1. 4QFY2010 Result Update I Oil & Gas
May 26, 2010
IGL REDUCE
CMP Rs229
Performance Highlights Target Price Rs210
IGL reported a 27.7% yoy increase in bottom-line to Rs51.5cr (Rs40.3cr) in Investment Period 12 Months
4QFY2010, lower than our expectation of Rs61.0cr, because of lower gross
Stock Info
gas margin and subdued CNG volume growth on a qoq basis. On account of
healthy top-line growth of 26.8% yoy and payment of overdrawl charges on Sector Oil & Gas
excess drawl of gas in 4QFY2009, OPM expanded by 75bp yoy to 32.6%
(31.8%) in 4QFY2010. We continue to harbour concerns on sustainability of Market Cap (Rs cr) 3,205
the company’s high-margin business model, especially considering that Beta 0.4
margins were fueled by lower gas costs (subsidised gas). We recommend a
Reduce rating on the stock. 52 WK High / Low 257/126
Volume growth continues: CNG volume increased 12.1% yoy to 1.98mmscmd Avg. Daily Volume 188919
(1.76mmscmd), which was below our expectation of 2.04mmscmd. Overall,
Face Value (Rs) 10
total volumes increased by 16.5% yoy to 2.20mmscmd (1.93mmscmd), lower
than our expectation of 2.24mmscmd. Due to healthy revenue growth and BSE Sensex 16,388
OPM expansion, EBITDA grew by 29.8% yoy to Rs94.4cr (Rs72.7cr).
Nifty 4,917
Depreciation during 4QFY2010 increased 12.6% yoy to Rs19.8cr (Rs17.6cr)
but was flat on a qoq basis. Other income dipped 53.7% yoy to Rs3.6cr Reuters Code IGAS.BO
(Rs5.7cr) on account of deployment of surplus funds. Bottom-line grew by
27.7% yoy to Rs51.5cr (Rs40.3cr), below our expectation of Rs61cr, mainly on Bloomberg Code IGL@IN
account of higher gas cost. Shareholding Pattern (%)
Outlook and Valuation: Given the fact that high margins for the company Promoters 45.0
were largely a function of subsidised gas prices, we believe passing through
complete price hike will be difficult. We model an increase of Rs2.1/kg in MF/Banks/Indian FIs 32.4
CNG prices (50% of the required price hike of Rs4.2/kg). Thus, we have
FII/NRIs/OCBs 11.9
downgraded our earnings estimates for FY2011E and FY2012E on account of
the recent increase in the APM gas price. At the CMP of Rs229, the stock is Indian Public 10.7
available at relatively expensive valuations of 15.8x FY2012E EPS and 3.1x
Abs. (%) 3m 1yr 3yr
FY2012E P/BV. We recommend a Reduce view on the stock (Sell earlier), with
a revised Target Price of Rs210. Sensex 0.8 20.6 14.3
IGL 9.6 66.9 99.3
Key Financials
Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E
Net Sales 853 1,084 1,403 1,636
% chg 20.8 27.1 29.4 16.6
Net Profit 172 215 187 204
% chg (1.1) 24.9 (13.5) 9.1
OPM (%) 35.2 36.0 26.2 25.8
EPS (Rs) 12.3 15.4 13.3 14.5
P/E (x) 18.6 14.9 17.2 15.8 Deepak Pareek
P/BV (x) 4.7 3.9 3.4 3.1 Tel: 022 – 4040 3800 Ext: 340
E-mail: deepak.pareek@angeltrade.com
RoE (%) 27.4 28.6 21.2 20.6
RoCE (%) 34.8 38.6 27.9 26.5 Amit Vora
EV/Sales (x) 3.5 2.7 2.1 1.8 Tel: 022 – 4040 3800 Ext: 322
EV/EBITDA (x) 9.8 7.6 8.1 7.2 E-mail: amit.vora@angeltrade.com
Source: Company, Angel Research
1
Please refer to important disclosures at the end of this report Sebi Registration No: INB 010996539
2. IGL I 4QFY2010 Result Update
Exhibit 1: 4QFY2010 Performance
Y/E March (Rs cr) 4QFY10 4QFY10 %chg FY10 FY09 %chg
Total Operating Income 290 228 26.8 1,084 853 27.1
COGS 138 116 19.5 495 411 20.5
