Indraprastha Gas Limited

Indraprastha Gas Limited

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1. Abstract

Indraprastha Gas Limited (IGL) is a joint venture company between Bharat

Petroleum Corporation Limited, Gas Authority of India Limited and Government

of National Capital Territory, Delhi. It was started to lay the network for the

distribution of natural gas in the National Capital Territory of Delhi to consumers

in the domestic, transport, and commercial sectors.

Indraprastha Gas Ltd (IGL) is the sole supplier of compressed natural gas (CNG)

and piped natural gas (PNG) in the national capital territory (NCT) region of

Delhi. There is no competitor for IGL within the NCT region due to licensing

requirement and unavailability of firm gas allocat ions; hence any incremental

demand for PNG or CNG in this region would directly benefit IGL. IGL, co-

promoted by GAIL and BPCL, has a distinction of operating a low risk-high return

business model. The company is also foraying into new markets of Greater

Noida, Ghaziabad, Sonepat and Panipat, thus expanding its presence around the

NCT region. Indraprastha Gas Ltd (IGL) has better operational as well as net

profit margins compared to its industry peers. Since the company operates in the

retail space, margins seem to be on the higher side.

The following pages elaborate the results of study of the capital structure and

complete financials of the company.


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2. Introduction

Indraprastha Gas Ltd (IGL) is engaged in the marketing and distribution of

compressed natural gas (CNG) as well as piped natural gas (PNG) in the

National Capital Territory of Delhi (NCT). While the company distributes CNG to

customers like the Delhi Transport Corporation (DTC), three and four wheelers

and PNG to commercial and domestic users (small as well as large). Hospitals,

hotels, restaurants and other establishments depending upon their size are

classified as large and small commercial users of PNG.

Incorporated in 1998, IGL took over Delhi City Gas Distribution Project in 1999

from GAIL (India) Limited (Formerly Gas Authority of India Limited).

The two main business objectives of the company are:-

To provide safe, convenient and reliable natural gas supply to it’s

customers in the domestic and commercial sectors; and

To provide a cleaner, environment-friendly alternative as auto fuel to

Delhi’s residents. This will considerably bring down the alarmingly high

levels of pollution.

The transport sector uses natural gas as Compressed Natural Gas (CNG), while

the domestic and commercial sectors use it as Piped Natural Gas (PNG).

Milestones so far: -

Incorporated in 1998

Started with 9 CNG stations & 1000 PNG consumers

Crossed 100 stations in 2003

Maiden dividend in FY 2002-03

Completed 12” steel pipeline in December 2002

IPO listing on 26th December 2003

Two stations commissioned in Noida in December 2004


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3. Capital Structure of Indraprastha Gas Ltd. The equity structure consists of equity contribution of 22.5% each by BPC And

GAIL and 5% by Government of Delhi and the balance by third parties. The

authorized share capital is Rs. 2.2 billion and BPC has contributed Rs. 315

million.

Shareholding Pattern of Indraprastha Gas Limited as on 31st Dec 2005:

S. No. Category No of Shares Held

% Of Share Holding

A PROMOTERS HOLDING 1. Promoters* - Indian Promoters 63,000,080 45.00% - Foreign Promoters - -

2. Persons acting in Concert # - - Sub-Total 63,000,080 45.00%

B NON- PROMOTER HOLDINGS

1. Institutional Investors a) Mutual Funds and UTI 15,049,192 10.75%

b)

Banks, Financial Institution, Insurance Companies (Central/ State Government Institutions/ Non - Government Institutions

11,071,850 7.91%

c) FIIs 31,491,582 22.49% Sub-Total 57,612,624 41.15% C OTHERS 1. Private Corporate Bodies 3,306,271 2.36% 2. Indian Public 15,306,677 10.93% 3. NRIs / OCBs 314,840 0.22% 4. Foreign Companies - - D Any other: (i) Trusts 4,405 - (ii) HUF 358,241 0.26% (iii) Clearing Members (NSDL 97,022 0.07%


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& CDSL) Sub-Total 19,387,456 13.85% GRAND TOTAL 140,000,160 100% Notes:

Total Foreign Shareholding includes:

