Indraprastha Gas Ltd - Stock Valuation and Financial Performance

IGL reported further 20% reduction in gas allocation by nodal agency GAIL, effective from November 16, 2024. We had written about reduction in gas allocation in our earlier notes- quarterly as well as a note on change in sourcing mix.

As mentioned above, company has diversified gas sourcing mix. APM (administered price mechanism; government allocated) sourced gas is ~35% lower than spot prices and hence company could maintain healthy profitability. Now allocation of this is reduced by ~40% and hence raw material costs will increase. 

What triggers can make up for this increase in raw material costs?

• Anticipated price hike (dependant on market dynamics). This price hike (Rs. 4-5/kg) for CNG is not expected to significantly impact its volume growth trajectory.
• The company is actively engaging with the government to advocate for tax rationalization, including potential reductions in excise duty and VAT. This trend is expected to offset any negative impact arising from reduced APM gas allocations.
• Additionally, the company is seeking a lower GST rate for CNG and LNG vehicles and equipment, aligning it more closely with the current 5% GST rate for EVs.

Overall volumes increased by 9% YoY, driven by a 7% growth in Delhi NCR and a 29% growth in newer geographic areas (Noida, Ghaziabad are expanding at a rate of 17-18%). While margins were impacted due to change in gas sourcing, company’s growth plans are intact. 

Highlights from the conference call- 

Gas sourcing mix

• We have written about reduction in gas allocation to CGD in earlier note (read). Management commented that they have secured short term RLNG (regassified liquefied natural gas) supplies and will enter into long term gas supply contracts after evaluation (mostly in next financial year). Also, the company doesn’t anticipate any drastic cut in future. 

• The Industrial and Commercial segment, being entirely reliant on RLNG, is inherently linked to market prices. However, the pricing remains competitive compared to alternative fuels. The Domestic PNG segment continues to receive 105% of its allocated gas, ensuring uninterrupted supply. The impact of the recent gas allocation reduction is primarily felt in the CNG segment.

• The company anticipates potential price increases in the near future (dependant on market dynamics). This price hike (Rs. 2-3/kg) for CNG is not expected to significantly impact its volume growth trajectory.

Future plans and capital expenditure  

• The company aims to achieve a total volume of 3,400 mmscmd for FY25 and projects a year-on-year growth rate of 8-10% in absolute volume across all segments. Additionally, the company is prioritizing LNG and CBG to enhance both volume and profitability.
• LNG opportunity
  • IGL has secured short-term LNG supplies for the month of November. Longer-term arrangements are currently under evaluation.
  • The company believes that the absence of excise duty on LNG, combined with careful consideration of costs, transportation, and other factors, will help maintain profitability levels (similar profile to rest of the business).
  • It has ambitious plans to establish approximately 50 LNG stations within the next 3-5 years. This aligns with the government's initiative to allocate 0.5 million metric standard cubic meters per day (MMSCMD) of gas for LNG from the APM (administered price mechanism).
• The company has a capital expenditure (capex) target of Rs. 1,700 crore for the current fiscal year. This will be allocated primarily to Delhi NCR region (45-55%) and other geographic areas (45%).

Other highlights-

• The company is actively engaging with the government to advocate for tax rationalization, including potential reductions in excise duty and VAT. This trend is expected to offset any negative impact arising from reduced APM gas allocations.
• Additionally, the company is seeking a lower GST rate for CNG and LNG vehicles and equipment, aligning it more closely with the current 5% GST rate for EVs.
• Declared interim dividend of Rs. 5.5/share (total 2% yield on CMP of Rs 442).

Moneyworks4me Opinion-

What is mentioned in company notification to exchanges?

The company gets domestic gas allocation for meeting the requirement of CNG sales volumes (majorly auto; 75% of overall volumes) at the pricing fixed by the Govt. (presently at $6.5/mmbtu). The revised domestic gas allocation to company is approx. 21 % lesser than previous allocation. The company is in discussion with key stakeholders to minimize the impact.

How has the market reacted? 

The stock has corrected ~10% since morning and currently trades around Rs. 450. 

What is our take?

IGL sources on average about 1/3^rd from APM (administered price mechanism) source, RLNG is long term sourced from mix of APM/NAPM (non-administered price mechanism). At most the impact of lower allocation from APM source will be ~10% on overall raw material volumes (21%* APM sourced ~50%). IGL can source the same from open market, as it already does (Spot prices are ~11 mmbtu), increasing overall pricing by ~7-8%. 

