Indraprastha Gas Most Preferred Bet For Analysts But There’s A Risk

Indraprastha Gas Ltd. is the most-preferred bet for analysts among peers even as rising gas prices pose a risk of the fuel losing edge over costlier petrol and diesel.

The optimism stems from the New Delhi-based city gas distributor’s business model to ensure a steady supply of eco-friendly fuel amid stricter environmental norms in the National Capital Region, according to ICRA Ltd. and the company’s filings. Other contributing factors are the government’s support to the gas sector and pricing advantage against petrol and diesel.

A favourable gas demand outlook, sourcing of natural gas through its tie-up with GAIL (India) Ltd. and ability to hike prices to pass on the increased gas costs are other potential growth drivers for Indraprastha Gas.

Exclusivity Benefit

Indraprastha Gas supplies to transport, domestic, commercial and industrial consumers in the National Capital Territory of Delhi. That includes Noida, Greater Ghaziabad, Hapur, Gurugram, Meerut, Shamli, Muzaffarnagar, Karnal, Rewari, Kanpur, Hamirpur, Fatehpur, Kaithal, Ajmer, Pali and Rajsamand districts in the neighbouring states.

The company has 622 CNG stations, 17.63 lakh residential connections, and around 7,000 industrial or commercial customers as of September, according to its latest investor presentation.

Indraprastha Gas has infrastructure exclusivity up to December 2023 for its national capital operations. That restricts any new entity from replacing and upgrading the assets.

The company’s marketing exclusivity, that bars other firms from using its network on paying a tariff, however, has expired in December 2011. Still, “IGL will continue to enjoy a dominant market share because of its first-mover advantage and significant entry barriers for third-party marketers”, ICRA said in a report.

CNG Cushion

Indraprastha Gas’ sales volume mix, according to its investor presentation, is dominated by CNG, followed by commercial, industrial and residential segments.

HDFC Securities said in a Dec. 17 note that it prefers Indraprastha Gas citing the higher share of CNG (73%) in its portfolio than peers Mahanagar Gas (72%) and Gujarat Gas (17%). The demand for fuel is rising because of its price gap with petrol and diesel, and also because it’s cleaner.

The company's sales across fuels—CNG, PNG and LNG—recovered to pre-pandemic levels in the first half of the ongoing fiscal, and it targets higher volumes in the rest of the fiscal.

Expanding Network

The company expanded in Uttar Pradesh and Maharashtra in 2013 and 2014. Now it plans to expand its network further.

2013: Acquired 50% equity share capital of Central UP Gas Ltd. for Rs 68 crore. CUGL supplies piped gas in Kanpur and Bareilly, Unnao and Jhansi in Uttar Pradesh.
2014: Acquired 50% equity share capital of Maharashtra Natural Gas Ltd. for Rs 190 crore. MNGL is a supplier in Pune and nearby areas.

The company’s cumulative capex stood at Rs 7,940 crore as of September 2021, a twofold jump in the past five years, its investor presentation showed. Most of this has been spent on the expansion of PNG and CNG networks.

According to CARE Ratings and the company's annual report, a Rs 1,500-crore capex (meant for FY22) will be used for the development of CGD network in the newly awarded geographical areas (districts in Haryana, Uttar Pradesh and Rajasthan), expansion of CGD network in its already operational areas and setting up CNG stations.

Indraprastha Gas targets to commission around 125 CNG stations in FY22.

The company aims to provide long-distance connectivity and is exploring conversion of long-haul transport from diesel to CNG for various state transport undertakings and private transporters, according to its annual report.

The company also plans to set up 50 electric vehicle charging stations for two and three-wheelers at a capex of Rs 100 crore, Reliance Securities said in a note.

Indraprastha Gas has yet to respond to BloombergQuint’s emailed queries on EV plans, and long-distance connectivity.

Pricing Risk

Indraprastha Gas sources most of the fuel at India's administered pricing.

It gets gas on a preferential basis for its domestic segment at the government-notified price. But such allocation, according to HDFC Securities and Reliance Securities, stands reduced by 10-15% temporarily for all city gas distributors.

For other segments, the company buys short-term gas in the open market from Indian Oil Corp., Gujarat State Petroleum Corp. and Royal Dutch Shell Plc.

India increased administered prices, based on a basket of global rates with a lag, by 62% in October. Short-term spot LNG surged 186% in 2021 because of supply disruptions, low inventory, growing demand, and costlier crude.

HDFC Securities, Emkay Global and ICICI Direct expect the administered domestic gas price to increase further in the April 2022 revision, tracking the international trend.

For every $1 per metric million British thermal unit increase costs, IGL needs to increase CNG price by Rs 4.7 a kilogram in Delhi to maintain gross margin, according to an Emkay report. The company would require a total hike of Rs 19.3 a kg in the next two pricing cycles till April 2022, it said.

Indraprastha Gas has raised CNG prices four times since October. The current rate in Delhi-NCT is Rs 53.04 a kg.

But peers, too, hiked prices to counter the impact of higher gas prices to protect margin. Mahanagar Gas Ltd. has increased CNG price twice in as many months to Rs 63.5 a kg, while Gujarat Gas Ltd. hiked PNG price two times since Oct. 5. The Morbi PNG sells at Rs 57 a standard cubic metre.

Higher gas prices, coupled with lower gas allocation to domestic segments, are likely to impact margins of city gas distributors in the near term, including Indraprastha Gas, HDFC Securities said in a report.

Indraprastha Gas didn't respond to queries on its outlook for administered and spot LNG pricing.

Financial Position

Indraprastha Gas lags peers on profitability and other financial metrics.

The company, however, is debt-free with cash and cash equivalents of Rs 2,895.8 crore as of September, according to Bloomberg data.
While Mahanagar Gas, too, has no long-term cash borrowing, it has cash worth Rs 1,822 crore.
Gujarat Gas has a long-term debt of Rs 769.9 crore and cash worth Rs 424.5 crore.

Analysts from HDFC Securities and Nirmal Bang prefer Indraprastha Gas over peers.

And it has the highest proportion of ‘buy’ ratings among peers even as consensus price implies the best return potential for Mahanagar Gas.

HDFC Securities

Reiterates ‘buy’ on Indraprastha Gas citing a robust volume growth at 22% CAGR over FY21-23E and steady margins.
Regulatory support from the government to curb pollution in the Delhi/NCR region will help the company.

Nirmal Bang

Indraprastha Gas is its top pick among city gas distributors, while it calls Mahanagar Gas as a “dark horse”.
Gujarat Gas could face short-term headwinds from unrelenting LNG prices that pose an interim risk to its PNG sales volume in the Morbi ceramic cluster.

Emkay Global

Industrial-commercial PNG segment demand is healthy as it is inelastic to LNG pricing due to ban in NCR.
IGL would look at staggered retail selling price hikes in the run-up to APM gas price increase next fiscal.

ICICI Securities

Raises FY22-FY23 volume estimates by 9-12% to 6.9-7.9 mmscmd, assuming no more disruptive Covid waves.
There’s a big risk to FY23E margin as APM gas price is expected to increase by $3.7-2.9 per mmbtu in April-October 2022. This would mean a 56% CNG price hike is needed to keep the margin at Rs 8 an scm.

Reliance Securities

APM gas allocation to IGL is at 90-95%, which will likely touch 100% by the December-quarter-end. The restoration of APM gas volume and no rollback of CNG/PNG household price hike (during Q2 FY22) will lead to an improvement in Ebitda per scm.
New geographical areas, pollution control norms and the competitive price differential between PNG domestic gas and non-subsidised LPG are potential volume growth drivers.