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The prospects of Delhi-based city gas distributor Indraprastha Gas (IGL), which recently bought a 50 per cent stake in Pune's leading city gas distributor, Maharashtra Natural Gas (MNG) for Rs 190 crore, appear bright. This acquisition follows a 50 per cent stake buy in Central UP Gas (CUG) last June for Rs 70 crore. These two buyouts also address a key concern of IGL - revenue concentration in the national capital region. This inorganic growth strategy has also gone down well with analysts.
"Being nascent entities, both MNG and CUG provide terrific growth opportunity for IGL. We estimate the two entities together to contribute an EPS (earnings per share) of Rs 6 to IGL's FY17 consolidated earnings, which implies a valuation upside of Rs 60 per share for IGL," says Amit Rustagi of Antique Stock Broking. He has a target price of Rs 450 on IGL. Notably, these companies have strong balance sheets and can fund the capex internally, say analysts. IGL continues to explore similar inorganic opportunities in other cities, which could provide fresh triggers.
After the ministry of petroleum and natural gas allocated 100 per cent domestic gas for city gas distribution operations (versus 80 per cent earlier) in February, compressed natural gas (CNG) and domestic piped natural gas prices corrected by 20-30 per cent. This has widened the price differential between CNG and other auto fuels such as petrol and diesel. CNG's attractiveness versus other auto fuels has increased significantly and this could trigger more car owners converting to CNG, thereby fuelling demand.
IGL's volume growth is pegged at a healthy 20-30 per cent over the next two or three years. Delhi Transport Corporation (DTC) is slated to add 1,400 CNG buses, which will provide an impetus to IGL's CNG business (75 per cent of its total volumes). Notably, IGL has signed a 10-year agreement with DTC to supply CNG till December 2020, which provides strong visibility.
While domestic gas prices will be raised soon, analysts are not worried. Satish Mishra of HDFC Securities says even if the domestic gas price is raised to $7.2 per million British thermal units (mBtu) from $4.2 per mBtu, CNG prices will stay at Rs 48 a kg, about 44 per cent and 28 per cent lower than petrol and diesel prices, respectively. At these levels, it will still be lower than the Rs 50-plus peak during December 2013.
On the flip side, any adverse decision in the case against Petroleum and Natural Gas Regulatory Board (PNGRB) will hit IGL's prospects. PNGRB is looking to cap the gas marketing margin, the final decision on which is subject to the Supreme Court's verdict. Most analysts, however, believe IGL has a strong case. According to IGL management, PNGRB has accepted it does not have the right to regulate the marketing margins (final selling price). So, the possibility of retrospective cuts or adjustments in IGL's selling prices is minimal.
Not surprisingly, most analysts are positive on IGL. The stock, which has gained 13 per cent in less than a month, trades at 11.6 times its FY16 estimated earnings. Investors with a long-term perspective could consider it on correction.
