IGL: Riding high on the green wave

Company a key beneficiary of measures to boost demand of environment-friendly fuels

After two years of subdued volume growth, Indraprastha Gas (IGL), the sole city gas (piped and compressed natural gas or CNG) distributor in Delhi and the national capital region (NCR), could see improvement in this metric, thanks to the recent measures announced by the Supreme Court to make Delhi 'greener'. IGL's CNG volumes grew only four per cent in FY15 and similar growth is expected in FY16. Implementation of the regulatory measures to curtail use of diesel such as mandatory conversion of taxis and addition of new CNG buses for public transport, will be a key positive.

The temporary ban on registration of diesel-run sports utility vehicles and cars with engines above 2,000 cc in Delhi and NCR will not have significant impact on IGL's business, CNG vehicles typically have engines lower than 2,000 cc and diesel cars cannot be converted to CNG. But, analysts at Edelweiss believe the mandatory switch of cabs in the city from March will add four per cent to IGL's FY17 volume estimate.

A key reason for the company's subdued CNG volume growth was delay in addition of new buses by the Delhi government. The government now plans to float a tender for 1,500 new CNG buses by September 2016 and hire another 4,000-6,000 private buses immediately. As buses form about a fourth of IGL's volumes, analysts estimate an addition of 100 buses would boost IGL's annual CNG volume growth by 30 basis points. IIFL analyst Harshvardhan Dole believes addition of 4,000 buses will push IGL's annual CNG volume growth to 12-14 per cent.

There is a flip side as well- the implementation of running odd and even numbered vehicles on alternate days in Delhi will reduce CNG demand. However, most analysts expect the final policy to exempt vehicles run on CNG, which is a greener fuel playing a crucial part in reducing vehicular pollution in the city.

These estimates are subject to change as the final policy will be announced at end of this month.

The scrip jumped seven per cent on Wednesday, to close at Rs 500 a share. It now trades at 13 times the FY17 estimated earnings, higher than its historical average one-year forward PE of 11 times. Given the long-term gains arising from enhanced focus on environment-friendly measures, investors could look at accumulating it on corrections.