Buy Indraprastha Gas CMP Rs 141 Target Rs 165-180

Indraprastha Gas’ future growth prospects look bright on account of the sustained growth in CNG vehicles in the Delhi NCR driven by increased conversion of private four-wheelers and impressive growth in customers for piped natural gas (PNG). The potential for converting LCVs into using CNG is also another sweetener.

Company Background

Indraprastha Gas Ltd (IGL) is a joint venture between GAIL, BPCL and the Delhi state government. The company was incorporated to implement a compressed natural gas (CNG) expansion programme, and project for piped natural gas (PNG) for various applications in the domestic and commercial sector.

The company started operations in February 1999 by taking over the Delhi City Gas Distribution project from GAIL. The project took off with setting up of 9 CNG stations catering to approximately 1,500 cars. On the PNG front, the Delhi City Gas Distribution project provides natural gas through piped network to the national capital.

Investment Rationale

Court ruling to boost clean fuels
We believe the recent Supreme Court directive to the Haryana and Uttar Pradesh governments to speed up the setting up of CNG stations in selected cities is positive for IGL, which is on expansion mode. The company is likely to grow at over 10% per annum. It is also planning an aggressive marketing strategy for PNG by targeting LPG customers and commercial establishments.

Conversion to CNG likely in near-term
An ordinance is to be passed, subsequent to which all new light commercial vehicles (LCVs) will have to be compulsorily run on CNG. Further, existing vehicles that are over 8 years will also have to be converted to CNG. This move would boost demand for CNG significantly. Moreover, the prospects for private petrol vehicle converting to CNG are robust based on favourable economics. This argument will be further strengthened by the hardening crude prices, which is currently at over US$90 a barrel.

Business with significant entry barriers
IGL is the sole distributor of CNG and PNG in Delhi. To start a CNG and PNG business, a new entrant requires large investment in gas distribution network, several government approvals, gas allocation and land. Putting all these things at one place erects a very high entry barrier. With the entry barrier is significantly high in CNG and PNG business, IGL is likely to continue to enjoy the monopolistic status for the years to come.

Commonwealth games to boost demand
In order to prepare for the 2010 Commonwealth games, the Delhi government proposes to introduce new CNG buses in the private sector. IGL will be the major beneficiary of this move. The company is investing Rs 300 crore over FY08E-10E to expand its city gas and CNG infrastructure in Delhi. The expansion will increase the number of CNG outlets from the current 156 to 171 by FY08 end, including three new outlets in Greater Noida.

Geographic expansion
The Haryana and Uttar Pradesh governments have approved IGL’s plan to set up PNG and CNG distribution networks in 2006. However, the progress on these projects has not been fast, though it is picking up of late. The regions include Faridabad, Greater Noida and Ghaziabad in Uttar Pradesh, and Sonepat and Panipat in Haryana. Initially, the company plans to start up 3 of the 5 proposed CNG outlets by the end of 2007 at an investment of Rs 12 crore to Rs 20 crore. Based on this, and modest demand for piped gas from commercial and domestic segments, the company expects revenues from Greater Noida to start accruing from FY09.