No of Shares Held % of Share Holding

Non Resident Indians 314,840 0.22% Overseas Corporates - Foreign Nationals - FII's 31,491,582 22.49% TOTAL 31,806,422 22.72% ADR/GDR - NIL

No. of Shares Held % of Share holding

Person acting in concert - 0.00% - 0.00% TOTAL - 0.00%


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4. Financials a. Statements Following are the financial statements for Indraprastha Gas Ltd. The financial

sound status of the company is easily sensed by the figures reflecting in the

financial statements.

i. Profit / Loss A/C

As on 31-Mar-05 Rs mn %OI

Net Sales 4580.51 98.72

Operating Income (OI) 4640.05 100

OPBDIT 1999.04 43.08

OPBDT 1876.8 40.45

OPBT 1395.38 30.07

Non-Operating Income 15.93 0.34

Extraordinary/Prior Period -13.96 -0.3

Tax 470.5 10.14

Profit after tax(PAT) 926.85 19.98

Cash Profit 1408.27 30.35

Dividend-Equity 280 6.03


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ii. Balance Sheet:

Assets Rs mn %BT

Gross Block 4774.47 97.04

Net Block 3436.34 69.84

Capital WIP 310.28 6.31

Investments 0 0

Inventory 180.48 3.67

Receivables 118.31 2.4

Other Current Assets 874.9 17.78

Balance Sheet Total(BT) 4920.32 100

Liabilities Rs mn %BT

Equity Share Capital 1400 28.45

Reserves 1724.68 35.05

Total Debt 515.17 10.47

Creditors and Acceptances 564.33 11.47

Other current liabilities/ provision 716.13 14.55

Balance Sheet Total (BT) 4920.32 100


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iii. Cash Flow Statement:


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b. Notes: 1. Significant Accounting Policies 1.1 Basis of Preparation of Financial Statements

The financial statements are prepared on the accrual basis under the

historical cost convention in accordance with Generally Accepted

Accounting Principles and applicable accounting standards issued by the

Institute of Chartered Accountants of India and the provisions of

Companies Act, 1956.

1.2 Use of Estimates The preparation of financial statements in conformity with generally

accepted accounting principles requires management to make estimates

and assumptions that affect the reported amounts of assets and liabilities

and disclosure of contingent liabilities on the date of financial statements.

Actual results in future could differ from those estimates. Any revision to

accounting estimates is recognised prospectively in current and future

periods.

1.3 Fixed Assets i. Fixed assets are stated at their original cost including freight, duties, taxes

and other incidental expenses relating to acquisition and installation.

ii. Expenditure incurred during the period of construction including, all direct

and indirect expenses, incidental and related to construction is carried

forward and on completion, the costs are allocated to the respective fixed

assets.

iii. Gas distribution systems are commissioned on commencement of supply

of gas to consumers. In the case of commissioned assets where final

payment to the contractors is pending, capitalisation is made on an

estimated basis pending receipt of final bills from the contractors, and


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shall be subject to adjustment in cost and depreciation in the year of

settlement.

iv. Insurance spares are capitalised with the cost of the plant and machinery

and depreciated over the useful life of the asset.

v. Capital inventory represents items of capital nature lying in the store and

valued at cost.

vi. The carrying amount of the assets, including those assets that are not yet

available for use, are reviewed at each Balance Sheet date to determine

whether there is any indication of impairment. If any such indication exists,

the assets recoverable amount is estimated. An impairment loss is

recognised in the Profit and Loss Account whenever the carrying amount

of an asset exceeds its recoverable amount. An impairment loss can be

reversed if there are changes in estimates used to determine the

recoverable amount in future periods. An impairment loss is reversed only

to the extent that the carrying amount of asset does not exceed the net

book value that would have been determined, if no impairment loss had

been recognized.

1.4 Depreciation Depreciation is charged on a pro-rata basis on the straight line method

over the estimated useful lives of the assets determined as follows:

Mother Compressors, Online

Compressors and Booster

Compressors

7 years

Leasehold land Over the period of lease

Bunkhouses 5 years

Signages 10 years*

All other assets All other assets Rates prescribed under

Schedule XIV to the Companies Act,

1956.


