ValuePickr Forum

Indraprastha Gas Limited (Special situation/Long term)

I am not qualified/experienced enough to try out Special Situations. Hence creating the thread under Company Q&A.

IGL is a monopoly catering to Delhi and NCR region. CNG is being supplied for transport and PNG for households. Industries get Regasified LNG.

1 year back, Petroleum and Natural Gas Regulatory Board ( PNGRB ) had ordered IGL to cut tariff by 63 % and retrospectively had also asked IGL to refund the difference to it customers from April 2008-April 2012.

IGL approached delhi high court questioning the power of PNGRB to regulate tariff and compression charge.

Delhi high court ruled in favour of IGL. The aggrieved party ( PNGRB ) tapped the doors of Supreme Court by filing a Special Leave Petition against the delhi HC.

The next date of hearing is on 16/07/2013. Most of them are hoping for a favourable outcome to IGL.

In the meantime government increased the prices of natural gas to 8.4$ which will be applicable from April 2014 for a period of 5 years. Hence even if IGL gets a favourable order from SC, it will be negated by hike in domestic gas prices.

Before the adverse order of PNGRB, IGL used to trade @16 pe. Now its @11.09.

Situation 1

SC rules in favour of IGL by upholding delhi high court order.

Will the market re-rate IGL?. If the market does, upside potential is 44 % from current levels by assigning a pe of 16 and eps of 25.29 (ttm).

Assuming positive order from SC, taking into account the rise of natural gas prices to 8.4$ from next year, will IGL be able to maintain its margins ?

Yes.

)—>In the past IGL has passed on the hike to it customers. Recently i.e on June 24th it raised CNG prices by 2rs and PNG by 1 rupee for delhi and CNG price hike of 2.25 rs for other regions.

Situation 2

SC rules against IGL.

IGL will crash. Downside potential ? Will need seniors help to calculate the risk.

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Leaving the special situation aside -

Will natural gas lose its shine compared to diesel from next year ?

May be, due to hike of natural gas prices.

Going forward diesel will be deregulated completely and subsidy will be targeted.At present the subsidy is at 8.10 rs. Hence difference between diesel and natural gas will not be huge.

IGL may lose its customers from transport sector if diesel will cost less than natural gas. ( But i read its mandatory for LCV’s to use CNG in delhi. Can anyone confirm)?.

But i doubt it will lose household connections.

And going forward, we can expect upside in topline due to the following factors

1.Kanpur and Bareilly in UP will contribute. IGL has invested 69cr in Central U.P Gas Limited.

( CUGL Revenues were 124 cr and eps were 3.52 for 2012 ).

2.License to start operations in Unnao and Jhansi.

3.Delhi government is hoping to add more buses to its fleet.

Disclosure- No position

Regards

mallikarjun

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I think IGL court matter is taking long time. Stuck in typical indian judicial system because of Government’s fishy attempt.

I got chance to compare both IGL and GujGas. Voila those are trading at same level, same market capitalization, and many other things are same.

However there are some differences but looking into current scenario, GujGas is better bet for new entrant. For existing IGL investor, its really taking patience.

Kunal

it look better now …please put your views …i am preparing.

  1. no new diesel vehicle registration in Delhi
  2. CNG vehicles are exempted from odd even formula.
  3. rate revision from Qatar
    4.debt free co
    5.long term horse …

Buy Indraprastha Gas; target of Rs 580:Axis Direct

http://www.moneycontrol.com/mccode/news/article/article_pdf.php?autono=4688161&num=0

Maintain ‘buy’ on Indraprastha Gas, target price Rs 551: Edelweiss

Indraprastha Gas unleashes intense marketing campaign to add 3 lakh households in FY16

http://articles.economictimes.indiatimes.com/2015-09-07/news/66297404_1_piped-gas-indraprastha-gas-limited-narendra-kumar

Delhi: SC Bans Registration Of New Diesel SUVs

IGL IN MAKING…:grinning:
on 1st march delhi ncr all taxis will be in cng …
ASHIKA STOCK BROKING HAVE PICKED IGL AS 2016 PICK WITH PRICE TARGET 625 AND
MOTILAL OSWAL HAVE PICKED IGL AS 2016 PICK WITH PRICE TARGET 640.

This could be gamechanger for IGL. From my own experience, lots of rented accommodations don’t opt for IGL since it involves an upfront deposit and many landlords don’t refund it later. With no deposit, landlords will have nothing to lose and the occupants will opt for it out of sheer convenience.

