Indraprastha Gas Burns Bright with High Demand
Ban on use of pet coke, fuel oil in Delhi, introduction of CNG-run two-wheelers to drive growth
ET Intelligence Group: The stock of Indraprastha Gas (IGL), a natural gas distributor to the National Capital Region, has nearly doubled in one year following better volume growth in the past three quarters after stagnation in the last two fiscals.
Regulatory proposals such as a ban on use of pet coke and fuel oil in Delhi, implementation of graded pollution response plan and introduction of CNG-run two-wheelers are expected to keep the gas volume growth high. These factors are expected to help the stock retain the current rich valuation. IGL’s gas volume grew 13.4% between April and December 2016 compared with measly 3% annualised growth between FY14 and FY16.
The Supreme Court’s directive to ban the use of pet coke and fuel oil by industries in Delhi region will help in improving the industrial gas volume, which currently accounts for nearly 10% of the total volume. In the December quarter, industrial volume grew by 16% compared with just 1% in the first half of FY17.
The piped natural gas (PNG) segment accounts for nearly a quarter of the total volume of the company; balance is contributed by the vol- umes of Compressed Natural Gas (CNG). Industrial volume is a subsegment of PNG.
Analysts expect volume growth of 11% and 8% in FY18 and FY19, respectively. This may result in 18% earnings growth in each of the two fiscal years.
Other factors that will propel the gas usage are implementation of graded pollution response in Delhi, incremental gas demand from new cities, which it won through bidding, CNG-run two-wheelers and gas generators. Also, imposition of income limit for LPG subsidies will push high income users towards CNG.
Investors will also be curious to see whether IGL’s management would prefer to match its dividend payout — currently at 21% of net profit — to 50% for its Mumbaibased peer, Mahanagar Gas (MGL). If that happens, it will be another trigger for the stock.
At Wednesday’s closing price of ₹ 1,051.2, the company’s stock was traded at 19.8 times its FY18 projected earnings compared with 15 times a year ago. The current valuation is nearly 43% premium to its five-year average multiple.