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Indraprastha Gas: Unfolding prospects

May 26, 2005

Performance summary
Indraprastha Gas (IGL) announced its FY05 results yesterday. While the company's topline growth has been much slower than our estimates, margins have improved in 4QFY05 as well as in FY05 owing to marginal savings in raw material cost and significant reduction in other expenses. The growth in piped natural gas (PNG) was significantly higher than CNG (compressed natural gas) in FY05.

(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Net sales 1,101 1,167 6.0% 4,194 4,500 7.3%
Expenditure 668 678 1.4% 2,502 2,656 6.2%
Operating profit (EBDITA) 432 490 13.2% 1,692 1,845 9.0%
EBDITA margin (%) 39.3% 42.0%   40.3% 41.0%  
Other income 75 51 -32.3% 86 78 -9.5%
Interest 24 7 -70.8% 72 31 -57.1%
Depreciation 113 127 12.6% 420 480 14.3%
Profit before tax 371 407 9.6% 1,286 1,411 9.7%
Tax 133 110 -17.3% 464 484 4.4%
Profit after tax/(loss) 238 297 24.5% 822 927 12.8%
Net profit margin (%) 21.7% 25.4%   19.6% 20.6%  
No. of shares (m) 140.0 140.0   140.0 140.0  
Diluted earnings per share (Rs)* 6.8 8.5   5.9 6.6  
Price to earnings ratio (x)         15.4  
(* annualised)            

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 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. 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 FY05?
PNG outpaces CNG:  During FY05, volume sales of PNG, which is used for domestic and commercial applications, grew at a faster rate of 40% as compared to CNG, which is used by vehicles as an alternate cost-efficient fuel. CNG volumes in FY05 grew at marginally over 5%. While CNG sales are primarily driven from conversion from conventional fuels like petrol and diesel, PNG demand is influenced by availabilty of gas and relative costs savings with respect to LPG (liquified gas). As per the company, conversion of passenger cars to CNG is happening in Delhi at the rate of 500 to 600 cars per month, which it expects to continue going forward. As far as PNG is concerned, as against a 40% growth in volumes, there was a 60% growth in value in FY05. Our overall sales growth estimate was higher than the actual performance, as we had factored more than 8% growth in total CNG consumer base (actual growth in FY05 was 5%). We had also factored in higher growth in PNG consumption, which was lower during the year.

Cost control improves margins:  In FY05, IGL has managed to improve operating margins by 70 basis points on account of marginal reduction in raw material cost and better control over other expenditure (which has reduced as a percentage of sales in FY05). Total volume of gas purchased during the year increased by 9.6% with prices remaining the same as FY04 levels. If one were to look the profitability trend of IGL in FY05 (graph), there is consistency in the same. Our estimates on the margins front are in line with FY05 numbers.

Expenditure table
(%) of sales 4QFY04 4QFY05 FY04 FY05
Consumption of
raw materials
42.2% 41.3% 42.4% 42.1%
Staff cost 2.3% 2.3% 2.1% 2.1%
Other expenditure 16.2% 14.5% 15.2% 14.9%

Lower interest cost cushion:  In FY05, IGL has swapped loans from OECD to the tune of Rs 650 m and consequently the average rate of interest has fallen. This is reflected in the lower interest cost. While the approval for expansion in other cities is awaited, the company has increased the number of its outlets in FY05. Despite a fall in other income, net profit growth in FY05 at 13% is commendable.

What to expect?
The stock currently trades at Rs 102, implying a price to earnings multiple of 15.4 times FY05 earnings. IGL has declared a dividend of Rs 2 per share for FY05 (dividend yield of 2%). Going forward, the company expects to double its customer base in the PNG side in FY06 and is also planning to add more clients in the commercial user segment. As far as growth prospects in CNG are concerned, while the conversion is likely to progress at a steady rate, if the Delhi government approves the conversion of LCVs (around 47,000 units) in FY06, it will provide a fillip to the topline growth. We also expect the company to expand its presence in other NCR states as soon as the government approval is received (2HFY06). Overall, the growth prospects continue to remain promising and to that extent, we maintain our Buy view on the stock from a two to three year perspective.

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