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Fuel prices soar: Long queues at CNG stations cause traffic congestion http://www.millenniumpost.in/delhi/fuel-prices-soar-long-queues-at-cng-stations-cause-traffic-congestion-318801

Beneficiary: Indraprastha Gas. Mahanagar Gas also beneficiary as similar trend would be in Navi Mumbai as well.

Intracity pipelines are low pressure pipelines and are made from MDPE. No Indian company manufactures MDPE.

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Igl uses jain irrigation pipes for cgd connection.
It is fitted in my area and my house

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The recently released CARE ratings report on IGL debt highlights the strong financial profile, healthy return ratios and strong liquidity position of the company. The capex plans & regulatory interferences remain key risk but the company is expected to keep growing in a fairly predictable manner.

Below is a comparison of IGL share price over a 5 Yr period with the biggest names in the market (Reliance, Titan, HDFC Bank & Asian Paints) - 100 RS of investment in IGL is 450 RS in 5 Yr period. Not getting in the valuation and market sentiment debate, I can relate with what PL said long back - simple businesses that do dull things is where you make money! Happy investing!! Indraprastha Gas Limited-02-11-2019.pdf (399.7 KB)

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IGL has won CNG distribution rights in 3 more cities on its own in the 10th round of bidding - in Haryana, Rajasthan and UP.

Complete list of winners :
PressRelease26022019.pdf (311.9 KB)

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The bet on CGD companies is not risk free in my opinion. Was just reading through this article which says that there has been a proposal for free market pricing of APM gas.

Since we know IGL and other players are really dependent (70-75%% of gas sold by IGL comes from APM) on subsidised domestic gas to sell CNG and PNG cheaper (relative to petrol, diesel etc) to end customer, any such proposal is likely to hurt volume growth and margins as well.

But flip side to this proposal is even if market price is allowed to be charged for domestic gas, CGDs will start importing more gas (which is cheaper than domestic gas anyway). Glut of supply of natural gas in US means that the international gas price will not go up by much. So will there be incentive to use domestic gas at high prices? Maybe ONGC etc may answer this question better.

Let’s see how this pans out…

With all due respect, I work in gas marketing and international gas price is not cheaper than demestic gas. Prima facie it might seem to you that cost of natural gas in USA is much lower than domestic gas but imported gas is 3 and a half times more costly due to transportation, liquifaction, transmission and regasification charges. Also if imported gas had been cheaper we won’t have any NPA in the power sector where all the gas power plants have turned in to NPA because CAPEX was done based on projections of gas productions from KGD6 basin which did not materialise and also in 2013 government changed the priority order for gas allocation.

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My comment was based on what’s written in the article. It says that if market price is allowed instead of APM pricing, gas prices would jump by 40-45% for CGDs and they’ll have to import more gas.

I’ve been looking for someone to guide me as to how the import/non-APM gas prices work. Here’s what I know :

  1. Intl gas production prices are 3-4$ / mmbtu. India imports around 50% of its gas consumption and rest is domestic.

  2. Domestic gas is priced under APM at a price similar to prices in gas surplus countries like US, Canada and Russia. And this APM is allocated to diff industries in an order mentioned in priority sector list - CGD gets 110% allocation of its prior year usage. Rest of the need of CGDs has to be met via imports or non-APM gas.

  3. Govt also allows pricing freedom for difficult to explore domestic areas with price ceiling decided at ~6$/mmbtu (changed every 6 months).

  4. CGDs are reliant on APM gas with IGL having 75% of its gas coming from APM (as per the article) so cheap gas is really important for volume traction.

Now I’ve a couple of questions to ask if you if you could please address:

  1. If the imported gas is more expensive, why would CGDs be using that over domestic non-APM gas (as guided in the article) ? Would domestic players rather sell to other industries than CGDs ? Or is the article incorrect here ?

  2. You say intl prices including sundry import expenses are 3.5 times that of domestic prices. The article talks about import prices being 2 times that of domestic. What’s the more correct figure and how?

  3. What would be the approx free market price of non-APM gas and how would that compare with the gross import price of gas ?

Thanks for your inputs.