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*The Company has during the current year revised the estimated useful

life of signages to 10 years. This has resulted in an additional depreciation

charge of Rs. 4,210,765 in the current year.

Assets costing Rs. 5,000 or less are fully depreciated in the year of

purchase. Rates of depreciation are equal to or more than Schedule XIV

to the Companies Act, 1956.

1.5 Investments Current investments are stated at the lower of cost and fair value.

1.6 Inventories i. Stores are valued at lower of cost on First In First Out (FIFO) basis or Net

Realisable Value.

ii. Stock of CNG in cascades and Natural Gas in pipelines have been valued

at lower of cost on First In First Out (FIFO) basis or Net Realisable Value.

iii. Management has estimated the closing stock of Natural Gas in pipelines

on a volumetric basis. This being the first year of such estimation, the

impact on consumption of natural gas and profit for the year is not

material.

1.7 Revenue Recognition i. Revenue on sale of Piped Natural Gas is recognised on consumption.

ii. Revenue on sale of Compressed Natural Gas (CNG) is recognised on

sale of gas to customers from CNG stations.

1.8 Foreign Currency Transactions Transactions in foreign currency are translated at the exchange rates

prevailing on the date of the transaction. Monetary foreign currency assets

and liabilities are translated at exchange rates prevailing as at the year-

end. Exchange gains or losses arising out of fluctuation in exchange rates

on settlement during the year/ translation at year-end are recognized in


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the Profit and Loss Account except in case of liabilities related to

acquisition of imported fixed assets, which are adjusted to the carrying

cost of the respective asset and is depreciated over the remaining useful

life of the underlying asset.

1.9 Borrowing Costs

Borrowing costs that are directly attributable to the acquisition or

construction of a capital asset is capitalised as a part of the cost of that

asset. Other borrowing costs are recognised as an expense in the period

in which they are incurred.

1.10 Retirement Benefits

The liability in respect of gratuity and leave encashment is provided for on

the basis of actuarial valuation as on the Balance Sheet date.

1.11 Operating Leases Lease rentals are recognised as an expense on straight-line basis over

the term of the lease.

1.12 Taxation Income tax expense comprises current tax (that is amount of tax for the

period determined in accordance with the Income-tax Act, 1961) and

deferred tax charge or credit (reflecting the tax effects of timing difference

between accounting income and taxable income for the period). The

deferred tax charge or credit and the corresponding deferred tax liability or

deferred tax asset are recognised using the tax rates that have been

enacted or substantially enacted by the Balance Sheet date. Deferred tax

assets are recognised only to the extent there is reasonable certainty of

realisation.

Such assets are reviewed at each Balance Sheet date to reassess

realisation. Where there are unabsorbed depreciation and carry forward


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losses under tax laws, deferred tax assets are recognised only if there is

virtual certainty supported by convincing evidence that such deferred tax

assets can be realised in future.

1.13 Deposits with Government Agencies, Local Authorities and Other Electricity Companies Deposits given to Government Agencies, Local Authorities and other

Electricity Companies that are perennial in nature are charged to revenue

in the year of payment.

2. Segment Reporting: The Company operates in a single segment of Natural Gas Business.

In view of the Accounting Standard Interpretation issued by the Institute of

Chartered Accountants of India for companies operating in single

segment, the disclosure requirements as per Accounting Standard 17

Segment Reporting are not applicable to the Company.

3. Operating Lease Arrangements The Company has taken certain equipments, vehicles and premises for

office use under operating lease agreements.

The total lease rentals recognised as expense during the year under the

above lease agreements amounts to Rs.137,879,024 (Previous Year

Rs.109,695,213). Lease obligations under non-cancelable periods are as

follows:

Amounts payable in the next 1 year Rs. 64,355,285

Amounts payable in the next 2 to 5 years Rs. 20,369,576

4. Cash and cash equivalents represent cash and bank balances and short-

term investments. Cash and bank balances include Rs. 878,137 (previous

year Rs. Nil) lying with bank pertaining to unclaimed dividend.


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5. The above Cash Flow Statement has been prepared under the indirect

Method as set out in the Accounting Standard-3 on Cash Flow Statements

issued by the Institute of Chartered Accountants of India.

