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Piping Gains

A virtually monopolistic market control has put this company at the centre-stage in this segment

Profile
Indraprastha Gas Limited (IGL) supplies two products, Compressed Natural Gas (CNG) for the transport sector and Piped Naural Gas (PNG) for the commercial and the domestic sector. The company is going on an aggressive expansion plan to consolidate its monopoly position with an investments of more than Rs 1,200 crore on CNG and Rs 600 crore on PNG network this fiscal (FY10). It is also expanding its network to the neighbouring states like Uttar Pradesh and Haryana.

Fundamental Performance
IGL has steadily increased its profits over past five years, growing at the rate of 15.98 per cent per annum. With no interest obligation due to zero debt, IGL is a regular dividend paying company, with the payout ratio, as of March 31, 2009, standing at 31 per cent.

But the company’s ongoing tussel with Petroleum and Natural Gas Regulatory Board (PNGRB) makes it difficult for it to renew its license  beyond 2010, when it will expire. If the board does go against IGL, then it will lose its monopoly status.

Moreover, as IGL fully utilizes gas allocated to it by GAIL, it would need to find sources to keep up with the customer demand. But this additional procurement won’t come at the same rate as it pays to GAIL. This can depress the current margins of the company.

Stock Performance
Traditionally, IGL stock has not been a fast mover during uptrends. Over the past 5 years the stock’s annualized performance is 16.64 per cent, but neither does it nose-dive like others when market crashes. Between January 8, 2008 to March 9, 2009, when Sensex was down by 55 per cent, IGL went down by just 41.5 per cent.

The dividend yield of 2.46 of the company is also an additional plus point. Currently, IGL is trading at a PE of 12.84 while its 5-year median PE is 12.64, hence the stock is trading very near its historic price. With adequate downside protection, and high dividend yield, this is still an ideal candidate as a defensive pick.

History
IGL was created to look after the distribution network of gas to the national capital, New Delhi and surrounding areas, the so-called national capital region (NCR). In 1999, IGL took over the Delhi City Gas Distribution Project from GAIL (India) Ltd. It is the sole distributor of gas in NCR.

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Alse see: Indraprastha Gas
This article was previously published in October 2009 issue of Wealth Insight