IGL’s pricing power, expanding reach to keep investors glued

ET Intelligence Group: Improving volume visibility beyond its traditional markets and strong pricing power should continue to draw investors to India’s leading city gas company, Indraprastha Gas.

To be sure, the stock is relatively expensive. It is trading at 23 times its next twelve-month earnings, a premium of 31 per cent over its five-year average.

But the volumes increased 13 per cent to 5.9 mmscmd in the September quarter, the highest pace of growth in the last four quarters, as demand from industrial and commercial clients rose by a fourth. Industrial and commercial supplies account for about 11 per cent of the total volumes, followed by 25 per cent for piped natural gas (PNG), and the remaining from compressed natural gas (CNG) sales to vehicles.

The Street was expecting volume growth of around 10 per cent in the second quarter. IGL took out-of-turn price increases in September by 4 per cent to offset the increased cost of gas brought about by a falling local currency. Gas prices increased 10 per cent due to the increase in domestic natural gas prices and the rupee depreciation.

Average gas prices increased to Rs 15.5 per standard cubic metre (scm) in the September quarter, up 26 per cent year-onyear. The company was able to pass on higher prices to consumers as alternative fuels are 45-60 per cent more expensive than CNG. The significant price difference with alternative liquid fuels has allowed the company to maintain its pricing power and take out-of-turn price increases.

By acquiring Haryana City gas, Indraprastha should be able to expand the catchment size in the National Capital Region. The size of the Gurgaon CNG market is around 1.2-1.5 million metric standard cubic metre per day (mmscmd). Therefore, the buyout can add 10 per cent to Indraprastha’s volumes in the next few years.

Furthermore, the company got city gas licences for Rewari and Karnal in Haryana. New markets, increasing curbs on diesel vehicles, ban on the use of pet coke, and focus on domestic PNG connections will help the company sustain 11-12 per cent volume growth.

The recent decision of the Uttar Pradesh government to cut taxes on natural gas to 10 per cent could improve volume growth even further.

The difference between the price of CNG in Delhi and the neighbouring areas in Uttar Pradesh was around Rs 5 per scm, mainly on account of higher tax rates.