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To answer your questions -

Firstly on Sourcing side -

Domestic Gas Sourcing -

  1. Gas Produced from Shallow Water Wells - Easy Exploration

Apart from PMT - Panna-Mukta Tapi and KG basin (KG basin gas price is $4.2 MMBTU currently as per 2014 notification as the matter is under arbitration) all the domestically produced gas is governed by government prices which are yearly volume weighted average of

a) Henry Hub (US) Weight - 41%
b) National Balance Point (UK) - Weight -33%
c) Russian Gas - Weight -21%
d) Alberta Hub (Canada) - Weight - 5%

*Weights are indicative, I’ve calculated their average yearly consumption for last three years to get the weights
Exploration companies e.g. GAIL are forced to charge this domestically produced gas as per given formula

  1. Gas Produced from Deep Water Wells
    In 2016, Gas produced from Deep water wells was given pricing freedom but with a ceiling price.

Currently, Out of 73 operation wells, India has only 2 deepwater wells which are in KG basin and thus under arbitration.

  1. Apart from these two remaining gas requirement is met by imports for which Gas Marketing companies have long term, short term contracts and spot buying options

Customer Side -

  1. Firstly, in many industries natural gas (Methane - CH4) is used as a feedstock.
    Secondly, prices determined by government (i.e. APM prices) are only applicable to CGD priority sector -
    i) Domestic Usage - Heating and Cooking
    ii) Transportation &
    iii) Small industrial consumers - upto 5000 SCMD usage
    These sector get 110% allocation i.e. 110% of previous 6 months usage of CGD priority sector would be reserved from projected output of domestic gas. Considering CGD priority sector demand and domestic gas production it is safe to assume that we won’t be needing imported gas for CGD prioirty sector.

  2. Now, CGD also serves industrial and commercial customers for these customers gas is provided at pooled gas prices which is weighted average of sourced gas this includes -
    i) Domestic Gas after priority sector allocation
    ii) Imported Gas

Now to answer your first question -
Given the price competitiveness of natural gas over some of the fuels e.g. Diesel (in Diesel Gensets), fuel oils etc customers would continue its usage in future as well. As far as marketing companies are concerned they already have main piplines present they just have to spend marginally to acquire industrial consumers which will supply steady and good volume of gas offtake

Secondly, generally gas import price (landed price for India) has varied in the range of $8/MMBTU to $14/MMBTU

Thirdly, I think prices charged to industrial customers would be good measure to check realistic gas price (which are not govern prices).

PS: Other priority sectors include - Power, Fertilizers, Petrochemicals

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My take on the present situation (been an investor in IGL for more than 10 years and working in national oil Company) is as follows. CGD Companies are enjoying a very huge gross margins for too long and their profitability is very high due to pricing freedom of product and availability of APM gas at cheap price. This situation was about to change in 2012 when PNGRB ruled that it has the right for determining CNG/PNG cunsumer price but Delhi high court turned down PNGRB’s order and pricing freedom was restored. The balance between producers, mid-stream distributors and consumers has to be maintained. In the present situation this balance is tilted in favour of consumers ( due to govt"s environmental push) and distributors are enjoying their natural monopoly and pricing freedom. Producers are suffering and not generating enough surplus for reinvestments. This situation is not sustainable and Govt & PNGRB ( New PNGRB Head is Ex-ONGC CMD) are aware of this.
While i do not see any drastic price regulation move as that will scuttle CGD growth but there is some head room to increase CGD prices as there is a significant discount vis a vis alternatives such as diesel for CNG and LPG for PNG. This can be done without effecting demand in any meaningful manner.
APM prices to the producers may be increased so that a healthy reinvestment surplus is generated by producers.
High profitability and margins of CGD companies may not be sustained if gas cost is increased which looks likely. Anyway product prices for utility companies with natural monopoly are based on cost plus reasonable profits and not market based prices.

LNG is still costly vis a vis domestic gas and given low availability of domestic gas , its use is continuously increasing despite high cost. Global availability is likely to be high and cost is likely to remain stable due to global supply-demand factors.

Overall growth outlook for CGD companies is good but profitability is difficult to sustain. Valuation implied a sustainable growth and profitability. I remain cautious.

(Have sold one third of my holding recently so views may be biased)

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Some recent comments from the PNGRB chief that should soothe investors in CGDs:

If cheap gas is not available, it will hurt implementation of projects. That goes without saying. But what are the chances of this fear fructifying?” PNGRB chairman DK Sarraf told ET in an interview.

For a driver, CNG turns out to be about 60% cheaper than petrol, and 40% cheaper than diesel, giving city gas distributors ample scope to accommodate future increases in natural gas price and yet stay profitable, Sarraf said.

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