Indraprastha Gas Limited (IGL) is India’s one of the leading natural gas distribution companies which supply natural gas for cooking as well as vehicular fuel. In this article, we will do a detailed analysis of the following 5 points – Company Overview, Corporate Governance, Company Financials, Valuation, and Industry Outlook.
Company overview and Corporate Governance
- Let us first take a look at the company’s shareholding pattern as of Jun’20.
- As seen from above, GAIL (India) and Bharat Petroleum Corporation Ltd have a promoter holding of 22.5% each, accounting for 50% in total. The government of Delhi holds ~5% shareholding. Thus, the total promoter holding comes to 55%.
- Let us take a look at the foreign and domestic institutional investors holding pattern.
- The company has decent allocation from FIIs and DIIs as it is evident from the recent (Jun’20) shareholding pattern.
- Being a PSU owned company, there are no corporate governance issues.
Areas of Operation
- Company operates mainly in Delhi, Ghaziabad, Guru-gram, etc. Company is planning to expand its operations in northern regions, which will lead to increase in volumes by 40-50%.
Product and Revenue Mix
- Company has mainly 2 products – Compressed Natural Gas (CNG) and Piped Natural Gas (PNG).
- 74% of the total revenue comes from CNG and the remaining 26% from PNG.
- PNG penetration is increasing, mainly in capital intensive sectors.
- This company/sector has many entry barriers for new companies as it requires many legal approvals. In a way, there is good earnings visibility for IGL as the threat of new entrants is lesser.
- Natural Gas has received a status of the Priority sector from the Government of India. Let us understand what priority sector means.
- Whatever domestic gas production takes place, Indian companies operating in priority sector will first receive the supply. The surplus production if any then shall be exported.
- Under the pollution control norms, traditional fuel will be changed to natural gas. This change is not only restricted for Passenger/Commercial vehicles, but it also will be applicable for industrial applications.
- Thus, we can see the government’s thrust on non-conventional energy resources will benefit Indraprastha Gas Limited (IGL).
- Diesel is also expected to show similar kind of growth even after facing various hurdles like entry-level automobile segment avoiding diesel cars, but for commercial vehicles, diesel vehicles cannot be replaced easily.
- Thus, if the company can have operational efficiencies, it can grow at a faster rate than the industry average growth rate of 12%.
- As we can see despite being in a capital intensive sector, company is debt-free, which is a quite positive sign.
- Return ratios of the company like Return on capital employed (RoCE) and Return on Equity (RoE) are quite strong at 30% and 20% respectively.
Sales and Profit growth
- If we look at 5 year Sales CAGR, growth is not much attractive, however, looking at the recent year growth rates company has registered good CAGR of 12-15%.
- Thus, we can see that the company is growing at the average rate of the industry of ~12%. Looking at the major levers for revenue growth, there is a good earnings visibility.
- Operating Profit margins of the company are ~23-24% currently, however with the newer technologies and government support,company has good scope to increase its operating efficiencies and thus increase it margins to 30-35%.
- Company’s net profits have grown at ~15% CAGR for the last 10 years. However, company registered a profit growth of whooping 45% in last 1 year, owing to the corporate tax rate cuts from 35 % to 25%.
- Thus, to conclude we can say that company has healthy financials and good earnings visibility.
- If we take a look at the average PE ratios of the company over a span of 30 years, we can see that company has undergone PE re-rating from average PE of 17x 10 years ago to current PE of 24x.
- Company’s current PE is well above it 0 year average PE. However if we look at 3 years average PE, company looks to be trading at fair valuations
- If the company outperforms the overall industry expected CAGR of 12%, this company will trade at premium valuations.
- The current quarter (Q1FY21) results are expected to subdued mainly as the company’s operations were hampered in April-May’20 due to lock-down.
- Currently, the stock is trading at ~INR 389 giving a rally of 35% from its 52-week low price of INR 284.
- In the upcoming times, it might happen that company might post muted results on the higher base in previous year, which can lead to stock price falling from the current levels.
- However, looking at the overall business model, company looks good from a long term perspective and should be on an investor’s radar if they wish to invest in this sector.