Riding on CNG demand

Rising demand for cleaner and cost efficient fuels, and the forthcoming Commonwealth Games are positive triggers for Indraprastha Gas.

The recent decision of the Delhi High Court giving reprieve to city gas distributor, Indraprastha Gas, to operate in neighbouring Ghaziabad has brought the company into the limelight as the sector’s regulator had earlier rejected its licence application.

This move comes at a time when demand for CNG is increasing in the NCR regions (home to the largest number of four wheelers and expanding population), which could get a further boost during the Commonwealth Games.

While CNG is considered to be environment friendly as compared to other fuels, consumers are increasingly turning towards it as it is cost efficient too.

The increasing conversion by newer segments (cars, LCV, buses) and geographical expansion into neighbouring areas would churn robust revenues for the company, going ahead. To meet the increased demand, IGL has already entered into gas sourcing arrangements with RIL and GAIL for additional capacities.

Robust demand
The company exclusively supplies CNG (compressed natural gas) in the national capital region (NCR). While as many as 12,000 public transport vehicles are already sourcing CNG from IGL, the company is also gaining from increasing conversion of private vehicles (average of 4000-5,000 vehicles per month) into CNG in the recent past.

As per estimates, the operating cost of CNG vehicles is 66 per cent cheaper than petrol and 36 per cent lower than diesel vehicles.

Besides CNG, the company also supplies PNG (piped natural gas) to 1.38 lakh households. PNG occupies around 7-8 per cent of the revenue pie. In terms of volumes, the proportion of PNG to total volume is increasing, which along with relatively better realisations makes piped gas a profitable proposition for the company.

In fact, PNG sales grew by 27 per cent over the last one year compared to CNG sales of 20 per cent. With estimated LPG (liquefied petroleum gas) connections of around 40 lakh in Delhi and cost advantage that PNG enjoys over LPG has been driving up the volumes for the company. For 2009-10, the company plans to add a further 50,000 connections.

Additional triggers
The cost advantages of CNG over petrol and diesel have accelerated the conversions of private vehicles to CNG. The management expects the conversion rate to remain at around 5,000 vehicles per month, which would help sustain CNG demand going ahead.

In October 2010, New Delhi would play host to Commonwealth Games. In this context, the government will be introducing around 2,000 high capacity buses and 20,000 radio taxis to strengthen the transport infrastructure. As a result, CNG volumes are expected to increase by about 25 per cent in time for the start of the games, compared to 19-20 per cent as of now.

In a move that would help the company consolidate its position in NCR, recently, the Delhi High Court has allowed the company to sell CNG in Ghaziabad (currently two gas stations) apart from the existing network in the Noida region. Further, it is seeking permission to enter into newer regions like Gurgaon and Faridabad. However, the matter is pending with the Court.

To meet the growing demand from these regions including Delhi, the company is planning to set up additional 30 gas stations in 2010; it had added 18 in 2009 taking the tally to over 180. The company is also enhancing its compression capacity from the present 26.76 lakh kg per day to around 30-35 lakh kg per day by Commonwealth Games, which should supplement its CNG business.

Margin drop
Due to the surge in demand for CNG, the company overdrew gas (above the allocated quantity of 2 mmscmd for Delhi) in the last few quarters. This had led to higher over-drawal costs and thus, increased costs. Operating margins thus, slipped to 31 per cent in the third quarter of 2008-09, the lowest in the last thirteen quarters, as compared to 40 per cent it enjoyed between 2007 and early 2009. Positively, the margins stood higher at 36 per cent in June 2009 quarter as IGL had hiked prices, which would cushion margins going ahead.

For augmenting supplies, IGL has recently tied up for KG gas and engaged with BPCL and GAIL. While the commencement of KG gas supply and the expected APM gas price hike would increase the blended gas costs, the company believes that it could offset the cost increase by containing expenses as well as increasing gas prices. Hence, expect the margins to be around 35 per cent in the next two years.

Conclusion
IGL has marketing exclusivity in the NCR only until December 2011. This could sound alarm bells but its first mover advantage, an extensive distribution network and existing gas sourcing agreements would make it difficult for competitors to make a dent into IGL’s prospects in any significant manner. The demand for CNG from private vehicles could get a boost with car manufacturers introducing models with factory fitted CNG kits.

Meanwhile, the company has earmarked around Rs 500 crore for setting up CNG stations, new PNG connections and expansion into regions like Noida and Ghaziabad. As a debt free company generating annual cash flows of Rs 200 crore from operations would help fund its growth plans adequately.

The robust demand and the increased capital outlay would help the company deliver an average growth of 20 per cent in the next two years. At Rs 164, the stock is trading at 9 times its 2010-11 estimated EPS and can deliver 15 per cent returns in a year’s time.