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IGL SWOT Analysis-II - Views on News from Equitymaster

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IGL SWOT Analysis-II

Nov 12, 2007

In the previous article , we began the SWOT analysis of Indraprastha Gas Limited (IGL) with a look at its strengths. In this article, we continue our analysis with a study of its weaknesses. Weaknesses
Conflict with business interests of promoters- GAIL and BPCL
GAIL is planning to enter the natural gas distribution business in around 200 cities in India, excluding Delhi, either independently or through joint ventures. GAIL’s plans may overlap with the company’s plans and it may have to compete with GAIL in expanding its business. BPCL is engaged in the production and marketing of petrol, diesel and LPG for use in automobiles, all of which compete with CNG. BPCL is also engaged in production and marketing of LPG for use by domestic and commercial customers in the NCT of Delhi, which competes with PNG marketed by IGL. The promoters might be less willing to support the company’s initiatives if they conflict with their own business objectives.

Single supplier of natural gas
GAIL is the sole supplier of natural gas to IGL at present, which potentially creates limitations in negotiating gas supply with GAIL. In fact, the supply agreements contain commitments by IGL to purchase a minimum pre-determined quantity on a monthly basis. Any dispute with GAIL over supply of natural gas can affect IGL’s business adversely.

Interruption of supply due to the distance over which natural gas is transported
The natural gas supplied to IGL is transported over a distance of approximately 1,200 Kms through the supply network of GAIL. Disruption or interruption of supply to the company may adversely affect its sales and profitability. However, the gas purchase agreement it has signed with GAIL is valid up to 2010 and assures it priority in the event of any disruption in supply. In the event of stoppage, supply to IGL will be the last to stop and first to start. However, the company does not have an insurance policy, which could insure it against loss of business from disruption in supply of natural gas.

Dependence on the BPCL’s retail outlets
Several CNG stations operated by IGL are situated on the retail outlets of BPCL. The company has entered into an agreement with BPCL to formalize the arrangements to set up infrastructure for CNG dispensation in BPCL owned retail outlets. This agreement is valid till March 31, 2010 and is renewable at mutually agreed terms.

Short tenure of land leases
A number of IGL’s CNG stations are located on land allotted by Municipal Corporation of Delhi, Delhi Development Authority, the Ministry of Defence, the Airport Authority of India and the Land and Development Office. These lands are typically allotted on short-term leases ranging from two years to five years. In the event that the duration of these leases is not extended, the company may have to vacate the land and relocate the CNG stations at additional expense. Procuring suitable alternate land for setting up CNG stations within a reasonable period of time might also prove to be difficult.

Delhi Transport Corporation (“DTC”) is the largest customer of CNG
DTC is the company’s largest customer and the sale of CNG to DTC accounts for a substantial portion of its total net revenue from CNG sales. The company has several CNG stations located within the bus depots of DTC for supply of CNG to DTC’s buses. There could be disputes over the roles, responsibilities, infrastructure cost sharing, pricing and discounts, payment terms, minimum off-take commitments etc for the stations. Any such dispute with DTC could potentially adversely affect the company’s sales and profits. Any delay or shortfall in payment by DTC would affect the company’s cash flows. Moreover, since DTC is a large public utility in the NCT of Delhi, in the event of any delay or default in payment by DTC, the company’s ability to take appropriate measures to protect our interest may be limited.

Regulation of the price of CNG
Due to the evolving regulatory framework, the price of CNG may be regulated and as a result, IGL’s profit margins in future may be dependant on such regulations. Rulings by the Supreme Court, the Environmental Pollution (Prevention & Control) Authority (EPCA), government or another regulatory body potentially have a bearing on the business.

We shall continue with the SWOT analysis in the next article.

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Mar 25, 2019 03:25 PM