6. Purchases of fixed asset are stated inclusive of movements of capital work

in progress, capital inventory and preoperative expenses and are treated

as part of investing activities.

Corresponding figures of the previous year have been regrouped and

reclassified wherever considered necessary to conform to current year is

figures.


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5. Summary of financials:

The above financials can be summarized in the following chart:

Sr. Description Value

1 OPBIT/Prod.cap.empl. (%) 55.8

2 PBIT/Cap. Employed (%) 45.64

3 PAT/Networth (%) 29.66

4 Tax/PBT (%) 33.67

5 Total Debt/Networth (x) 0.16

6 Long Term Debt/Networth (x) 0.15

7 PBDIT/Finance Charges (x) 16.37

8 Current Ratio (x) 0.92

9 RM Inventory (days consumption) 0

10 FG inventory (days cost of sales) 0.31

11 Receivables (days gross sales) 8.18

12 Creditors (days cost of sales) 77.99

13 Op. curr. Assets (days OI) 44

Share Statistics:

Sr. Description Value

1 EPS (Rs.) 6.62

2 CFPS (Rs.) 10.06

3 Book Value (Rs.) 22.32

4 DPS (Rs.) 2


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6. Comment on IGL future: Indraprastha Gas Ltd (IGL) is a city gas distribution (CGD) company, operating in

the national capital territory (NCT) region of Delhi. With just 3% penetration of

CNG within the private vehicles segment (92% of FY06 revenues) and 1%

penetration of PNG within the domestic household segment (8%) in the NCT

region, there is huge potential for growth going forward. IGL is foraying into

newer markets surrounding the NCT region (Greater Noida and Ghaziabad).

Considering the economical and environmental advantages of both CNG and

PNG over conventional sources of fuel, I believe IGL will be a key beneficiary of

an increasing customer base for these fuels.

IGL's revenues are expected to grow at a CAGR of 14.5% over FY06-08 and

PAT is expected to grow at a CAGR of 18.2% over the same period. Its PNG

business is expected to grow at a CAGR of 60% (in volume terms) over FY06-

08E, clearly outpacing the 9% CAGR growth in CNG (volume terms) over the

same period IGL is currently debt-free, and is generating an RoCE of 41.8% and

RoE of 28.2% for FY06E. The company is expected to generate better returns

going forward as it penetrates further in the NCT region of Delhi and obtains

better efficiency in its operations. IGL's operating margins are expected to

improve from 40.9% in FY06E to 43.2% in FY08E.


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The following facts and figures make IGL a healthy company and show

tremendous growth prospects in 5 years:

a. Sole player in the high potential Delhi market i. Low penetration levels:

Figure 1 CNG station growth and total sales volume

IGL is the only supplier of CNG and PNG in the NCT region of Delhi. Any new

player would have to obtain a CGD license and a firm allocation of gas from the

government to enter this region. Even if a new player obtains the license, it will

be very difficult for it to match IGL's existing infrastructure. Currently, only 3% of

private vehicles (passenger cars) in the NCT region operate on CNG and only

1.3% of household population in Delhi use PNG. Hence, there is a huge growth

potential of CNG and PNG suppliers in the NCT region of Delhi. IGL would be a

key beneficiary of this potential and is currently taking significant initiatives in this

regard. Currently IGL has 146 CNG stations catering to around 106,000 vehicles

and going forward 12-15 stations annually are planned for the NCT region.


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ii. Increased private cars conversion to be a trigger:

Figure 2 CNG vehicles break-up

Currently, there are around 800,000 - 1 mn private cars running in Delhi, of which

only 30,000 cars have converted to CNG (3%). With CNG becoming increasingly

prefer red due to its inherent cost and environmental benefits, we believe that

more and more private car owners would convert to CNG. This argument is

supported by the fact that leading passenger car manufacturers (Maruti, Tata

Motors, etc) in India are introducing CNG variant models. IGL is expanding its

retail outlets (currently 146 CNG stations) and is also planning a tie-up with

BPCL for supplying CNG to consumers at their retail outlets. The company

expects around 20,000-22,000 cars to be converted every year going forward.

