X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
IGL v/s Gujarat Gas: The better bet - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Dec 17, 2011

    IGL v/s Gujarat Gas: The better bet

    City gas distribution (CGD) companies have enjoyed enormous investor confidence in the last few years, consistently beating the Sensex (Indraprastha Gas and Gujarat Gas have offered average annual growth rate (CAGR) of 26% and 28% respectively w.r.t to the markets) in the last four years. The sector seems set to benefit from relatively under penetrated markets (gas consumption accounts for just 9% of Indian energy matrix versus 23% globally). The city gas distribution story has many facets- regulations , infrastructural aspects, gas supplies, pricing and the business economies. The country is perennially short of energy supplies in comparison to its needs. With 70% dependence on substitutes like oil imports and inadequate coal supplies, the natural gas seems to be the answer to India's energy woes. This makes the city gas distribution story look promising. The companies that are playing the key roles here are the likes of Indraprastha Gas (IGL), Gujarat Gas (GGAS), Mahanagar Gas and Gujarat State Petroleum Corporation Gas (GSPC Gas) that control 84% of the CGD market volumes. These are the companies that procure gas from suppliers like Gas Authority Of India Ltd. (GAIL), Reliance Industries Limited (RIL) and transport it through their pipeline network to the end users - the industrial and retail users. Among the four key players, we will compare GGAS and IGL - the two players that have lost 23% and 16% on the bourses since their September 2011 peak.

    Let us start with the basics of the two companies

    The 'Promoter's premium'

    IGL's promoters are Bharat Petroleum Corporation Ltd. (BPCL) and GAIL, each having 22.5% stake in the company. Having backing of strong players like these makes the availability of imported gas more secure, without compromising its access to domestic gas supplies at subsidized prices. Gujarat Gas, which has in the past enjoyed 65% promoter stake of BG, however, seems to be losing in this regard with the recent announcement of stake sale by BG. While GGAS has more than 65% of gas sourcing already tied up by way of long term supplies (2018), the potential new supplies and even the bargaining power while making spot purchases is something we expect to suffer as a result of this event. The GGAS stock took a hit of 6% immediately after the announcement. However, with lot of potential suitors keen to own BG's share, the company may face aggressive bidding, thus firming up the stock price.

    The 'Operational' factor

    Both IGL and Gujarat Gas are leading players in City gas distribution segment. However, there is a stark difference in the category of clients they serve. While Gujarat Gas predominantly serves regions in Gujarat, IGL operates in NCR. Around 80% of Gujarat Gas' client base comprises of industrial customers and 10% comprises of Auto gas, unlike IGL which has key focus on supplying CNG for public transportation (80% of its business) and 10% to the industrial customers.

    This makes a difference when it comes to the wiggle room available to hike prices (which in turn is a function of price of substitute fuels). For IGL, diesel and petrol are the key substitutes (of auto gas) that are approximately 52% and 23% costlier than CNG. For Gujarat Gas customers which are mainly industrial, the key substitutes are fuels like naphtha that are around 30% costlier than natural gas.

    More on pricing...

    IGL has 75% - 80% sourcing from domestic gas while Gujarat Gas' gas supplies are reliant on imported gas to the extent of 30%-35%. This makes Gujarat Gas less attractive in terms of margins. This is because there is a huge pricing differential between the domestic and imported gas. While the pricing of domestic gas varies between US$ 4.2 to US$ 7 .2 per MMBTU, the imported gas costs between US$ 10 to upto US$ 18 per MMBTU, depending upon whether they are procured under long term contracts or have been sourced on a spot basis. While both the companies have consistently increased gas prices, it will be a little harder for Gujarat Gas to continue the same in the future without impacting the volumes of gas sold. It is important to note here that Industrial segment is the most lucrative segment for any CGD company. However, the advantage for GGas is limited going forward since the regions in which it operates remain well supplied thus limiting the potential for price hikes. Gujarat Gas has already faced trouble in this regard as the textile industry and CNG based autos in the regions of Gujarat went for an indefinite strike in wake of price hikes in the current year.

    While IGL has increased its prices by 50% in last two years (latest hike in October), Gujarat Gas has done the same by 40%.

    To summarize, both the companies enjoy being the market leaders in their own regions. However, with the shortage of domestic gas supplies, the future performance will depend on how well they are able to maintain volumes without sacrificing margins - both on account of increasing share of the costlier imported gas and ability of the companies to pass price increases to end users.

    In the next article, we will focus on the financial aspects of both the companies.

     

     

    Equitymaster requests your view! Post a comment on "IGL v/s Gujarat Gas: The better bet". Click here!

    2 Responses to "IGL v/s Gujarat Gas: The better bet"

    dpm

    Dec 21, 2011

    Still awaiting the financial details and stock price conclusions.

    Like 

    Ranjit Manley

    Dec 17, 2011

    good stuff . clear concise and listing the pros and cons of two great companies .

    Like 
      
    Equitymaster requests your view! Post a comment on "IGL v/s Gujarat Gas: The better bet". Click here!
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working (Vivek Kaul's Diary)

    Aug 21, 2017

    Most Indians who cannot find jobs, look at becoming self-employed.

    The Key Factor Pushing Gold Up These Days (Outside View)

    Aug 21, 2017

    PersonalFN explains the chief factor pushing gold prices up of late.

    How Unique Are the Companies You Invest In? (The 5 Minute Wrapup)

    Aug 21, 2017

    One of the hallmarks of successful investing is to look out for companies that have a unique and enduring moat.

    You've Heard of Timeless Books... Ever Heard of Timeless Stocks? (The 5 Minute Wrapup)

    Aug 19, 2017

    Ever heard of Lindy Effect? Find out how you can use it to pick timeless stocks.

    More Views on News

    Most Popular

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    The Most Profitable Investment in the History of the World(Vivek Kaul's Diary)

    Aug 8, 2017

    'Yes, it looks like a bubble. And, yes, it's like buying a lottery ticket. But there's something happening that has never happened before. It's an evolutionary leap in money itself.'

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    Bitcoin Continues Stellar Rise(Chart Of The Day)

    Aug 10, 2017

    Bitcoin hits an all-time high, is there more upside left?

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Aug 21, 2017 (Close)

    MARKET STATS