Moneyworks4me Opinion-

Steady volume growth focus on improving EBITDA per SCM above Rs. 7.5

Q1FY25 concall highlights- 

• In Q1 FY25, IGL posted a sales volume of ~786 MMSCM, which grew by ~5% on a YoY basis. This is after absorbing the decrease in CNG sales to DTC buses.  Within the product mix, the company did ~587 MMSCM in CNG, and 153 MMSCM in PNG Segment (CNG & PNG segment account for 79% and 21% of total volume sales) which grew by ~5%/10% respectively on a YoY basis.

• Capex Plan: The Company is expected to incur ~Rs. 1,700 Cr to Rs 1,800 Cr in FY25 (out of which ~Rs. 300 Cr spent in Q1 FY25) for capacity expansion and new initiatives like CBG (Compressed Biogas) plants and LNG stations.

• New initiatives: Compressed Biogas (CBG) is a purified form of biogas with a high methane content (usually more than 90%), making it similar to compressed natural gas (CNG) in terms of energy content and utility. CBG plants will help the IGL to mitigate the risk of reducing APM (Administrative Price Mechanism) gas allocation. IGL is planning to add 10 CBG plant in this financial year for the capex of around ~Rs. 350 Cr.

About IGL

Indraprastha Gas Limited (IGL) is in the business of city gas distribution (CGD) in Delhi. IGL also supplies the gas to the nearby regions of Noida, Greater Noida, Ghaziabad, Hapur, Gurugram, Meerut, Shamli, Kanpur, Muzaffarnagar, Karnal and Rewari, Hamirpur, Fatehpur, Ajmer, Pali, Rajasmand.

IGL is formed as a JV promoted by GAIL (India) Limited and Bharat Petroleum Corporation (BPCL), each owning 22.5% equity. Also, Government of NCT of Delhi is holding 5% equity.

What are its Product Segment?

CGD sector has two segments - Compressed Natural Gas (CNG) predominantly used as auto-fuel, and Piped Natural Gas (PNG) used in in domestic, commercial and Industrial segments

Currently IGL derives 75% of its volume from CNG segment and remaining 25% from PNG segment.

What was historical Growth Rate?

Over the last seven years, IGL has achieved a compound annual growth rate of 9% in the CNG segment's volume and 10% in the PNG segment's volume.  During the same period IGL has increased its CNG infrastructure by 10%.

The share of CNG variants in passenger vehicle expanded from 7.4% in FY19 to 15% by FY24.

Since March 2019 IGL has expanded its PNG connection network significantly, growing from approximately 11 lakh to around 26 lakh domestic connections and from 4,337 to 9,993 industrial/commercial connections.

What is Future growth rate?

India has embarked on an ambitious trajectory to amplify its existing 6% share of natural gas in the energy basket to 15% by 2030. CGD will play pivotal role in the same. Healthy growth in CNG station infrastructure will drive the growth of CNG vehicle share. According CRISIL MI&A, by FY29 share of passenger vehicle CNG variants is estimated to rise to 22-27% from the 15% share clocked in FY24.

Delhi being early adopter of CNG infrastructure saw significant CNG vehicle penetration during 2017-18 period due to ban on diesel vehicles. Sales peaked at 79,000 units in FY17 and have since stabilized around 67,000 units in FY24. This trend indicates that while Delhi's market for CNG vehicles is reaching saturation, the overall CNG fleet continues to grow at a moderate pace. Future growth opportunities for CNG vehicle sales are expected to come from less penetrated regions, particularly in Uttar Pradesh, where CNG infrastructure is still developing.

What is the future Capex Plan?

IGL has envisaged annual capex of around Rs. 1,200 crore from FY24 to FY26. This capex will be for development of CGD network in the newly awarded GAs (Geographical Areas) and expansion of CGD network in its already authorised / operational areas. The said capex plans of IGL are envisaged to be funded through internal accruals. As of March 2024 IGL has Rs. 2,149 Cr cash and bank balance.

What are the other Investments?

IGL has acquired 50% stake in the two CGD companies 

• Central UP Gas (CUGL): CUGL is engaged in the CGD business in the cities of Kanpur, Bareilly, Unnao & Jhansi in Uttar Pradesh.
• Maharashtra Natural Gas (MNGL): MNGL is engaged in the CGD business in the city of Pune, Pimpri-Chinchwad, Talegaon, Chakan and Hinjewadi.

What are the concern areas?

• EV Adoption: Faster adoption of electric vehicles by state bus transports and individuals may impact volume growth in CNG business segment.
• Regulatory risks : Any change in tariff regulations which will drive the pricing and volume may affect the business. But CGD companies will emerged as major beneficiaries of price stabilisation post the implementation of the Kirit Parikh Committee recommendations.