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IGL: Volume led growth - Views on News from Equitymaster
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IGL: Volume led growth
Oct 31, 2007

Performance summary
  • Topline increases by 13% YoY during 2QFY08 on the back of higher volumes.
  • EBITDA margin expands to 43% during 2QFY08, up from 42% in 2QFY07. Marginal decline in raw material and staff costs (as percentage of sales) helps matters.

  • Other income grows by 107% YoY.

  • Bottomline registers a growth of 23% YoY during 2QFY08 owing to operating margin expansion and higher other income.

Financial snapshot
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 1,542 1,741 12.9% 2,899 3,358 15.8%
Expenditure 896 991 10.6% 1,713 1,921 12.2%
Operating profit (EBDITA) 645 750 16.2% 1,187 1,437 21.1%
EBDITA margin (%) 41.9% 43.1%   40.9% 42.8%  
Other income 23 47 107.2% 44 87 96.6%
Depreciation 150 158 5.3% 300 314 4.6%
Profit before tax 518 639 23.4% 931 1,211 30.0%
Tax 170 211 23.8% 307 398 29.6%
Profit after tax/(loss) 347.9 428 23.2% 624 813 30.2%
Net profit margin (%) 22.6% 24.6%   21.5% 24.2%  
No. of shares (m)         140.0  
Diluted earnings per share (Rs)*         11.20  
Price to earnings ratio (x)*         11.7  
(* On trailing twelve months earnings)

What is the companyís business?
IGL is a joint venture between GAIL and BPCL, incorporated in order to market CNG (compressed natural gas - 93% of revenues) and PNG (piped natural gas) in the NCR of Delhi. IGL has 154 CNG stations and plans to take it to 158 by the end of FY07. It has a CNG compression capacity of 1.951 million kgs per day. It fuels over 1,28,000 vehicles including 11,535 buses, 70,159 three wheelers, 5,368 RTVs, 5,686 taxis, 35,229 private cars. Domestic PNG segment currently has 156,156 customers, while industrial customers of PNG are 252. The company plans to expand business in surrounding areas, mainly, Noida, Gurgaon and Ghaziabad, for which approval is awaited. Increased revenues from the newer geographies and the PNG segment are likely to drive the future growth of the company.

What has driven performance in 2QFY08?
Growth in volumes: Volumes drove IGLís topline growth in this quarter in the absence of any significant price hikes. Given the spiraling crude prices, the cost advantage of CNG vis-ŗ-vis petroleum fuels is sustainable in the years to come and is likely to drive further conversions. In fact, the company is looking at conversion of 2,500 private vehicles per month.

On the PNG front, the construction work for the pipeline network in Greater Noida has already begun. The company expects it to be operational by the end of this year. It will also start laying pipeline in Ghaziabad and Sonipat in 2007. The company has set a target at 70,000 domestic PNG customers for this fiscal in 16 new locations. This is twice the previous yearís target.

Cost break-up
(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Raw materials 675 746 10.5% 1,260 1,439 14.1%
% sales 43.8% 42.8%   43.5% 42.8%  
Staff cost 36 35 -2.9% 67 70 5.0%
% sales 2.3% 2.0%   2.3% 2.1%  
Other expenditure 186 211 13.5% 385 412 7.0%
% sales 12.0% 12.1%   13.3% 12.3%  
Total cost 896 991 10.6% 1,713 1,921 12.2%
% sales 58.1% 56.9%   59.1% 57.2%  

Costs decline on scale economies: Although raw material costs went up by 11% over the last quarter on a YoY basis, it fell slightly as a percentage of sales from 43.8% to 42.8%, thereby having a positive impact on operating margins. Staff costs declined by 3%, while other expenditure increased by 14%. However, other expenditure as a percentage of sales remained steady hinting at economies of scale. Clearly costs have not been an issue with IGL this quarter with total operating costs declining as a percentage of sales.

Other income contributes as usual: The investment of surplus cash available with the company led to a growth of 107% YoY in the other income for 2QFY08. This is line with the previous quarters, which have witnessed a steady climb in the figure.

What to expect?
Expansion of the user base (from conversion of private cars) in the CNG segment is expected to propel IGLís volumes going forward. In order to maintain the fuel parity, the management has not hiked the prices of CNG. The management is expected to maintain the parity between the prices of petrol and CNG in order to further encourage private car conversions. Despite this, margins are still expected to be around 40% over the next few years. Furthermore, the benefits of scale on the back of higher CNG volumes in the future are also expected to accrue to it. Expansion to nearby regions has had hiccups due to regulatory and bureaucratic reasons. However, with expansion likely to start contributing to revenues in FY09, volumes are likely to receive a further boost. PNG network has been extended to 60 locations in the capital with 85,000 family connections and the target for this fiscal is 70,000 more connections in 16 new locations.

At Rs 132, the stock is trading at a multiple of 12 times its trailing twelve months earnings. We maintain our positive view on the company.

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