Posted by: sanjayshetty | July 13, 2009

Lets play Monopoly

In general, when one hears of a company which is a monopoly, people look at it with distaste, but in the world of investing one literally salivates when one finds one.

In investing, businesses which have an edge, a monopoly are almost sure bets for providing great returns. In the words of Warren Buffet:

“In business, I look for economic castles protected by unbreachable ‘moats’.” -Warren Buffett"

(You can read the post I had made earlier where I’ve covered what a Moat is in detail Rule #1 Don’t lose money)

My focus in this post is to explore one of such companies, and list out a few more likely candidates, which have an advantage over most others. I would love to hear your thoughts about the companies I cover, and about similar companies you’ve identified.

Ok, here’s the first one, Indraprastha Gas(IGL).

General Company Overview:

  • Incorporated in December, 1998(IGL took over Delhi City Gas Distribution Project in 1999 from GAIL (India) Limited (Formerly Gas Authority of India Limited ).)
  • Having confidence of over 80,000 esteemed investors. 
  • Having 181 CNG stations. (Started with 9 CNG stations & 1000 PNG consumers, Crossed 100 stations in 2003)
  • Fuelling over 2,50,000 vehicles including over 12,000 buses, 85,000 three wheelers and over 1,50,000 private cars.
  • Supplying online cooking gas to around 1,40,000 households.
  • Providing energy solutions to major 5-star hotels, hospitals, embassies and restaurants.
  • A dedicated team of 350 employees.

IGL now focuses on conversion of private vehicles (private cars) to CNG. In this connection efforts are being made on the private vehicle front encouraging them to convert to CNG mode. IGL has been in coordinating with CNG kit suppliers, Transport Department, Automotive Research Association of India (ARAI) and Vehicle Research and Development Establishment (VRDE) to ease the process for endorsement of the same on Registration certificate of the vehicle.

The company is in the process of enhancing its compression capacity by adding new stations and also by converting the daughter and daughter booster stations to mother and online stations.

IGL is also working towards expanding its gas retail network to the other cities of National Capital Region (NCR) viz. Noida including Grearter Noida, Gurgaon and Faridabad. The Company aims to lay natural gas pipe grid in these cities to set up CNG stations and providing PNG to domestic, commercial and industrial sectors.

The latest on IGL is, it’s gearing up towards the upcoming Commonwealth games, and hoping to setup new gas stations etc. IGL is a debt free company and the management has clearly identified that distributing piped gas is where it needs to focus on and expand it’s customer base.

My take on IGL: Most people when talking about IGL seem to worry about the fact that by 2011 it’s monopoly would end and other players would be allowed entry into this market.

I feel that competitors would have an uphill task to reach the current level at which IGL is today. So, even though the monopoly might end in 2011, the tailwinds for the business would last for a long time to come. In addition, the nature of the business is such that once you’ve established yourself, for e.g. take the case of a customer who has piped gas from IGL, for a competitor to make the customer to change over, would be very difficult. It’s like trying to make you change your electricity provider, almost next to impossible unless the rates offered are far lower, which is very very unlikely. In addition, IGL has the first mover advantage of getting premium real estate spots for it’s gas stations. In short, IGL has a MOAT which would exist even if it’s monopoly to operate in the region ends in 2011.

Ok, now that you have a brief overview of the company, let me take you through their numbers?(Click on the image for a larger sized view.)

image     

I’ve done a Discounted Cash Flow calculation by projecting Free CashFlow, basically the FWallstreet.com model as explained by Joe Ponzio, which in turn is based on Buffet’s model. (The data I’ve used is provided by CMIE, so if you’re using publicly available data you might notice some variations in the numbers. For detailed definitions of the various line items as indicated by CMIE visit their website www.businessbeacon.com)

Well, not surprisingly this monopoly is doing quite well. It’ median CROIC is around 17% and it’s FCF has been positive and growing at a median value of 28%. In projecting future free cash flow I’ve taken the lower of Equity, FCF and CROIC as the growth rate. I’ve taken a 25% Margin of Safety as it is a market leader/monopoly, in it’s area of operation. At a 15% discount rate, and current market price this stock appears to be undervalued. (Your valuation could and would differ from mine, and that’s quite alright, don’t worry about it, there is no precise fixed value, at best you could arrive at an approximate value.)