Total operating expenditure 195 156 25.4 697 553 26.2
EBITDA 94 73 29.8 387 300 28.8
EBITDA Margin % 32.6 31.8 35.7 35.2
Other Income 3 5 (53.7) 15 26 (41.3)
Depreciation 20 18 12.6 77 67 14.9
Interest - - - -
PBT 77 61 27.4 324 259 25.3
PBT Margin % 26.6 26.5 29.9 30.4
Total Tax 26 20 26.8 109 86 26.1
% of PBT 33.2 33.4 33.6 33.4
PAT 51 40 27.7 215 172 24.9
PAT Margin % 17.8 17.6 19.9 20.2
Source: Company, Angel Research
Exhibit 2: 4QFY2010 Segmental Performance
Segmental 4QFY10 4QFY09 %chg FY10 FY09 %chg
CNG
Volume (mnkgs) 135.7 121.1 12.1 528.7 460.4 14.8
Value (Rs cr) 285 226 26.1 1,076 862 24.8
PNG
Volume (mmscm) 25.0 15.4 62.3 62.7 54.3 15.4
Value (Rs cr) 39 30 30.2 116 100 16.1
Total Gross Sales (Rs cr) 324 256 26.5 1,192 962 23.9
Source: Company, Angel Research
Operating revenue marginally below expectation: For 4QFY2010, IGL reported a
26.8% yoy increase in operating income to Rs290cr (Rs228cr), which was marginally
below our expectation of Rs294cr. CNG volumes increased 12.1% yoy to
1.98mmscmd (1.76mmscmd), below our expectation of 2.04mmscmd. Whereas,
PNG volumes increased 62.3% yoy to 0.28mmscmd (0.17mmscmd) and were much
above our expectation of 0.19mmscmd due to clubbing of the sales to Adani under
the PNG segment during the quarter. Total volume increased by 16.5% yoy to
2.20mmscmd (1.93mmscmd), which was below our expectation of 2.24mmscmd,
due to lower-than-expected CNG volumes. Average gross CNG realisations were
higher on a yoy basis at Rs21/kg (Rs18.7/kg) due to the price hike effected on June
16, 2009, whereas average PNG realisations took a substantial dip on a yoy basis
during the quarter to Rs15.6/scm (Rs19.5/scm) due to clubbing of lower margin
sales to Adani under the PNG segment.
OPM expands by 75bp yoy to 32.6%: Gas sourcing cost increased 19.5% yoy to
Rs138cr (Rs116cr), which was above our expectation of Rs131cr. Gas cost per scm
came in at Rs6.8/scm (Rs6.6/scm) as against our expectation of Rs6.4/scm. Gross
gas spread during the quarter on a yoy basis stood higher at Rs7.5/scm
(Rs6.5/scm), but was lower than our expectation of Rs7.9/scm. On account of higher
gas cost per scm, gross gas spread also stood lower on a qoq basis at Rs7.5/scm
(Rs7.9/scm). Staff cost increased 49.1% yoy to Rs9.6cr (Rs6.5cr) owing to increased
minimum wage, whereas other operating expenditure increased 41.4% yoy to
Rs47.5cr (Rs33.6cr). OPM during the quarter expanded by 75bp yoy to 32.6%
(31.8%); however, it was lower than our expectation of 36.6%. On account of
healthy revenue growth and OPM expansion, operating profit grew by 29.8% yoy to
Rs94.4cr (Rs72.7cr). However, the same declined by 10.2% on a qoq basis due to
lower CNG volumes and increased gas cost.
May 26, 2010 2
3. IGL I 4QFY2010 Result Update
Depreciation flat qoq; other income dips: Depreciation during 4QFY2010 increased
12.6% yoy to Rs19.8cr (Rs17.6cr), but was flat on a qoq basis. Other income dipped
53.7% yoy to Rs3.6cr (Rs5.7cr) on account of deployment of surplus funds.
PAT up 27.7% yoy, but below our expectation: Higher revenue growth and OPM
expansion resulted in bottom-line growing 27.7% yoy to Rs51.5cr (Rs40.3cr), which
was below our expectation of Rs61cr, mainly on account of higher gas cost and
lower-than-anticipated CNG sales volumes.
