Indraprastha Gas: Clean and green - Buy

Continuing its fine run from FY 2017-18, the Delhi-based city gas distributor Indraprastha Gas put up a good show in the June 2018 quarter too.

Aided by healthy volume growth of 13 per cent and price hike of 10 per cent, the company’s sales grew 24 per cent Y-o-Y, while profit rose 9 per cent.

In 2017-18, sales increased about 20 per cent and profit about 17 per cent, driven primarily by volume growth of 13 per cent, supported by price hikes over the year.

Meanwhile, after falling about 30 per cent from early January 2018 until end-June, the Indraprastha Gas stock has recouped some of these losses, gaining about 23 per cent since; still, the stock is down about 12 per cent since the beginning of the year. The weakness in the stock though presents a good buying opportunity for investors with a long-term perspective.

At ₹299, the stock quotes at about 31 times its trailing 12-month earnings, lower than the 35 times it had traded at over the past year.

While the current valuation is higher than the average of 28 times over the past three years, the stock has perhaps been re-rated and valuations should sustain at levels seen over the past year.

The company has robust business prospects with earnings growth likely to be strong over the next few years. Volume growth — about 13-14 per cent Y-o-Y for several quarters now — should also remain healthy.

This is thanks to its near-monopoly position in Delhi and nearby areas, regulatory diktats that mandate use of natural gas, network expansion initiatives, entry into new markets and big price differentials of the company’s products vis-à-vis competing fuels. Cost advantage due to allocation of cheap domestic gas for a chunk of its business should also aid volume and profit growth.

The company’s strong pricing power gives it the leeway to pass on cost hikes, as and when needed. This pricing power has improved with the rise in the past few months in the price of crude oil and, consequently, of petrol, diesel and other competing fuels.

Volume growth

As the near-monopoly supplier of compressed natural gas (CNG) to vehicles and piped natural gas (PNG) to households and businesses in and around Delhi, Indraprastha Gas is in a sweet spot.

Volume growth should remain healthy. With natural gas-based fuels becoming more cost-competitive in the wake of rising prices of competing fuels, vehicle conversion to CNG and households shifting to PNG in Delhi and surrounding areas should pick pace. The Delhi Government’s plans to add to the city’s bus fleet should also boost demand for CNG.

The company has also been expanding beyond its core market of NCR into new areas such as Rewari. Earlier this year, it was authorised to develop the city gas distribution (CGD) network in Karnal.

Last week, it got authorisation to develop the CGD network in Meerut, Muzaffarnagar and Shamli districts. Besides, the government, to encourage the use of clean fuel, has ambitious plans of expanding the CGD network across many cities in the country. This can present good opportunities for seasoned players such as Indraprastha Gas and aid volume growth in the long run.

A strong balance-sheet with zero debt gives the company the muscle to fund its expansion plans.

Indraprastha Gas also has 50 per cent stakes in Central UP Gas and Pune-based Maharashtra Natural Gas. These companies are doing well, with a combined profit of ₹38 crore in the June 2018 quarter.

Cost benefit

Companies supplying CNG to vehicles and PNG to households have been given top priority in domestic gas allocation. Indraprastha Gas gets nearly 85 per cent of its volumes and revenue from these businesses.

Domestic gas is much cheaper than imported gas due to formula-based pricing prescribed by the government.

Imported gas cost, while it has risen this calendar year, is unlikely to see sharp increases, going forward. In any case, the company has good pricing power in the segments it supplies the imported gas to.

Electric vehicles, if they take off in a big way, could disrupt the transportation and fuel markets. In that scenario too, suppliers of clean fuels such as CNG should be better placed and may be able to hold their own than suppliers of more polluting fuels such as petrol and diesel.

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