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Leading player in city gas distribution

Indraprastha Gas Ltd. (IGL) is one of the pioneer and among the leading city gas distribution (CGD) company in India. Through its extensive distribution network of 652 compressed natural gas (CNG) stations and 17,876kms of piped natural gas (PNG) network, it provides safe and uninterrupted gas supply to domestic, commercial and industrial consumers. The company also has two associates, which also operates as CGD companies i.e. Central UP Gas Ltd. (catering to the cities of Kanpur, Bareilly, Unnao and Jhansi in Uttar Pradesh) and Maharashtra Natural Gas Ltd. (catering to the city of Pune and nearby areas of Pimpri, Chinchwad, Chakan, Talegaon and Hinjewadi in Maharashtra).

Investment rationale:

• Government policy support to improve the business outlook for CGDs: The government of India is aiming to achieve 15% natural gas share in the primary energy-mix by 2030 from the existing levels of 6%. The government is pushing for the greater adoption and use of cleaner & greener fuels in its clean energy initiatives. This will create opportunities for the companies such as IGL to increase CNG and PNG sales in the near future.

• Restriction to use clean fuels in Delhi-NCR, positive for IGL: The industrial sector is the one of the major contributors of the air pollution in Delhi & the NCR and significant steps are being taken by the government to fight with it. The Delhi Pollution Control Committee is taking significant steps by banning all other industrial fuels except PNG and advising all industrial customers to switchover to PNG. IGL being the sole distributors of natural gas in the Delhi & NCR region is likely to benefit from this regulation.

• Sustained higher petrol/diesel prices aiding the adoption of CNG vehicles: Delhi Transport Corporation (DTC) is the largest CNG-powered bus service operator in the world. IGL has signed a long term gas supply agreement with DTC, to supply CNG for a period of ten years till Dec. 2030. At present DTC consumes around 0.28mn kgs of CNG per day for its buses which constitutes around 11% of daily CNG sale of IGL. The consumption of CNG is expected to increase as DTC is in the process for procurement of 1,000 new CNG buses.

With sustained higher retail prices of petrol & diesel, the conversion to CNG vehicles in Delhi has surged to 14,000-15,000 vehicles per month from 4,000-5,000 vehicles per month. This coupled with the Delhi government emphasizing on use of CNG in all light commercial vehicles is likely to boost the CNG volumes of the company.

• FY21 margins not sustainable, but are anticipated to remain above pre-Covid levels: FY21 being a pandemic year, was characterized by pandemic related restrictions & lockdown leading to suppressed demand and lower commodity prices which cumulatively led to higher profitability. However, subsequently with elevated international gas prices, we believe that the company will find it tough to maintain the FY21 profitability. We are forecasting over 300bps contraction in EBITDA margins over FY21-24E. On the contrary, gas sales volume is expected to increase by 13.3% CAGR over FY21-24E as compared to a growth of 10.9% CAGR over FY15-20.

Valuations: IGL is one of the most efficient CGD player in India with sector leading EBIDTA margin of over 20%. During FY15-20, its revenue grew by 12% CAGR, with an average EBITDA and PAT margins of 20.9% and 12.7%, respectively. Moreover, debt free operations with strong cash flow generation ability and double digit return ratios reflects strong fundamentals of the company. Thus we assign a “BUY” rating on the stock with a target price of Rs. 435.

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