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IGL: The good show continues… - Views on News from Equitymaster
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IGL: The good show continues…
Nov 1, 2006

Introduction to results
Indraprastha Gas (IGL) has declared its results for 2QFY07. The topline for the quarter registered a growth of 15% YoY led mainly by price increases. Substantial increase in other income accompanied by the absence of interest charges during the quarter further aided the bottomline growth, which registered a growth of 29% YoY. For the half year, while the topline of the company grew by 17%, the bottomline grew at a much higher rate of 32% YoY.

Financial snapshot…
(Rs m) 2QFY06 2QFY07 Change 1HFY06 1HFY07 Change
Net sales 1,341 1,542 15.0% 2,481 2,899 16.8%
Expenditure 803 896 11.5% 1,506 1,713 13.7%
Operating profit(EBDITA) 538 645 20.1% 975 1,187 21.7%
EBDITA margins(%) 40.1% 41.9%   39.3% 40.9%  
Other income 10 23 123.9% 18 44 142.2%
Interest expenses 6 - -100.0% 13 - -100.0%
Depreciation 138 150 9.1% 271 300 10.5%
Profit before tax 403.7 518.1 28.3% 708.9 931.2 31.4%
Tax 133 170 27.6% 236 307 29.9%
Profit after Tax 270.3 347.9 28.7% 472.7 624.2 32.1%
Net profit margin(%) 20.2% 22.6%   19.0% 21.5%  
No.of shares(m) 140.0 140.0   140.0 140.0  
Diluted earnings per share 1.93 2.48   3.38 4.46  
Price to earning ratio.(x)*   14.1        
* Based on trailing twelve months earnings.

What is company’s business?
IGL is a joint venture between GAIL and BPCL, incorporated in order to market CNG (compressed natural gas - accounted for 93% of revenues) and PNG (piped natural gas) in the NCR of Delhi. Company has 146 fuel stations situated in Delhi and plans to take it to 158 by the end of FY07. Company has CNG compression capacity of 1.908 m kgs per day. Domestic PNG segment has 156,156 customers, while industrial customers of PNG are 252. The company plans to expand business in surrounding areas, mainly, Noida, Gurgaon, Greater Noida and Ghaziabad, for which approval is awaited. The revenues from the newer geographies will start to accrue from November/December 2007 onwards as the work is expected to start within 2 months. The company currently fuels 125,137 vehicles.

What has driven the performance in 2QFY07?
Realisation led growth: Topline for IGL registered a growth of 15% YoY for the quarter ended September 2006. CNG sales volumes registered a growth of 6% during the quarter, while the CNG realisations grew by 8%. CNG, as a matter of fact, is cheaper by 70% when compared to petrol, taking into account all relevant factors. Thus, the cost advantage is likely to drive increased conversion of petrol cars into CNG based cars. As a matter of fact, the increase in car conversion to CNG is roughly 2,500 per month, while the management has anticipated conversion of 2,000 cars per month. Also, the recent Delhi government notification with respect to LGV’s (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 this segment going forward. Further, expansion across Ghaziabad and Greater Noida will also lead to increase in revenues and consequently the bottomline of the company.

Margin expansion, a big positive: IGL has been able to pass through the impact of rise in the price of inputs to its ultimate consumers. This is substantiated from the fact that consumption of raw material (constituting 44% of the total sales in 2QFY07) has declined by 90 basis points as a % of sales, during the quarter over the corresponding period. 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 1HFY06 1HFY07 Change
Consumption of raw material 598.5 674.8 12.7% 1,119.4 1,260.7 12.6%
% of sales 45% 44%   45% 43%  
Staff cost 26.03 35.77 37.4% 46.9 67.1 43.0%
% of sales 2% 2%   2% 2.3%  
Other expenditure 178.8 185.6 -3.6% 340.1 385.1 -11.7%
% of sales 13% 12%   14% 13%  

Robust bottomline growth: Other income registered a growth of 124% YoY, thus further 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 122, the stock is trading at a price to earnings multiple of 9.8 times our estimated FY09 earnings. Topline for the company is expected to increase at a faster clip given the fact that the conversions of car to CNG is at a much faster rate of 2,500 cars per months as compared to 2000 in the recent past. Also, expansion into newer geographies will further augment volumes and consequently, the revenues. Margins are expected to be stable as the company is able to pass through the increased cost to the customers, without adversely affecting demand due to cost advantage of CNG over petrol. Hence, even if crude prices slide, shift to CNG will not take a significant hit. 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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