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IGL: Stellar start to the year… - Views on News from Equitymaster

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IGL: Stellar start to the year…
Aug 3, 2006

Performance summary
Indraprastha Gas (IGL) has declared its results for 1QFY07. The topline for the quarter registered a growth of 19% YoY led by price increases. Substantial increase in other income accompanied by the absence of interest charges during the quarter aided the bottomline growth. Bottomline for the quarter registered a growth of 37% YoY.

Financial snapshot…
(Rs m) 1QFY06 1QFY07 Change
Net sales 1,140 1,358 19.1%
Expenditure 703 816 16.1%
Operating profit(EBDITA) 437 541 23.7%
EBDITA margins(%) 38.3% 39.9%  
Other income 8 22 165.0%
Interest expenses 7 - -100.0%
Depreciation 134 150 12.1%
Profit before tax 305 413 35.3%
Tax 103 137 33.0%
Profit after Tax 202 276 36.5%
Net profit margin(%) 17.8% 20.4%  
No.of shares(m) 140 140  
Diluted earnings per share 1.45 1.97  
Price to earning ratio.(x)*   14.0  
* Based on trailing twelve months earnings.

What is the company’s business?
IGL is a joint venture between GAIL and BPCL to market CNG (compressed natural gas - accounted for 93% 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 the performance in 1QFY07?
Realisation drives sales: The topline for the IGL registered a growth of 19% YoY. Price hike of 6.7% during previous fiscal, along with recent price hike of similar basis points, helped the company register a 19% YoY growth in its topline. Extrapolating the facts, we can conclude that the volumes would have increased by 5% to 7% during the quarter. This is lower than the growth in the past. However, volumes are expected to increase following the price hikes in the case of petrol and diesel (CNG and PNG are substitutes). CNG, as a matter of fact, is cheaper by 70% in terms of operation cost when compared to petrol. Thus, the volumes will grow on the back of increased conversion of petrol cars into CNG based cars. Also, the recent Delhi government notification with respect to LGVs (light goods vehicle) registered in Delhi post June 2006 to be run on CNG will help the company. Also, the efforts on the part of its PNG business can increase the volumes in the segment going forward.

Margins expand: IGL is able to pass through the impact of rise in the price of inputs to the ultimate customers. This is substantiated from the fact consumption of raw material (constituting 72% of the total operating cost in 1QFY07) has decline by 150 basis points during the quarter over the corresponding period. Price hike of 13.3% in the trailing twelve months has helped the company to pass on higher cost to the consumers. We continue to have a stable bias as far as operating margins are concerned over the next two years.

Expenditure break-up…
(Rs m) 1QFY06 1QFY07 Change
Consumption of raw material 520.8 585.6 12.4%
as a % of sales 45.7% 43.1%  
Staff Cost 20.9 31.4 49.9%
as a % of sales 1.8% 2.3%  
Other expenditure 161.3 199.5 23.7%
as a % of sales 14.1% 14.7%  

Robust bottomline growth: Other income registered a growth of 165% YoY, thus propelling the bottomline growth. Also, there was no interest expenditure during the quarter, which also helped the bottomline to grow at a robust pace.

What to expect?
At Rs 113, the stock is trading at a price to earnings multiple of 9.1 times our estimated FY09 earnings. IGL is able to pass through the increased cost to the customers, which is commendable. But we do not foresee any substantial price increases in the next one year for political reasons. Any further price rise in the petrol and diesel will help the company, as CNG is the competitive fuel for the vehicles. Thus, the rate of conversion (private vehicles to CNG due to it being cheaper) is expected to accelerate. Also, the expansion in the NCR region is going to boost volumes going forward. We continue to remain positive on the long-term growth prospects of IGL and therefore, have a BUY view on the same.

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