Indraprastha Gas adds another feather in its cap

Healthy prospects of core business to drive growth and stock

Indraprastha Gas (IGL) recently won a bid to develop the city gas distribution (CGD) network in Haryana's Rewari district and added another growth engine. The company's inorganic buyout of 50 per cent stake each in two CGDs - Maharashtra Natural Gas and Central UP Gas - enabled it to diversify into Pune and Kanpur/Bareilly, respectively. The Rewari win, coupled with these buyouts, will reduce IGL's dependence on NCR.

The Rewari CGD is likely to deliver high volumes for IGL due to a couple of reasons. One, National Highway 8 (NH8) passes through Rewari, which means the demand for auto CNG will be high. Second, it is also located in close proximity to the industrial hubs of Bawal and Dharuhera. Third, the district has up to 200,000 households, which can be brought into the piped natural gas (PNG) ambit going forward.

In this backdrop, IGL's earnings growth is likely to get a significant leg-up going forward.

Amit Rustagi, analyst at IDFC Securities, says, "We expect IGL's EPS compounded annual growth rate at 22 per cent in FY16-18 versus 10 per cent in FY11-16. The improvement should be led by gross spread expansion, higher volume growth and resultant Ebitda boost."

The strong prospects were reflected in the June 2016 quarter results as well. Though overall volume growth of 13 per cent was the highest over the past nine quarters at least, falling realisations led to a flattish growth in revenues which stood at Rs 897 crore (down 0.3 per cent year-on-year) and were in line with Bloomberg consensus estimate of Rs 894 crore.

Lower realisations were driven by a cut in prices in both compressed natural gas (CNG) and PNG segments. Thus, even after passing on some of the savings from lower gas prices, the company improved its Ebitda (earnings before interest, tax, depreciation and amortisation) margin by 623 basis points to 28.9 per cent.

Higher other income and lower tax rate further aided IGL's bottom line in the quarter. Its net profit grew 44.4 per cent to Rs 148 crore and was way ahead of the Bloomberg consensus estimate of Rs 118 crore. Notably, the increased regulatory push to cleaner fuels such as CNG in Delhi has boosted IGL's volumes in recent times and the trend is likely to continue going forward as well.

It is thus not surprising that the IGL scrip has outperformed the benchmark S&P BSE Sensex in the past year as well as the past one month. In fact, the stock made an all-time high of Rs 734 per share on Monday. Nevertheless, given the under-penetration of both CNG and PNG, the stock could witness further re-rating. Addition of new CNG buses and adoption of green fuels in other markets are other growth catalysts for IGL.