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IGL: Visibility in numbers
Feb 8, 2006

Performance Summary
Indraprastha Gas, the Delhi-focussed CNG and PNG distribution major, announced encouraging third quarter results. Both volume and value growth in CNG (compressed natural gas) and PNG (piped natural gas) resulted in a healthy 16% growth in sales in 9mFY06. As was expected, PNG outpaced CNG segment in 9mFY06. While capital expenditure plans lowered other income, net profit growth was higher as compared to the rise in operating profit on the back of lower interest charges.

(Rs m) 3QFY05 3QFY06 Change 9mFY05 9mFY06 Change
Net sales 1,161 1,370 18.1% 3,333 3,852 15.6%
Expenditure 704 789 12.0% 1,978 2,295 16.0%
Operating profit (EBDITA) 457 582 27.4% 1,355 1,557 14.9%
EBDITA margin (%) 39.3% 42.4%   40.6% 40.4%  
Other income 16 7 -53.8% 27 26 -4.7%
Interest 8 6 -22.6% 24 19 -20.8%
Depreciation 122 143 17.4% 353 414 17.2%
Profit before tax 343 440 28.3% 1,005 1,149 14.4%
Tax 122 147 20.8% 375 383 2.1%
Profit after tax/(loss) 221 293 32.5% 629 766 21.7%
Net profit margin (%) 19.1% 21.4%   18.9% 19.9%  
No. of shares (m) 140.0 140.0   140.0 140.0  
Diluted earnings per share (Rs)*         7.6  
Price to earnings ratio (x)         18.3  
(*trailing twelve month earnings)            

What is the company's business?
IGL is a joint venture between GAIL and BPCL to market CNG (compressed natural gas - accounted for 95% of revenues) and PNG (piped natural gas) in the 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 segments ranging from households to commercial applications. The company plans to expand business in surrounding areas, mainly, Noida, Gurgaon, Greater Noida and Ghaziabad, for which approval is awaited.

What is the company's business?
IGL is a joint venture between GAIL and BPCL to market CNG (compressed natural gas - accounted for 95% of revenues) and PNG (piped natural gas) in the 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 segments ranging from households to commercial applications. The company plans to expand business in surrounding areas, mainly, Noida, Gurgaon, Greater Noida and Ghaziabad, for which approval is awaited.

What has driven performance in 3QFY06?
PNG shows the way: As compared to the total CNG vehicle base of 95,000 in FY05, we expect this to touch around 105,000 in FY06 and the company's first nine months performance is in line with this assumption. The impressive topline growth has been driven largely by 14% YoY growth in CNG (7% volume growth and 6% to 7% increase in average realisation) and 84% YoY growth in PNG. We expect the PNG segment to outpace CNG over the next two to three years, given the sharp rise in LPG prices since the dismantling of the APM regime.

Further increases on the anvil, combined with the intent to align domestic LPG prices to international parity, will result in domestic consumers opting for PNG in the future. Having said that, the company, in our earlier interactions, opined that it will be in a position to increase prices of both CNG and PNG in relation to petroleum product prices (while CNG is at an estimated 30% discount to petrol/diesel, PNG was cheaper by 10% as compared to LPG). However, the company has been unable to increase prices proportionately. While this is a concern, it also strengthens the case for migration from conventional fuels to CNG and PNG in the long-term.

Stable margins: With effect from July 2005, natural gas prices were increased from Rs 2,850 per TSCM (thousand standard cubic meters) to Rs 3,200 per TSCM. This apart, annual increase in gas transportation charges payable to GAIL and additional tax burden owing to new statutory levies were the key reasons for the marginal decline in operating margins in 9mFY06 (in 1HFY06, operating margins were lower by 170 basis points). With alternate fuel prices increasing in the last quarter, the company was able to increase prices, which is reflected in higher margins in 3QFY06. In the long-term, we expect the company's operating margins to be on the lower side, considering the fact that it has been largely insulated from the sharp spurt in natural gas prices internationally (IGL sources gas at administered prices currently).

In an expansion phase: Out of the Rs 1.3 bn of capital expenditure planned in FY06 (towards network expansion in the NCR region as well as investments in new cities), the company has already invested Rs 980 m and the 17% rise in depreciation charges in 9mFY06 reflects the increase in capital expenditure. We expect the capital expenditure to be sustained in the next two years, depending on the approval for its proposed expansion into four other cities in the northern region. Despite lower other income, a significant decline in the effective tax rate (37% in 9mFY05 to 33% in 9mFY06) enabled the company to post a 22% YoY growth in net profits. The first nine months performance has been fairly in line with our numbers.

What to expect?
At Rs 139, the stock is trading at a price to earnings multiple of 13.7 times our estimated FY08 earnings. The company has sanctioned expenditure of Rs 297 m for city gas distribution network in the city of Ghaziabad, which is a positive. Also, in a new initiative, the company has commenced supply of natural gas to locomotives (currently around 2), which will be scaled up to 20. Besides, by sourcing gas from its parent i.e. BPCL, IGL has commenced supply of natural gas to large-scale industrial units. We have not factored in potential revenues from both these initiatives and to that extent, there is a need to upgrade our estimates post-FY06. We continue to remain positive on the long-term growth prospects of IGL and therefore, have a HOLD view on the same.

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