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Indraprastha Gas: The wait elongates

Jul 21, 2005

Performance Summary
Indraprastha Gas (IGL) announced its first quarter results late yesterday. While the topline growth at 9% is good, the increase in gas prices by the government has made a dent in the operating margins. Also, adding to the pressure are higher depreciation charges arising out of the company's expansion of outlets in the National Capital Territory and other select cities. While net profit grew by 2% YoY, profit before tax has actually declined at the same rate during the quarter.

(Rs m) 1QFY05 1QFY06 Change
Net sales 1,046 1,140 9.0%
Expenditure 615 703 14.3%
Operating profit (EBDITA) 430 437 1.6%
EBDITA margin (%) 41.2% 38.3%  
Other income 4 8 95.4%
Interest 8 7 -19.3%
Depreciation 114 134 17.3%
Profit before tax 312 305 -2.3%
Tax 115 103 -10.3%
Profit after tax/(loss) 198 202 2.3%
Net profit margin (%) 18.9% 17.8%  
No. of shares (m) 140.0 140.0  
Diluted earnings per share (Rs)* 5.7 5.8  
Price to earnings ratio (x)   18.7  
(* 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 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 1QFY06?
Steady topline growth: IGL derives 95% of its revenues from the sale of CNG (compressed natural gas) to the automotive sector. Since the company operates predominantly in the NCT (National Capital Territory), demand from public transportation is one of the key customer segment apart from private vehicles. We expect the number of customers in the automobile segment to increase from marginally over 94,000 in FY05 to over 100,000 in FY06 (close to 500 to 600 private cars convert to CNG on a monthly basis) apart from public transportation demand. This apart, the company's focus on the PNG (piped natural gas - an alternative to LPG cylinders) has also powered the topline growth in 1QFY06. PNG customers are expected to double in FY06, from FY05 levels of 25,000, even as the contribution from this segment is likely to be lower to the overall topline. We expect the topline growth to accelerate in the second half of the fiscal year.

Gas price hike affects margins: The Government of India increased the price of natural gas from Rs 2,850 per TSCM (thousand standard cubic metre) to Rs 3,200 per TSCM with effect from 1st July, 2005, a hike of 12.2%. Besides, there has been an increase in tax rates (due to VAT) and the transportation charges payable to GAIL. As a result, raw material costs to sales has escalated from 42% in 1QFY05 to 46% in 1QFY06. However, the company has increased the selling price of CNG by 6.6%, which is effective from 1st July 2005. Since the hike is less than proportionate to the input price hike, margins have suffered. We had factored in 120 basis fall in operating margins for FY06 and we do not foresee any need to downgrade it further for now.

Expenditure table
(%) of sales 1QFY05 1QFY06
Consumption of raw materials 41.6% 45.7%
Staff cost 2.4% 1.8%
Other expenditure 14.8% 14.1%

Depreciation subdues profits: IGL, in its conference call last month, had indicated that the capital expenditure for FY06 is likely to be in the range of Rs 1.6 bn, provided it receives clearance from the government for its expansion in Delhi and other cities. The rise in depreciation has to be viewed in this context. Despite higher other income and lower tax incidence (on account of reduction in corporate tax rate in the budget), net profit growth was staid. We expect a 9% growth in net profit for FY06.

Over the last few quarters: While operating margins are more or less in line with the last five quarters (we expect it to decline in the next three years), the net margins have fallen at a faster clip owing to the ongoing expansion. However, the topline growth at 9% in 1QFY06 has gained pace and we expect this rate to be sustained in the future.

What to expect?
The stock currently trades at Rs 108, implying a price to earnings multiple of 10.2 times our estimated FY08 earnings. There are two key growth drivers in the future. One, the company hopes to expand its presence beyond the Delhi region to Noida, Ghaziabad and two more cities, for which clearance is awaited. We believe that there is potential to grow on both CNG and PNG fronts. Secondly, the Supreme Court order with respect to the conversion to CNG by LCVs (light commercial vehicles) is also awaited. If it is cleared, around 47,000 vehicles will convert to CNG. Amidst these positive, we would be conservative on the margins going forward on account of further gas price hike possibilities. Overall, we have a HOLD view on the stock from a two to three years perspective.

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