Indraprastha Gas: Stepping on the gas - Hold

Delhi-based city gas distributor Indraprastha Gas put up a stellar show in the June quarter. Strong volume growth, coupled with expansion in margin — thanks to lower gas sourcing cost — translated into a solid 44 per cent year-on-year growth in net profit to ₹148 crore. This helped the stock rise more than 12 per cent last week to touch record highs. The stock is up about 48 per cent this calendar and 66 per cent over the past year.

The company’s prospects look quite bright with demand growth expected to be healthy and costs benign. But the stock’s sharp run-up has pegged up its valuation and seems to be factoring in the positives, at least in the near term. At ₹784, the stock discounts its trailing 12-month earnings by about 24 times, much higher than its three-year average of about 16 times. Those holding the stock can stay invested but avoid exposure now, given the high valuation. Dips in the stock related to the broader market could provide a good buying opportunity. While the company’s performance is expected to be good, whether the next few quarters will be as strong as the June quarter needs to be seen.

Sales volume growth at Indraprastha Gas was tepid in low single digits in 2014-15 and in much of 2015-16 too. Slow pace of vehicle conversions to compressed natural gas (CNG), delays in new vehicle additions and competition to piped natural gas (PNG) from cheaper substitutes such as fuel oil hurt the company.

But over the past few quarters, volume growth has been strong; this has been driven by the various measures implemented by the Delhi government and the Supreme Court to curb air pollution in the city.

Indraprastha Gas benefited because it is the sole supplier of CNG, a cleaner and cheaper fuel than petrol and diesel, in the National Capital Region (NCR). Vehicles driven on CNG were exempt from experimental curbs such as the odd-even formula, which required cars to ply on alternate days based on their registration numbers. CNG also got a push from the crackdown on diesel cars.

The fuel’s volume growth was a robust 10 per cent year-on-year in the June quarter. With CNG-run vehicles likely to be a preferred choice in Delhi and thanks to the State government’s plans to augment the fleet of CNG buses in the city, volume growth should be healthy. The company has spare capacity to cater to the growing demand.

The company’s volumes of PNG to households and the industrial/commercial segment also grew a strong 17 per cent overall in the June quarter. This was due to higher conversion, thanks to favourable cost economics vis-à-vis alternatives.

Passing on some of the cost benefits from cheaper gas helped volume growth in both CNG and PNG.

Though overall sales revenue was flat, margins and profit grew strongly due to lower costs.

The sharp dip in the price of domestic natural gas, which is being allocated on a preferential basis to city gas distributors supplying CNG to vehicles and PNG for households, helped Indraprastha Gas.

The near-halving of the price of long-term imported gas due to Petronet’s renegotiated deal with Qatar Gas would also have helped, given that it is used to supplying to industrial customers.

The company’s operating margin increased to almost 30 per cent in the June quarter from 23 per cent in the year-ago period.

While costs are expected to be benign, a sharp dip from current levels seems unlikely.

Besides growth in its core NCR market, Indraprastha Gas should also benefit from its 50 per cent stake in Central UP Gas and Maharashtra Natural Gas which has operations in Pune.

The recent authorisation to develop the city gas distribution network in Rewari district in Haryana will also aid growth.

A strong balance sheet with negligible debt gives Indraprastha Gas adequate financial muscle to fund its expansion plans.

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