The 9% CAGR growth in CNG revenues of IGL over FY06EFY08E would be

mainly led by increased private car conversions to CNG variant and to a small

extent by the conversion of buses and autos to CNG variant.

iii. Buses constitute 60% of CNG revenues: IGL has a 5-year contract with Delhi Transport Corporation (DTC) for supply of

CNG for their 4,000 buses. This contract contributes around 25% to IGL's overall

CNG sales. Overall, buses (private and DTC) constitute around 60% of IGL's

total CNG sales.


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iv. PNG to be a key revenue driver going forward: The PNG business contributes around 8% to FY06E revenues. Of the total PNG

sales, around 80% constitutes commercial & industrial sales and 20% constitutes

domestic users. Currently there are around 3.6 mn users of LPG in Delhi, of

which only 50,000 user s (around 1 .3%) have converted to PNG. Going forward,

we expect PNG volumes for IGL to grow at a CAGR of 60% over FY06E-08E,

significantly outpacing the growth in CNG volumes (9% CAGR). Recently the

company has also tied up with BPCL to procure re-gasified LNG (RLNG) for

supplying to large and small industrial users.

b. Economical and environmental advantages

i. CNG and PNG being increasingly preferred: CNG is increasingly being preferred over petrol and diesel due to its inherent

economic and environmental advantages. At the prevailing fuel prices, CNG is

about 70% cheaper than petrol and about 40% cheaper than diesel.

Also, CNG is environment friendly considering low harmful emissions from

vehicles running on it. Going forward, increasing number of vehicles are

expected to convert to CNG, considering the Delhi government's initiatives

against high pollution levels in the capital.

ii. Various advantages over LPG: As PNG is 50% cheaper than LPG; it is increasingly becoming a preferred source

of domestic and industrial fuel in the NCT region of Delhi. Apart from being

economical and safer, PNG has many other advantages over LPG that include:

• Reduced possibility of leakage.

• Uninterrupted supply & narrower range of ignition.

• Inbuilt safety during installation & metered reading.


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c. Low risk-high return business model

i. High entry barriers: Currently, IGL enjoys no competition in CGD business in the NCT region. Going

forward, even if the government allows another player to operate in the NCT

region, it will be very difficult for the new entrant to match the infrastructure set-

up by IGL for distribution of gas. The new entrant would be forced to operate in a

joint venture with IGL, thus restricting the loss of market share for the company.

ii. Long-term visibility of revenues: As the only supplier of CNG and PNG in Delhi, any incremental demand for

these fuels would directly benefit IGL. With the initial cost (Rs5,500 per

installation) of setting up PNG infrastructure being high for a consumer,

probability of a customer shifting back to LPG for domestic fuel is very low.

Hence once a customer for PNG is added, there is an assurance of revenues for

long-term. Similar ly h igh investment is required (CNG kit installation costing

Rs30,000 - 40,000) for conversion of vehicles to CNG. Hence, once the vehicles

are converted to CNG, there is low probability of consumers turning back to

petrol/diesel.

iii. Assurance of gas supply: As GAIL (the gas transmission and distribution major) is the co-promoter; it gives

an advantage to IGL in terms of an assured supply of gas. IGL has entered into a

5-year contract with GAIL for supply of 2 mmscmd of gas. However, the company

currently procures only 1.4 mmscmd of gas, hence we do not foresee any need

for the company to enter into an additional contract for procurement of gas in the

near-term.


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iv. Attractive return ratios: IGL is currently generating RoE of 28.2% and RoCE of 41.8% in FY06E. The

company is expected to at least maintain or improve upon these ratios going

forward. These high return ratios are indicative of superior operational efficiency

of IGL considering the capital -in tensive nature of it s busines s. Going forward,

the compa ny's strategy is to improve upon it s asset turnover rather than expand

its network. This would further give a boost to its RoCE going forward.

d. IGL's business model depicted through Porter's model

e. Expansion into newer territories and segments

i. Foray into areas surrounding the NCT region: IGL is foraying into new markets of Greater Noida, Ghaziabad, Sonepat and

Panipat. The company has already obtained a NOC to set-up infrastructure for

CNG and PNG marketing and would be competing with other players (Gujarat

Adani Energy) in these markets. However, considering its experience of

successfully operating in Delhi, it should be able to replicate its success in these

markets too. We believe that expanding into newer markets is a key positive for

IGL, giving it good long-term visibility of revenues.