Segment-wise performance
Robust growth continues in CNG and PNG volumes: On a sequential basis, IGL’s
CNG volumes declined marginally by 0.3% to 1.98mmscmd (1.94mmscmd), but
were higher on a yoy basis, primarily on the back of growth in CNG vehicle
conversions. However, PNG volumes registered robust growth of 53.4% sequentially
to 0.28mmscmd (0.18mmscmd) on account of clubbing of sales to Adani under the
PNG segment from the current quarter. PNG volumes were also higher on a yoy
basis by robust 62.3% yoy.
Exhibit 3: CNG, PNG Volume Trend
160.0 25.0 30.0 70.0
140.0 60.0
25.0
20.0
120.0
50.0
20.0
% yoy growth
100.0
% yoy growth
15.0
mmscm
40.0
mn kgs
80.0 15.0
30.0
60.0 10.0
10.0
20.0
40.0
5.0
5.0 10.0
20.0
0.0 0.0 0.0 0.0
1QFY2007
2QFY2007
3QFY2007
4QFY2007
1QFY2008
2QFY2008
3QFY2008
4QFY2008
1QFY2009
2QFY2009
3QFY2009
4QFY2009
1QFY2010
2QFY2010
3QFY2010
4QFY2010
1QFY2007
2QFY2007
3QFY2007
4QFY2007
1QFY2008
2QFY2008
3QFY2008
4QFY2008
1QFY2009
2QFY2009
3QFY2009
4QFY2009
1QFY2010
2QFY2010
3QFY2010
4QFY2010
CNG sales volumes % yoy growth (RHS) PNG sales volumes % yoy growth (RHS)
Source: Company, Angel Research
CNG realisations up; PNG realisations decline substantially: Net CNG realisations
stood flat on a qoq basis to Rs18.3/kg, but were higher on a yoy basis at Rs18.3/kg
(Rs16.3/kg) on account of price hike effected on June 16, 2009, while PNG
realisations declined by substantial 18.7% qoq to Rs15.6/scm (Rs19.5/scm) on
account of clubbing of low-margin sales to Adani under the PNG segment. The net
CNG sales increased marginally on a qoq basis to Rs248.8cr (Rs248.4cr), while
PNG sales registered robust growth of 24.6% qoq to Rs39.0cr (Rs31.3cr).
Exhibit 4: CNG, PNG — Net Realisations, Gross Margin
15.0 8.0 25.0 14.0
14.0
7.5 13.0
13.0 20.0
12.0 7.0 12.0
15.0
Rs/scm
Rs/scm
11.0
Rs/scm
Rs/scm
6.5 11.0
10.0 10.0
10.0
9.0 6.0
8.0 5.0
9.0
5.5
7.0
0.0 8.0
6.0 5.0
1QFY2007
2QFY2007
3QFY2007
4QFY2007
1QFY2008
2QFY2008
3QFY2008
4QFY2008
1QFY2009
2QFY2009
3QFY2009
4QFY2009
1QFY2010
2QFY2010
3QFY2010
4QFY2010
1QFY2007
2QFY2007
3QFY2007
4QFY2007
1QFY2008
2QFY2008
3QFY2008
4QFY2008
1QFY2009
2QFY2009
3QFY2009
4QFY2009
1QFY2010
2QFY2010
3QFY2010
4QFY2010
Net realisation of PNG Gross margin (RHS)
Net realisation of CNG Gross margin (RHS)
Source: Company, Angel Research
May 26, 2010 3
4. IGL I 4QFY2010 Result Update
Outlook and Valuation
IGL’s 4QFY2010 performance was lower than our expectations driven by
lower-than-expected gross margins because of higher-than-expected gas cost. On
account of the recent hike in APM gas prices, the profitability and outlook for the
stock will be significantly dependent on the extent of the pass through of the price
hike to end-users by the company.
We have been building a scenario of margin compression for IGL on account of
increased APM gas prices post the end of the marketing exclusivity (CY2012E
onwards). We have been long maintaining our stance that IGL’s gas sourcing cost
should increase to provide a level playing field for all the new entrants in the region.
As PNGRB does not regulate Marketing Margins of the CGD companies, it will have
to ensure that IGL does not get gas at lower prices vis-à-vis the new entrants in the
NCR and NCT region, so that there is free and fair determination of marketing
margins on a competitive basis. We believe that the recent increase in APM gas
prices provides a level playing field to the possible entrants.
