With go-ahead received for CDG operations, it is new growth avenue in high potential market for IGL
Indraprastha Gas (IGL) has received the permission from the Haryana government to operate its city gas distribution (CGD) network in Gurugram. Director of Industries & Commerce, Haryana has awarded the new area between west Sohna and NH-8 to IGL. The area authorised to IGL covers 25 per cent of Gurugram.
Gurugram has high CGD volume potential of 2 million metric standard cubic meter per day (mmscmd) over long term. Presently, Haryana City Gas (HCG) operations cover one-fourth of Gurugram with volume of 0.2 mmscmd. Moreover, half the city is still unauthorised for CGD operations and potential award in ensuing years could further drive volumes.
With incumbent HCG failing to build the required infrastructure, the new area has been authorised to IGL. This decision paves the way for IGL to get permission for the remaining 50 per cent of Gurugram in coming years.
As per management, IGL will evaluate the expansion plans, potential market opportunity, and estimated investments in the new Gurugram areas. Also, the company has appointed a consultant to carry out a detailed feasibility study of the new area to assess potential volumes and investments.
The preliminary analysis conducted by Edelweiss Securities Limited suggests volume potential of 0.2-0.3 million mmscmd over long term, which will primarily be dominated by PNG segment.
Over the next one to two years, IGL will set up five to six CNG stations and 10,000 domestic PNG connections.
Capex Funding
IGL will add 35 CNG stations in Delhi in fiscal year 2018 and 2019. The capital expenditure of Rs 400 to 500 crore per annum in existing areas and investments in Gurugram will be funded through internal accruals. Capital expenditure for Delhi and NCR regions would be Rs 300 crore and for Rewari, it would be Rs 100 crore.
The prospects for the natural gas distribution company are quite positive. The move to venture in Gurugram strengthens the sustainable high growth outlook for IGL. In the 2016-17 fiscal year, IGL posted 14 per cent volume growth. Its expected compound annual growth rate (CAGR) volume growth over the period 2017-20 is 10 per cent driven by 8 to 10 per cent growth in existing markets and Rewari.
For Rewari, a robust return on equity (RoE) of 22 per cent is expected, along with expected earnings per share (EPS) and free cash flow CAGR of 14 and 12 percent, respectively.