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Indraprastha gas: Huge opportunity to capture- Part I - Views on News from Equitymaster

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  • Dec 4, 2006 - Indraprastha gas: Huge opportunity to capture- Part I

Indraprastha gas: Huge opportunity to capture- Part I

Dec 4, 2006

Post the market crash in May this year, most of the stocks have gone back to the levels seen before the market crash. However, IGL has been a laggard and has under performed the market since then. Having said that, we continue to believe in the company’s inherent strength and growth potential. In this write-up, we analyse the operating environment of the company.

About the company
IGL is a joint venture between GAIL and BPCL, incorporated in order to market CNG (compressed natural gas - accounting for 93% of revenues) and PNG (piped natural gas) in the NCR (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.

Analysis of the operating environment of the company

Threat of entrants
CNG and PNG offer immense growth potential in the NCR and NCT region. The benefits of the growth will solely be reflected in IGL’s profitability going forward. This is due to the fact that the threat of entrants is on the low for the company. This can be attributed to following points:

  • Superior location of outlets.

  • Tie-up with DTC.

  • Tie-ups with Oil marketing companies for sale of CNG.

  • First mover’s advantage.

  • Benefit of GAIL as a strategic partner.

In marketing of the retail fuels the position of the outlets is an important determinant of thruput per outlet. IGL has its outlets in premium locations; it also has a tie-up with oil marketing companies to sell CNG via their outlets. For any new player in the segment, establishing outlet at premium locations is difficult task due to unavailability of land and huge cost involved in the same. The recent proposal of marketing exclusivity will also ward off potential entrants in the same lines of business.

Threat of substitutes
Substitutes for CNG are petrol, diesel and LPG. However, the threat from the alternative fuels is relatively lower. DTC and autos are one of the biggest consumers of CNG. In FY06, there were 106,483 vehicles fueled by CNG, of which 72% were autos and buses. It is mandatory for the buses and autos to run on CNG. Thus, the threat of substitutes gets substantially lower. On the voluntary CNG usage front, favourable pricing reduces the threat of substitutes. CNG is cheaper to the extent of 69% vis-à-vis petrol on the operational basis, while it is cheaper to the extent of 40% compared to that of diesel. CNG is also cheaper to the extent of 30% compared to auto LPG.

In the PNG segment, domestic customers enjoy the benefit of hassle free and uninterrupted services of the cooking fuel. Also, PNG is priced at a discount to the domestic LPG. In the commercial segment too the pricing is attractive vis-à-vis alternative fuels.

Bargaining power of customers
In the CNG segment, bargaining power of customers is lower. Customers are fragmented and captive, thus the bargaining power gets reduced to an extent. Also, the natural bargain in the form of attractive pricing compared to alternative fuels makes bargaining power lower for the customers. In the PNG segment, bargaining power is moderate. The government subsidizes domestic LPG. With domestic PNG being priced in line with domestic LPG, the bargaining power of customers increases to an extent.

Bargaining power of suppliers
IGL has a sourcing agreement in place with GAIL to the extent of 2mmscmd (million standard cubic meters per day). The pricing is done at the APM (administered pricing mechanism) prices, thus the question of bargaining power from the suppliers point of view does not exist. The assured supply with priority basis is till 2010, thus mitigating the sourcing risk till then, given that the sales is lower than the contracted quantity.

Thus, in a nutshell, the company operates in a monopolistic market where the bargaining power of customers as well as suppliers is low. Also, there exists no threat of substitutes and threat of new entrants.

To conclude…
Synergies from the parent companies, positive macro economic outlook, stability in operating performance, stable annuity business and low political interference in addition to the huge untapped market in the CNG and PNG segment will augur well for IGL going forward. In the next write-up, we will analyse the huge potential in the CNG and PNG segment. We will also analyse the business dynamics and the financial performance of the company.

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