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IGL: Conference call excerpts - Views on News from Equitymaster
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IGL: Conference call excerpts
Sep 24, 2004

Following are the key highlights of our conference call with Indraprastha Gas, the compressed natural gas (CNG) major. The focus of the discussion was to know the company’s future growth potential as the market for CNG in Delhi has now saturated and how the company plans to grow its business.

Company Background
Indraprastha Gas is a joint venture between GAIL and BPCL, which together hold 45% stake in the company. The company is a regional player, currently operating in the National Capital Territory (NCT) of Delhi. Over the last three years, it has been a major beneficiary of the Supreme Court order to convert all public transport vehicles to CNG. However, currently the market for CNG has been saturated and the company has shifted focus to PNG (piped natural gas) for domestic and commercial purposes. While CNG business witnessed a growth of 38% in FY04, PNG business grew at a faster rate of over 54%. The growth was much faster in the earlier years backed by the apex court’s verdict.

Key Impressions
  • Addressable market size: Although the company has covered public transport vehicles under its business, the DTC, which is the dominant customer with a share of nearly 23% to 25% of the CNG business is likely to expand its number of buses and this shall help the company in terms of increased volumes. Further, new routes coming up with 12 new flyovers across the NCT of Delhi are also likely to help growth. Also, the company is now targeting private vehicles and it is difficult to estimate the conversion, as infrastructure support such as conversion kits is not available. Further, as per the transport department, there are nearly 3 m private vehicles, which come under the company’s ambit.

  • Pricing of CNG and PNG: There are nearly 3,000 DTC buses to which IGL supplies CNG at a discount of Re 1 per kg. This is given the fact that the company utilizes DTC’s infrastructure for the setting up of CNG stations. As for other vehicles, the price is Rs 16.8 per kg of CNG, which is nearly at a discount of 40% as compared to diesel of the same heating value. As for the PNG business, the company has adopted a penetrative strategy and priced the product at a 10% discount to the alternative fuel.

  • Infrastructure and investments: The company has nearly 130 kms of underground steel pipelines for its CNG business covering the NCT of Delhi and another 300 kms of pipelines to cater to PNG distribution. Further, the company has planned an investment of nearly Rs 1.6 bn so as to increase its compression capacity and also expand the presence of retail stations so as to meet the growing demand for CNG.

  • New avenues: Since Delhi is now saturating in terms of CNG growth, the company has planned to enter into surrounding areas for growth. It has been allocated 0.7 MMSCMD (million metric standard cubic meters of gas per day) to cater to these new markets. IGL plans to venture into Noida, Gurgaon, Greater Noida, Ghaziabad and Faridabad among others for this venture and has sufficient allocation of gas to cater to the demands from these markets.

At Rs 75, the stock is trading at a price to cash flow multiple of 6.5x our expected FY05 earnings (P/E multiple of 10.3x FY05E). We believe the company is likely to witness growth in the PNG business going forward as it is priced at a discount to alternative fuels. Going forward, increase in prices of LPG further advocate the strong growth prospects of PNG in a price sensitive market. However, entry into new avenues is likely to result in high capex for the next two years and to that extent, execution risks remain.

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