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IGL: Huge opportunity to capture- Part II - Views on News from Equitymaster
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IGL: Huge opportunity to capture- Part II
Dec 6, 2006

In the previous article ( Part I ), we analysed the macro-economic environment under which IGL operates. Taking our analysis to the next step, here we analyse the opportunity on offer to the company in the CNG segment and the demand driver of the same. Growth opportunities in the CNG segment

Historically, the volumes growth registered by the company was primarily a factor of regulatory moves. However, the dynamics are changing fast with voluntary conversion (from private cars) expected to propel volumes going forward.

Number of vehicles running on CNG…
CNG vehicles FY00 FY01 FY02 FY03 FY04 FY05 FY06
Buses 18 400 4,231 8,874 10,199 10,480 10,941
Auto - 14,000 35,978 49,810 59,027 62,048 65,335
RTV - 250 2,165 4,934 5,267 5,469 5,634
Others 5,182 11,700 15,166 15,505 16,098 16,249 24,573
Total 5,200 26,350 57,540 79,123 90,591 94,246 106,483

Number of CNG vehicles in the NCT region has grown at a CAGR of 65% over the past 6 years. Growth upto FY04 was primarily driven by the increase in the buses and autos, which are bound by the law to use CNG. However, if we see the growth in the other segment (majorly cars) in FY06, the increase in the voluntary conversion due to economic viability of CNG becomes visible.

CNG is cheaper compared to other fuels due to lower taxes in the final price that the consumer pays. Till recently, the conversion in the private cars were restricted due to lower availability of the conversion kits, lower number of outlets leading to long queues for filling CNG. There were also misconceptions in users mind regarding safety related aspect of CNG. However, things seem to be changing now with increased availability of kits, increase in the number of outlets and compression capacity (leading to faster filling). Also, Original equipment manufactures (OEMs) are also planning to sell cars, which have factory fitted CNG kits and this is going to increase the vehicle penetration further.

How big is the potential?

In the NCT and NCR regions combined, there are approximately 1.5 million cars. Assuming 50% of these cars are in the NCT regions. The target markets stands at .75 m cars. Management has stated that only petrol cars can be expected to convert to CNG. Thus assuming that 75-80% of the total cars to be petrol cars, the target market stands at 0.6 m cars. Assuming 90% of these cars to be small and mid size cars, the effective target market stands at .54 m cars. We believe the base case consumption is 2.5 kgs per day per car. Thus there exists a potential to increase the sales of CNG by more than 100% going forward.

Growth in CNG stations and CNG sales over the past few years…
Particulars Unit FY00 FY01 FY02 FY03 FY04 FY05 FY06
CNG stations Numbers 30 68 94 107 120 134 146
Compression capacity (m kgs/day) 0.02 0.19 0.58 1.20 1.61 1.69 1.91
CNG Sales (m kgs/day) 0.008 0.05 0.27 0.57 0.77 0.82 0.87
Compressor utilisation   40.0% 25.0% 45.9% 47.2% 47.9% 48.3% 45.8%

What is the benefit of conversion for the private car owners?

Price of petrol is currently Rs 51 per litre, while the price of CNG is Rs 19 per kg in the Delhi. As far as mileage is concerned, it is 15 kms per litre of petrol, while the same for the CNG is 18 kms. In effect, running cost per km for petrol works out to be Rs 3.4 per km, while the same for CNG works out to be Rs 1.06 per km, making CNG cheaper to the extent of 69% than petrol.

Other factor to be analysed by the private owners before conversion to CNG is the cost of the kit and pay back period of the conversion. The table given below highlights the same.

Analysis of pay back period of kit…
Assumed daily travel 50
Yearly travel ( assuming 280 days of travel) 14,000
saving per km ( in Rs) 2.3
Total savings in a year 32,200
Cost of kit 40,000
Payback period ( in months) 15

Another growth driver going forward is the recent notification regarding mandatory usage of CNG in the new LCVs registered in the region since July 2006 onwards. This will increase the number of LCV conversion by 4,000 units a year, which inturn will further boost volumes.

Thus, we continue to have positive stand on the growth prospects of the company going forward. In the next article, we will discuss the growth potential in the PNG (piped natural gas) segment and financial performance of the company.

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