The basic point out here is that Indraprastha Gas is a clear monopoly and will remain so for quite a while, my guess is that it would be a good performer for at least the next 10 years. I even tried a different scenario by changing the growth rate to about 15% and then the per share value comes to about 195 which is about a 20% discount to it’s current value. Is this is a good buy? At current price levels I’m not completely comfortable. I do hold the stock and had bought it at a larger discount about 37%(avg. purchase price of about 110). So for now, I would suggest keeping this stock in your watch list and evaluate it further.

Here’s another company, GAIL (GAS Authority of India) – Again a virtual monopoly, laying gas pipelines across India.

As I come across more such monopolies either in the Indian or the US markets, I’ll highlight them here. Let me know if this is of value to you.

P.s. A question for you, do you think you might be interested in an excel based tool, which will help you quickly scan the relevant numbers for FCF calculation, for Indian listed companies? (based on 5 yr data provided by Reuters online). Basically you enter a symbol, and it will pull up relevant data from Reuters and it will show you what the current value per share is based on FCF calculation. As of now I don’t have a list of all symbols on Reuters, hence, I can’t create an automatic scanner of all listed stocks on Reuters. Let me know your thoughts and if you are interested, drop me an email at my last name, “shetty”, at hotmail

P.p.s. as I finished writing this blog post I noticed that IGL had jumped almost 12% at the end of the day before I posted this article, this is a huge jump and hence thought i’d mention it.

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Responses

  1. Hi Sanjay,

    How do you calculate FCF for Indian companies as they do not have a clear CAPEX mentioned in the financial statements.

    Also, for each industry the CAPEX amount for FCF calculation would be different right? (I am wondering how to evaluate HDFC). Appreciate if you can share some thoughts on this.

    Regards

  2. Madhav S -> I have been using the CMIE Prowess database which is quite detailed, however you could also lookup a free resource such as Reuters (e.g. for Indraprastha Gas check this http://www.reuters.com/finance/stocks/incomeStatement?stmtType=CAS&perType=ANN&symbol=IGAS.NS

    In the case of financial companies/banks the way you go about it quite different, and I’m not an expert on this, I would recommend you look into the comments(by Robert Crawford) out there to get some insight http://www.fwallstreet.com/blog/84.htm

  3. Sanjay,

    I was abt to ask the same question on how you got the maint capex figures. Thanks to Madhav, I didnt have to ask it.

    Have u found any free site which provides seperate figures of maint & growth capex? reuters and others free sites provide a single figure for capex.

    Also, CMIE Prowess looks quite expensive for individual investors at Rs. 70,000/-. How is the database? Are you happy with the service? Also does Prowess proivdes the capex breakdown?

    George.
    http://www.rationalportfolio.com

  4. Hi Sanjay

    You’ve got a terrific blog. I’ve downloaded your sp sheet and that’s great too. (Copy of fwallstreet_model-modified-for-sp500-2003-version-10-….xls)

    Some questions though :

    1. I found your sp sheet does not work for finance companies / banks – Is that right ? or should I tweak it to make it work ?

    2. Your sp sheet did not work for some other companies as well – example Chubb corpn. ..again same question ..is tweaking needed

    3. Yes I am interested in an XL sp sheet that scans for value deals in the Indian Stock market. Have you posted this somewhere ?

    4. I too feel sleepy reading Intelligent investor !! I know you have a video… do you know IF someone has summaries the principles there into 10 or so basic formulae ? 10 ..12 … the number does NOT matter but just as formulae ?

    thanks in advance
    best regards
    Subu


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