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

The Economic Times - - Smart -

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.

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