportunity in these segments in Delhi and surrounding areas. The Delhi government’s plans to add to the city’s bus fleet should also boost volumes. Indraprastha Gas has adequate spare capacity and is also investing in infrastructure to meet future demand growth.

Costs for the chunk of its volumes should also stay benign with domestic gas available quite cheap. This is thanks to the pricing formula based on average pricing of four international gas sources that are trading low. The company has been passing on a portion of the cost benefit to customers; while this has kept revenues flat, volumes and margins have gained smartly.

The company’s operating margin has improved to about 24 per cent in the nine months ended December 2016 from about 19 per cent in the year-ago period. Margins should sustain around these levels. A recent favourable directive by the North Delhi Municipal Corporation, sharply reducing its usage charge for granting leave of way facility removes an overhang of high cost uncertainty for Indraprastha Gas among other service providers in Delhi.

Indraprastha Gas also seems better-positioned to cater more to industrial and commercial customers, who are supplied imported gas. With the Budget cutting customs duty on liquefied natural gas (LNG) from 5 per cent to 2.5 per cent, imported gas should get cheaper and more price-competitive. Also, the recent moves by the Courts to clamp down on use of polluting fuels such as furnace oil and petcoke in Delhi should mean increased opportunities for Indraprastha Gas. The company also plans to offer gas generators as an alternative to diesel generators for power back-up systems. This initiative, if successful, could open up a business opportunity and aid volume growth.

Besides its Delhi stronghold, Indraprastha Gas also has 50 per cent stake in Central UP Gas and Pune-based Maharashtra Natural Gas; these companies are profitable and doing well. The authorisation to develop the city gas distribution network in Rewari district in Haryana will also aid growth. The government’s plans to have city gas distribution networks across the country should present many opportunities for experienced players such as Indraprastha Gas.

The company has a strong balance sheet with negligible debt; this gives it adequate headroom to fund its expansion plans.

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