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IGL: Private conversions fuel growth…
Feb 1, 2007

Introduction to results
Indraprastha Gas (IGL) has declared its results for 3QFY07. The topline for the quarter registered a growth of 17% YoY led by increased volumes in CNG and PNG segments. Margins were slightly under pressure due to increase in cost of gas on the back of increased tariffs of HBJ pipeline. Substantial increase in other income accompanied by the absence of interest charges during the quarter aided the bottomline growth, which registered a growth of 21% YoY. For 9mFY07, topline of the company grew by 17% YoY while the bottomline grew at a higher rate of 28% YoY.

Financial snapshot…
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Net sales 1,370 1,599 16.7% 3,852 4,498 16.8%
Expenditure 789 945 19.8% 2,295 2,658 15.8%
Operating profit(EBDITA) 582 654 12.4% 1,557 1,840 18.2%
EBDITA margins(%) 42.4% 40.9%   40.4% 40.9%  
Other income 7 24 227.8% 26 68 166.6%
Interest expenses 6 - N.A. 19 - N.A.
Depreciation 143 150 4.8% 414 450 8.6%
Profit before tax 440.2 528.0 19.9% 1,149.7 1,459.2 26.9%
Tax 147 173 17.8% 383 480 25.3%
Profit after Tax 293.3 354.8 21.0% 766.5 979.1 27.7%
Net profit margin(%) 21.4% 22.2%   19.9% 21.8%  
No.of shares(m) 140.0 140.0   140.0 140.0  
Diluted earnings per share 2.09 2.53   5.48 6.99  
Price to earning ratio.(x)*         13.0  
* Based on trailing twelve months earnings.

What is company’s business?
IGL is a joint venture between GAIL and BPCL, incorporated in order to market CNG (compressed natural gas - accounted for 93% of revenues) and PNG (piped natural gas) in the NCR of Delhi. Company has 145 fuel stations situated in Delhi and plans to take it to 158 by the end of FY07. Company has CNG compression capacity of 1.908 m kgs per day. Domestic PNG segment has 156,156 customers, while industrial customers of PNG are 252. The company plans to expand business in surrounding areas, mainly, Noida, Gurgaon and Ghaziabad, for which approval is awaited. Increased revenues from the newer geographies are likely to drive the future growth of the company. The company currently fuels more than 1,25,000 vehicles.

What has driven the performance in 3QFY07?
Volume boost: Topline for IGL registered a growth of 17% YoY for the quarter ended December 2006. Gross CNG sales registered a growth of 15.2% YoY; led by 8.2% increase in volumes and 7.2% increase in realisations. Increased volumes in the CNG segment could be attributed to increased conversion by private petrol cars in the region. The cost advantage will continue to drive conversion going forward. As a matter of fact, the increase in car conversion to CNG stood at roughly 2,500 cars per month (according to the management) as opposed to 1,700 – 1,800 before. Also, the recent Delhi government notification with respect to LGV’s (light goods vehicle) registered in Delhi post June 2006 to be run on CNG will help the company.

Gross PNG sales registered a growth of 14% YoY for the quarter, which was driven by 14.6% increase in volumes and 1% decline in realisations.

Input price pressure: Consumption of raw material as a percentage of sales registered an increase of 280 basis points during the quarter. Given the fact that cost of transportation of the natural gas over the HBJ pipeline was hiked by GAIL during the quarter led to increase in the cost of raw material. Thus, higher costs combined with unchanged final selling prices led to pressure on the operating margins for the company. Consequently, the operating margins declined by 160 basis points during the quarter. Staff cost also registered a growth of 27% YoY and 37% YoY for 3QFY06 and 9mFY07 respectively. On the back of rationalization of costs and economies of scale, the other expenditure reduced as a percentage of sales over both the periods under consideration.

Expenditure break-up…
(Rs m) 3QFY06 3QFY07 Change 9mFY06 9mFY07 Change
Consumption of raw material 579.1 720.6 24.4% 1,698.6 1,981.6 16.7%
% of sales 42.3% 45.1%   44.1% 44.1%  
Staff cost 28.7 36.4 26.8% 75.7 103.6 36.8%
% of sales 2.1% 2.3%   2.0% 2.3%  
Other expenditure 181.4 188.0 3.6% 521.5 573.0 9.9%
% of sales 13.2% 11.8%   13.5% 12.7%  

Other income propels operating show: Company had repaid the loan taken from HSBC bank, thus leading to non-existence of interest obligation for the company. Further, the investments of surplus cash available with the company led to significant growth in the other income for both the periods under consideration.

What to expect?
At Rs 118, the stock is trading at a price to earnings multiple of 9.5 times our estimated FY09 earnings. Expansion of the user base (increase conversion of private cars) in the CNG segment is expected to propel volumes. In order to maintain the fuel parity, management has not hiked the prices of CNG. Management is expected to maintain the parity between the prices of petrol and CNG in order to further encourage private car conversions. Despite this, the margins are still expected to be around 40% over the next few years. Furthermore, the benefits of scale on the back of higher CNG volumes in the future are also expected to accrue to it. Expansion to nearby regions has had hiccups due to regulatory and bureaucratic reasons. However, with expansion likely to start contributing to revenues in FY09, volumes are likely to receive a further boost. We maintain our positive view on the company.

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