By Roma Agarwal, Kunal Dalal (Nirmal Bang)

Indraprastha Gas Ltd. (IGL) was incorporated in 1998 as a JV between GAIL, BPCL and the Govt. of National Capital Territory (NCT) of Delhi to implement the Compressed Natural Gas (CNG) expansion programme and the Piped Natural Gas (PNG) project for varied applications in the domestic and commercial sector. IGL has well laid out its city gas distribution infrastructure in Delhi, Noida and Greater Noida which consists of over 2000 kms of pipeline network.

Quarterly Results in line with our Expectations

- IGL declared its Q2FY10 results which were in line with our expectations. The company reported revenues of Rs. 307.3 crores as against Rs. 243.1 crores in Q2FY09 i.e. a 26.4% rise on a YoY basis and Rs. 261.5 crores in Q1FY10, a 17.5% rise on a QoQ basis. This was on account of volume growth in both the segments; viz. CNG recorded sales of Rs 275.09 crores a growth of 25% on a YoY basis and PNG sales registering a growth of 37% on a YoY basis at Rs 32.17 crores.

- Operating profits for Q2FY10 were Rs. 104.9 crores from Rs. 92.0 crores in Q2FY09 up by 14.1% on a YoY basis and Rs. 91.3 crores in Q1FY10 a rise of 15.0% on a QoQ basis.

- PAT was up by 13.1% at Rs. 56.7 crores from Rs. 50.2 crores on a YoY basis and Rs. 48.3 crores in Q1FY10, up by 17.5% on a QoQ basis.

- The operating margins of the company stood at 38.3% as against 42.4% in Q2FY09 and 39% in Q1FY10. Net margins stood at 20.7% compared to 23.2% in Q2FY09 and 20.6% in Q1FY10. The margins were mainly affected as GAIL supplies 2 MMSCMD of Gas at a discounted rate of Rs. 5.40 per Standard Cubic Meter (SCM) to IGL, where as additional 0.30 MMSCMD was sourced from the Reliance KG Basin field at a price of Rs. 12.15 per SCM.

- In Q2FY10, IGL has signed a Gas Sale and Purchase Agreement with RIL for the supply of 0.308 mmscmd gas. The price of this gas to IGL will be around Rs. 12.15 per SCM.

Valuation & Recommendation

At the current market price of Rs 160 per share, IGL is currently trading at a PE of 8.2x FY11E and 6.7x FY12E earnings, which looks quite attractive. We expect the company to earn an ROCE of 43.5% in FY11E and 44.3% in FY012E.

The company’s foray in to the newer markets like Faridabad & Gurgoan, coupled with assured supply of gas from Reliance provides better earnings visibility for next two years. Hence we put a HOLD rating on the stock with a revised price target of Rs. 203 (Rs.179 previously) per share based on a 10% and 7% upgrade in the EPS estimates for FY10 and FY11 respectively.

Future plans

IGL has embarked on a massive expansion programme. There has been a heavy increase in demand due to all round conversion of vehicles to CNG and increased acceptability of PNG as a domestic fuel. In addition, there is a challenging task lying ahead of IGL for creating CNG infrastructure not only in NCT but all over NCR due to forthcoming world event – Commonwealth Games in 2010. The company has planned a capex of Rs. 1600 crores for expansion of infrastructure in the next three to five years time.

IGL has already initiated the process of setting up new CNG stations. Project work has already commenced at 18 new sites and allotment of seven more sites is expected shortly. The company plans to add 50,000 new PNG connections in FY10. IGL has tied up its future gas requirements by signing Gas Sale Agreements with GAIL, BPCL and RIL.

Revenue Mix

The company generated 92% of its revenues from sale of CNG, 5% from large commercials and 3% from household. The revenue mix of the company remained unchanged on a QoQ basis.