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IGL: Huge opportunity to capture- Part III
Dec 18, 2006

In the previous articles, we analysed the macro-economic environment under which IGL operates and the growth potential in the CNG segment, the biggest revenue stream of IGL. In this article, we analyse the growth potential in the PNG (piped natural gas) business segment of the company. Growth opportunities in the PNG segment

PNG business segment contributes just 7% to the IGL net sales revenues. Lower contribution is however due to greater focus on development of the CNG infrastructure in order to honour the judicial verdict. However, now with most of its CNG infrastructure in place, the company has turned its attention towards the fast growing PNG segment. During the past 5 years, the number of PNG users has increased at a CAGR of 75% on the back of a lower base effect. However, the growth potential in the segment is still immense and there exists a huge target market.

Number of PNG users…
PNG users FY01 FY02 FY03 FY04 FY05 FY06
Domestic 2,821 4,111 7,719 15,245 25,103 46,727
Small commercial 15 37 72 100 140 215
Large commercial 5 5 11 18 34 47
Total 2,841 4,153 7,802 15,363 25,277 46,989

PNG users are classified under 3 segments; these are domestic segment, small commercial segment and large commercial segment. While domestic segment is the household segment, commercial segment includes hotels and restaurants and industrial estates.

Why PNG?

PNG has several distinct advantages to its credit, which are as follows:

  • Uninterrupted supply: PNG offers the convenience of ensuring continuous and adequate supply of PNG at all times, without any problems of storing gas in cylinders.

  • Convenience: PNG eliminates the tedious routine of checking LPG refill cylinder for any suspected leakage, or it being underweight, at the time of delivery. Moreover, the user is spared the inconvenience of connecting and disconnecting the LPG cylinder when out of gas. Apart from this, the hassle involved with getting the cylinder refilled is not associated with PNG.

  • Safety: Natural gas is lighter than air. Therefore, in case of a leak, it just rises and disperses into thin air given adequate ventilation. But LPG being heavier will settle at the bottom near the floor surface. On leakage, LPG expands 250 times, which is not the case with PNG. Thus, there are inherent advantages in terms of safety for PNG.

  • A versatile fuel: Natural gas has multiple applications apart from being used as domestic cooking fuel; PNG can also be used for water heating, space heating, air conditioning etc.

  • Benefits to commercial consumers: PNG does not require any storage tank or storage space since it is supplied through pipelines. The other functions that accompany storing alternative fuels – monitoring stock levels, checking the quality and quantity of fuels received – have also been rendered unnecessary.

Apart from all these benefits, PNG is competitively priced in relation to the alternative fuels for the various consumer segments. PNG is priced at 10% discount to domestic LPG.

How big is the potential?

There are more than 3.5 m domestic LPG connections in the NCT region. However, due to the inherent problems with filling of the cylinders, we believe there exist multiple connections with a single user. Assuming on an average, there exists 1.5 connections per user, the target consumer segments stands more than 2.3 m. When one compares this with the current number of domestic PNG users (approx. 57,000), the growth potential becomes apparent. Thus, given the advantages associated with the PNG along with enhanced focus on the segment, the penetration level is expected to grow at a fair clip. Expansion in the adjoining regions (with equivalent user base) is also expected to improve volumes and profitability going forward.

Also, analyzing the sales volumes and the customer base of its domestic peers, IGL seems to be well placed on a higher growth trajectory. Mahanagar Gas limited (MGL) has 271,355 customers, while for Gujarat gas, the customer roster has more than 1,50,000 names, thus highlighting the void between IGL and its peers.

Growth in the CNG and PNG business segments…
Particulars FY00 FY01 FY02 FY03 FY04 FY05 FY06 CAGR
CNG volumes sales (mmscm) 3.76 21.75 121.81 266.41 367.3 387.05 417.3 119%
PNG volumes sales (mmscm) 3.25 5.35 5.93 7.17 10.88 16.14 26.27 42%
Total sales volumes (mmscm) 7.01 27.1 127.74 273.58 378.18 403.19 443.57 100%

Conclusion

The management is trying to leverage the existing CNG network of IGL for expanding the PNG business of the company, which is also in harmony to its focus on improving the asset turnover ratio. The company has plans to tap large customer bases (residential apartments, industrial estate). These measures are likely to improve penetration at a marginal capital outlay.

How does the growth potential in the CNG and PNG segment gets reflected in the financials of the company? What is the growth potential of the company? We will peep into these questions in the concluding part of the series, as we will present the financial snapshot of the company and our estimates regarding the future growth potential.

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