Indraprastha Gas has enjoyed secular growth
In the 4 December 2008 issue, Moneylife had recommended a ‘buy’ for Indraprastha Gas (IGL) scrip (at around Rs92) and to hold it for steady long-term gains. The stock has reached around Rs328 on 21 January 2011. The stock has delivered great returns. The New Delhi-based company is in the retail gas distribution business—supplying compressed natural gas (CNG) to the transport sector, piped natural gas (PNG) to the domestic and commercial sectors and re-gassified liquid natural gas (R-LNG) to the industrial sector in the towns of the National Capital Territory (NCT) of Delhi and the National Capital Region (NCR). Among the company’s competitors are Gujarat Gas and Gujarat State Petroleum.
Incorporated in 1998, IGL took over the Delhi City Gas Distribution Project from GAIL (India) Ltd in 1999. With the backing of strong promoters—GAIL and Bharat Petroleum Corporation Ltd (BPCL)—IGL plans to provide natural gas to the entire NCR.
During FY09-10, IGL’s gross turnover increased by 26% to Rs1,213.13 crore from Rs962.14 crore in FY08-09. Net profit also went up by 25% to Rs215.50 crore in FY09-10 from Rs172.47 crore in the previous year.
The company recommended dividend of 45% (Rs4.50 per share) as against 40% (Rs4 per share) in the previous year. Growth has been steady. The total number of CNG stations increased to 241 in March 2010 from 181 in March 2009. During FY09-10, the company added 44,000 PNG connections and 40 commercial customers.
The company is supplying R-LNG to around 21 industrial consumers in Delhi. It has also started supplying R-LNG to the industrial segment in Noida and Greater Noida. During FY09-10, the company started CNG supply to vehicles in Ghaziabad for the first time. The online CNG station was also set up during the year. The company has planned capital investment of Rs240 crore to expand its CNG and PNG networks in NCT and NCR towns of Noida, Greater Noida and Ghaziabad.
During the December 2010 quarter, IGL’s net profit rose 14.01% to Rs67.19 crore from Rs58.93 crore in the corresponding quarter last year. Its revenues grew 60% to Rs457 crore from Rs284.61 crore in the corresponding quarter last year. The company’s raw material cost more than doubled to Rs259.87 crore, bringing down the operating profit margin to 28% from 36% in the year-ago period.
GAIL is the sole gas supplier to the company and, since it is one of the promoters of the company, IGL does not foresee any risk in oversupply of natural gas. The company has agreements with GAIL, BPCL and Reliance Industries for additional gas supplies to meet its growing requirements. The outlook for the company is positive. The growth drivers for increased CNG demand are car makers coming up with CNG variants. IGL’s average growth in revenues and operating profit over the past five quarters has been 45% and 31%, respectively. Its operating margin is a hefty 31% and return on net worth is 26%. Market-cap to revenues is 2.51, while its market-cap to operating profit is 8.87 times. The stock enjoys a P/E of 21.29 and a dividend yield of 1.37%. Buy at its current price.
Missing power targets could be the least of power generation companies’ worries—managing to sell power and securing coal could be bigger issues
It is not new for India to miss its power capacity addition targets. Nor is it new for it to miss even targets that have been revised downwards. We began the current Five-Year Plan (2007-12) with an ambitious target of 78,577 megawatts (MW) which was scaled down to 62,374MW in the mid-term review.
The current consensus view is even dimmer-that India will end the five-year period with an actual generation of only about 50,000MW. Most of the shortfall is being blamed on the delay in commissioning of hydropower projects.
However, this year, not meeting targets may be the least of the power generation companies' worries. Bigger issues are likely to be securing fuel at reasonable prices and getting buyers for it at profitable prices.
In a report to its clients today, CLSA says that India has seen a generation growth of only 4.3% for the period from April-December 2010, despite good capacity addition (relatively) in this period.
It believes that while lower coal production had some impact, the major reason for cutting back production was that state utilities are simply not picking up enough power.
For example, between October and December 2010, availability levels at NTPC's coal plants were 93%, but actual generation was down 3.3 percentage points at 87.2% plant load factor (PLF).
The best illustration of how state utilities are not buying expensive power is the sharp fall in merchant tariffs. Even though they have bounced back in December and January, the fact is that merchant tariffs hit rock bottom before this-falling to just Rs3.40 per kWh (kilowatt-hour) in November 2011.
Recently, Coal India conveniently declared (after its initial public offering) that its production has been impacted by the environment ministry's stand on mining activities in critically-polluted areas, which would lead to a shortfall of around 16 million tonnes (MT).
Coal India has estimated that if there is no relaxation of norms on this front, production could fall short by as much as 39 million tonnes (MT). Most utility stocks have underperformed the market in the last six months and it is unlikely that this year is going to be an easy year for these companies.
Within the lot, utilities which have passed through charges (such as NTPC, even though pass-through does not insulate it from lower offtake) or those that have resources such as coal mines (such as Tata Power and JSPL), are better bets.
Power deficits in India also declined much faster than expected against prospects that due to the fast pace of development, requirements will always be a long way ahead of generation.
However, from a peak of 14% in April 2010, the deficit is now down to 6% and is expected to shrink rapidly.
The only explanation is that demand is not actually rising as rapidly as earlier anticipated. Some estimates say that India will meet all its power demand by 2012.
That is just one year away. Some believe that this is because of the way 'demand' is defined. Not every Indian will be able to afford power at going rates for quite some time. In metro cities, the average power bill ranges between Rs500 and Rs1,000-definitely in the expensive range. Even industries will not be able to afford expensive power and would prefer to generate captive power, whenever viable.
Almost half of the rural households do not have access to any kind of electricity even today and would not be able to afford it even if it were offered to them. Out of the people who can afford electricity, almost 40% are 'accustomed' to power cuts. Power theft and transmission & distribution losses still remain big issues in India and power distribution companies lose big money to these factors each year.
However, for now, power generation companies need to focus on securing their fuel supplies and ensuring that their PLFs don't dip below critical levels. NTPC's share price has gone virtually nowhere for the last two years. According to CLSA's calculations, NTPC trades at a price to book value (FY12) of 1.9 times. CESC is the cheapest utility with a ratio of 0.9 times and JSPL and Adani Power trade at a premium of 3.1 times and 3.4 times, respectively.