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ii. Contract from Indian Railways: IGL has successfully implemented a pilot project for supply of CNG to the Indian

Railways. The company currently supplies CNG for two locomotives and has a

retail outlet in their premises. According to IGL management, the company would

be supplying to 20 locomotives in FY07, which would contribute around Rs85.4

mn (1.4% of FY07E revenues) to IGL's topline. We believe this to be a long-term

positive for the company going forward.

iii. Medium-term trigger from LCV conversion 60,000 LCVs operating in Delhi: In the past, the Delhi government had passed an

order for conversion of DTC buses (running on Diesel) to convert to CNG. On

similar lines, a court order for conversion of LCV vehicles to CNG is awaited. We

believe that this would be a major trigger for IGL as there are around 60,000

LCVs operating in the NCT region, and IGL would be a key beneficiary of this.

However, there is already a voluntary conversion of LCVs due to inherent

economic benefits of CNG. Hence, the order would result in accelerating LCV

conversion and we believe that around 6,000 LCVs would convert to CNG

annually once the order is passed. If this happens, our forecast for FY07E PAT

would increase by Rs146 mn (11.8% upside) and EPS would increase from

Rs8.9 to Rs9.9.


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7. Concerns – Suggestions to improve on them:

a. Limited supply contract with GAIL: IGL has entered into a contract with GAIL for supply of 2 mmscmd of gas

at a uniform price of Rs3,200/tcm. According to our estimates, this

contracted amount of gas would suffice IGL's requirement till FY10. As

IGL's customer base expands, it would have to procure more gas to cater

to the increasing demand. In case IGL is unable to procure the required

quantity of gas, it would negatively impact its growth going forward. GAIL

should look out for new sources for long-term gas supply (settingup

pipeline to import gas from neighbouring countries). Also, other companies

like Reliance and GSPC can also be sources of gas. I therefore believe

IGL would have many options to procure gas over the long-term.

b. Infrastructural and executional constraints: As IGL's customer base for CNG and particularly for PNG expands, the

company has to invest in setting up additional infrastructure to reach out to

new consumers. Similarly for CNG, it has to increase the number of CNG

stations (146 currently) to cater to an increasing number of CNG vehicles.

This infrastructure set up in a huge metropolitan, highly congested city like

Delhi is a challenge in terms of requirement of additional approvals,

permissions and clearances from government authorities. Hence, a limited

growth is possible in a particular time period.

This can be sorted with coordination with Delhi Government, also a

partner in the business. Best alternatives towards lying of infrastructure

can e sought from engineers and city development team of the

government.


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c. Geographical limitations: IGL's operations are currently restricted to the NCT region of Delhi. Any

macro factors affecting the NCT region could have an impact on IGL's

operations.

The company should diversify into newer markets of Greater Noida,

Ghaziabad, Sonepat and Panipat.


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8. Conclusion: Indraprastha Gas Ltd (IGL) is the sole supplier of compressed natural gas (CNG)

and piped natural gas (PNG) in the national capital territory (NCT) region of Delhi

Consider ing the inherent economical and environmental advantages of both

CNG and PNG over conventional fuels like petrol, diesel and LPG, demand for

these fuels is expected to accelerate going forward.

There is no competitor for IGL within the NCT region due to licensing

requirement and unavailability of firm gas allocations; hence any incremental

demand for PNG or CNG in this region would directly benefit IGL. The company

is also awaiting the Supreme Court's decision on light commercial vehicles'

(LCV) conversion to CNG variants, which would be a good medium-term revenue

trigger.

IGL, co-promoted by GAIL and BPCL, has a distinction of operating a low risk-

high return business model. The company is also foraying into new markets of

Greater Noida, Ghaziabad, Sonepat and Panipat, thus expanding its presence

around the NCT region.


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9. References:

1. Equity Analysis Reports from Ask-Raymond James & Associates Private

Limited, Mumbai.

2. CIMA books

3. www.bharatpetroleum.org

4. www.equitymaster.com

5. www.myiris.com

6. www.sebiedifar.nic.in

Indraprastha Gas Limited

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