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IGL: A lacklustre performance

Jan 31, 2005

Performance Summary
Indraprastha Gas (IGL), a joint venture between GAIL and BPCL, has posted lacklustre 3QFY05 results with its topline growing over 5% YoY, while the bottomline has witnessed a marginal rise of nearly 4% YoY. A faster increase in operating expenditure has resulted in this performance.

What is the company's business?
IGL is a joint venture between GAIL and BPCL to market CNG (compressed natural gas) and PNG (piped natural gas) in the National Capital Region (NCR) of Delhi. The company caters to the public transportation in the city with an established pipeline network of over 130 kms. Also, the company has a customer base of over 4 m for its PNG business across the segments ranging from household to commercial applications. Recently, the company board has approved plans to expand business in surrounding areas, mainly, Noida, Gurgaon, Greater Noida and Ghaziabad among others.

(Rs m) 3QFY04 3QFY05 Change 9mFY04 9mFY05 Change
Net sales 1,122 1,180 5.2% 3,142 3,390 7.9%
Expenditure 663 724 9.2% 1,882 2,035 8.1%
Operating profit (EBDITA) 459 457 -0.4% 1,260 1,355 7.5%
EBDITA margin (%) 40.9% 38.7%   40.1% 40.0%  
Other income 2 16 838.0% 11 27 151.0%
Interest 15 8 -49.8% 48 24 -50.3%
Depreciation 111 122 9.9% 308 353 14.9%
Profit before tax 334 343 2.6% 915 1,005 9.8%
Tax 121 122 0.5% 331 375 13.2%
Profit after tax/(loss) 213 221 3.8% 583 629 7.9%
Net profit margin (%) 19.0% 18.8%   18.6% 18.6%  
No. of shares (m) 140.0 140.0   140.0 140.0  
Diluted earnings per share (Rs)* 6.1 6.3   5.6 6.0  
Price to earnings ratio (x)   15.5     16.4  
(* annualised)            

What has affected performance in 3QFY05?
CNG freezes: During the quarter, the company has posted a topline growth of just over 5%. It should be noted that the company had had a robust fiscal last year following the Supreme Court order to convert all public transportation to CNG. The company finally achieved that target to convert all public transportation in FY04. Currently, the company is witnessing saturation for its CNG business while the concentration is shifting more towards the PNG business. Going forward, PNG is likely to help growth as alternative fuels become dearer.

(%) of sales 3QFY04 3QFY05 9mFY04 9mFY05
Consumption of raw materials 41.5% 41.9% 41.7% 41.6%
Staff cost 1.7% 2.1% 2.1% 2.0%
Other expenditure 15.9% 17.4% 16.1% 16.4%

Operating margins: During the quarter under review, IGL has witnessed a dip of 220 basis points in its operating margin on the back of higher than proportionate rise in expenditure. While the company sources raw materials (read gas) at regulated prices through GAIL under the government order, escalating staff cost and other expenditure have pruned margins, thereby creating major dent in operating income.

Other income boosts bottomline: The bottomline picture would have been much poorer in 3QFY05 but for higher other income component, which has grown by 838% during the period. Also helping boost the bottomline was lower interest outgo, which reduced by nearly 50% during the quarter. However, higher depreciation by nearly 10% during the quarter ensured a subdued bottomline growth.

What to expect?
At Rs 98, the stock is trading at a price to earnings multiple of 16.4 times annualized 9mFY05 earnings (price to cash flow multiple of 14 times). We believe the current fiscal is likely to witness a saturation level for the company's CNG business and therefore, growth is likely to be subdued.

Going forward, the company is anticipating the state government's order to convert 46,000 light commercial vehicles to CNG, which would help boost business. Also, entry into newer pastures is likely to help the company grow at a faster rate.

We had recommended a ‘BUY' on the stock at Rs 75 with a target of Rs 105. The stock recently breached our target price to touch a 52-week high of Rs 117 before settling at the current levels. We continue to remain positive about the company's long-term business and maintain a HOLD on the stock at current levels.

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