Dalal Street Choice Scrip Buy Call
It is stated that in turbulent markets its better to stick to the counters having a constant sales growth and good dividend payment history. Indraprastha Gas (IGL) is one such counter and hence has been recommended as our choice scrip. IGL, that provides compressed natural Gas (CNG) and piped natural gas (PNG) in the national capital region (NCR), has 181 stations and is likely to cross 210 CNG stations in the current fiscal itself. Encouraged by the government thrust and consumer demand for clean and cheaper energy fuel, IGL has registered strong growth. We feel that the aggressive expansion of markets in other parts of the NCR coupled with the Commonwealth Games being organised in the capital, the demand for CNG is set to soar. Further, its PNG business has 50,000 customers and the clientele is on an increase. IGL also has a good track record of dividend payment. The other factors like long term network exclusivity rights, assured supply of gas, its debt free status and rising crude oil price make the scrip a good buy at current levels. On the valuation front, the scrip is placed well. The CMP of Rs 217 discounts its trailing four quarter earnings by 14.50x and EV/RBITDA of 6.80x also seems to be placed well. We recommend investors to buy the scrip at its current levels with a target price of Rs 270 in the next one year.
As regards the business, IGL has exclusive marketing rights for three years and network exclusivity rights for 25 years for the city gas distribution within the NCR. This provides a first mover advantage to the company. IGL is the only supplier of the natural gases in the NCR and is aggressively expanding its presence in other adjoining areas as well. Another advantage is that IGL has signed long term sale agreements for its future gas requirements with GAIL and BPCL and has a supply pact with Reliance Industries for its KG D6 block gas, and hence will not have gas sourcing issues over the medium term. Such long term agreements eliminate the supply side risk for IGL. Further, the spiralling crude oil prices coupled with the mileage advantage of CNG has increased the conversion of private vehicles to CNG.
Also, with more companies introducing cars which have inbuilt CNG kits, the conversion costs are on a decline. All these factors help in increasing the total vehicles’ population under the CNG group. In preparation for the Commonwealth Games, the Delhi state government is planning to add about 2,500 new high capacity CNG operative buses to its public transport system to streamline travel during the event. IGL also expects an addition of over 20,000-30,000 CNG-operated taxis in Delhi over the next couple of years. Besides, the Delhi government recently directed all light commercial vehicles to convert to CNG. Consistently growing demand for natural gas and consumer preference for clean and cheaper energy fuel in cities like Delhi makes utility player IGL insulated from any economic slowdown.
Besides, IGL is a debt-free company which provides it enough headroom for leveraging. On the financial front, the company has posted strong performance. Its bottomline has increased on a QoQ basis for consecutive four quarters. For 9MFY10 it posted a topline of Rs 790.31 crore and bottomline of Rs 164 crore as against Rs 625.36 crore and Rs 132.15 crore respectively for 9MFY09. So considering its strong financial performance, expected growth in volumes and good valuations, we recommend investors to buy the scrip at current levels.
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