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Indraprastha Gas: More aggressive - Views on News from Equitymaster

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Indraprastha Gas: More aggressive

Oct 27, 2005

Performance Summary
Indraprastha Gas (IGL), the monopoly gas distribution company in the National Capital Region (NCR), announced results today. While net sales grew by 17% YoY in 2QFY06, net profit grew at a faster pace of 29% YoY on the back of significant savings on the tax front as well as lower interest outgo. While the topline growth and operating margins are in line with our full year estimates, the rise in net profit is higher than our estimate.

(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Net sales 1,146 1,341 17.1% 2,191 2,481 13.2%
Expenditure 678 803 18.6% 1,293 1,506 16.5%
Operating profit (EBDITA) 468 538 14.9% 898 975 8.5%
EBDITA margin (%) 40.9% 40.1%   41.0% 39.3%  
Other income 7 10 47.0% 11 18 65.1%
Interest 8 6 -20.7% 16 13 -20.0%
Depreciation 118 138 16.9% 232 271 17.1%
Profit before tax 349 404 15.7% 662 709 7.2%
Tax 139 133 -4.0% 254 236 -6.8%
Profit after tax/(loss) 210 270 28.7% 408 473 15.9%
Net profit margin (%) 18.3% 20.2%   18.6% 19.0%  
No. of shares (m) 140.0 140.0   140.0 140.0  
Diluted earnings per share (Rs)* 6.0 7.7   5.8 6.8  
Price to earnings ratio (x)         17.3  
(* 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 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 2QFY06?
Visible topline growth: As of now, the company derives its revenes from the sale of compressed natural gas (CNG - 95% of revenues) and piped natural gas (PNG), both of which are cost-effective substitutes of LPG and petrol respectively. We expect the company's CNG vehicle base to grow at 10% in FY06 and at a much higher rate in the next two years, depending on the LCV conversion permission from the apex court. The company had targeted more than doubling its PNG customer base in FY06 and considering the first half performance, it is in line to achieve the target. We have projected the company's topline to grow at 15% in FY06 and the first half performance is encouraging.

Margins lower due to price hike: Effective July 2005, natural gas prices were increased from Rs 2,850 per TSCM (thousand standard cubic meters) to Rs 3,200 per TSCM (12.3% hike). This apart, annual increase in gas transportation charges payable to GAIL and additional tax burden owing to new statutory levies has also impacted margins of IGL (the company is currently utilising only 35% of natural gas allotted). The decline in operating margins has to be viewed in this context (we have factored this in our numbers). While we have not assumed any increase in gas prices beyond FY06 (as it involves government intervention, which tends to be unpredictable), the downside risk to our margin estimate beyond FY06 exists. But this could be offset partly, if the company manages to receive the go-ahead for expansion into four other cities (approval is pending).

Effective tax rate tumbles: As compared to a 14% growth in operating profit, net profit grew by 29% YoY in 2QFY06 largely due to lower tax rate. To put things in perspective, the effective tax rate has come down from 40% in 2QFY05 to 33% in 2QFY06. Though we had factored in a marginal decline on this front, the percentage fall is higher and to that extent, we have to revise our earnings for FY06 upwards. However, we would like to mention that this is a one-off effect and unlikely to sustain beyond FY06.

Over the last few quarters: Looking at the margin and sales trend of the company, it is evident that the gas price revision has dented profitability. We would be more conservative on the margins front going forward for reasons mentioned earlier. The topline growth has accelerated because the company has become more aggressive (in FY05, CNG vehicles grew only by 5% YoY).

What to expect?
At Rs 118, the stock is trading at a price to earnings multiple of 11.6 times our estimated FY08 earnings. Depending on the approval to expand into Noida, Ghaziabad, Gurgaon and Faridabad, the upside to our estimate exists. Considering the fact that there are minimal concerns on the supply side of gas to IGL from GAIL, we continue to remain positive on the company's growth prospects in the long-term. However, we would be conservative on margins. We had re-iterated our Buy on the stock in August 2005 at Rs 108 with a two to three year target price of Rs 150. We maintain our view.

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