Stock review: Indraprastha Gas

Stiff Competition May Find Co Losing Marketing Exclusivity In Many Areas

 

 

AFTER an almost uninterrupted yearlong rally, the stock of the Delhi-based city gas distributor Indraprastha Gas faced a bout of weakness in the past couple of weeks. The scrip faced headwinds after the high valuations raised concerns on profit sustainability. Still, the scrip has significantly outperformed the broader market over a one year time-frame gaining 91% compared to 17% increase in Sensex.

   IGL has consistently shown attractive volume growth over the past few years with more users opting for natural gas over liquid fuels. After reporting a cumulative annualised growth rate (CAGR) of 83% between FY00 and FY07, IGL's volumes grew at 17% CAGR in the past three years. In the June quarter too, the growth continued with 18% growth in compressed natural gas (CNG) sales and a more than 100% growth in piped natural gas (PNG) volume.

   The company raised CNG and PNG prices in the fag end of June in response to the government raising APM gas prices. The September quarter will be the first full quarter when the company will derive the benefit of the price hike.

   Although the business outlook remains positive, there are a few concerns going forward. First, a part of the total demand growth emanates from the Commonwealth Games, which is likely to slow down after the Games gets over. As a result, the 17% annual volumes growth of past three years may come down to 15% or below.

   Second, the company enjoys marketing exclusivity in the National Capital Territory of Delhi, which expires on January 1, 2012. Thereafter, the field would be open for competition.

   Third, the company, which is a joint venture between GAIL and BPCL, could face problems in expanding into new geographies mainly due to its parents' independent ambitions in the city gas distribution business.

   A recent JP Morgan report mentions, "We see limited support from the parent entities for IGL playing an expanded role in geographies outside the NCR. A case in point, GAIL bid for and got the CGD licence for Sonepat from the PNGRB, though IGL had a prior approval from Haryana for setting up CGD in Sonepat."

   At the current market price of 315, the scrip commands a price-to-earnings multiple of 19.6. Unless the various concerns are addressed to, the scrip appears to have a limited upside.