IGL’s exorbitant margins in the past were fueled on account of three major factors:
1) liquid fuel-based pricing and APM gas pricing, 2) differential taxes structure on
CNG and other transport fuels, and 3) substitution of gas with liquid fuels. IGL has
historically charged its CNG and PNG customers based on prices of alternative
liquid fuel, while the company procures subsidised gas. Thus, IGL enjoys the benefits
of subsidy rather than passing it on to customers. Going ahead, we expect margins
to come under pressure, as this arbitrage should get eliminated to an extent by
de-regulation of APM gas prices. Recently, the government has increased APM gas
prices; however, there is no corresponding increase in CNG and PNG gas prices till
date, as the company is still mulling the extent of the hike. Given the fact that high
margins for the company were largely a function of subsidised gas prices, we
believe that passing through complete price hike will be difficult for IGL. On account
of this, we model an increase of Rs2.1/kg in CNG prices (50% of the required price
hike to maintain margins-Rs4.2/kg). Hence, we downgrade our earnings estimates
for FY2011E and FY2012E.
Exhibit 5: Revision in Estimates
Particulars Old estimates New estimates % chg
(Rs cr) FY11E FY12E FY11E FY12E FY11E FY12E
Revenues 1,275 1,534 1,403 1,636 10.1 6.7
EBITDA 449 482 367 422 (18.1) (12.6)
EBITDA margins (%) 35.2 31.4 26.2 25.8 901bp 567bp
EPS (Rs) 16.4 14.7 13.3 14.5 (18.7) (1.2)
Source: Company, Angel Research
However, considering that the APM gas price has been frozen until FY2014, the
possibility for price hikes on regular intervals will not arise for IGL, which will enable
the company to pass through increases in other operational expenditure post
FY2011E with relative ease. Earlier, we were expecting a steeper decline in
operating margins, assuming that large part of the increase in cost will be retained
by the company. However, now we model IGL to bear 50% of the total increase in
input cost due to recent APM gas price hike, which boosts our earnings estimates for
FY2013E and beyond.
At the CMP of Rs229, the stock is available at relatively expensive valuations of
15.8x FY2012E EPS and 3.1x FY2012E P/BV. On account of the change in our
estimates, we have revised the target price for the stock upwards to Rs210/share
(Rs190/share earlier), which provides a downside of 8.3% from the current level.
Thus, we upgrade our rating on the stock to Reduce (Sell earlier).
May 26, 2010 4
5. IGL I 4QFY2010 Result Update
Exhibit 6: One-year Forward Rolling P/E Band
230
15x
180 13x
Share Price (Rs)
11x
130
9x
7x
80
30
Apr-04
Aug-05
Apr-06
Aug-07
Apr-08
Aug-09
Apr-10
Dec-04
Dec-06
Dec-08
Source: Company, Angel Research
May 26, 2010 5
6. IGL I 4QFY2010 Result Update
Profit & Loss Statement (Rs cr)
Y/E March FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E
Total operating income 614 706 853 1,084 1,403 1,636
% chg 15.0 20.8 27.1 29.4 16.6
Total Expenditure 359 406 553 697 1,035 1,214
Purchase of gas 268 303 411 495 839 989
Staff expenditure 14 15 24 31 37 42
Other operating expenditure 77 88 118 172 160 184
EBITDA 255 300 300 387 367 422
% chg 17.6 0.0 28.8 (4.9) 14.7
(% of Net Sales) 41.6 42.5 35.2 36.0 26.2 25.8
Depreciation and amortisation 60 63 67 77 103 128
EBIT 195 237 233 309 264 294
% chg 21.5 (2.0) 32.8 (14.5) 11.1
(% of Net Sales) 31.8 33.6 27.3 28.8 18.8 18.0
Interest & other Charges - - - - 4 8
Other Income 10 23 26 15 21 21
(% of PBT) 5.0 9.0 10.1 4.7 7.5 6.9
Share in profit of Associates - - - - - -
Recurring PBT 206 261 259 324 281 307
% chg 26.9 (0.8) 25.3 (13.3) 9.1
Extraordinary Expense/(Inc.) - - - - - -
PBT (reported) 206 261 259 324 281 307
Tax 68 86 86 109 95 104
(% of PBT) 32.9 33.1 33.4 33.6 33.7 33.7
PAT (reported) 138 174 172 215 187 204
Add: Share of earnings of
- - - - - -
associate
Less: Minority interest (MI) - - - - - -
Prior period items - - - - - -
PAT after MI (reported) 138 174 172 215 187 204
ADJ. PAT 138 174 172 215 187 204
% chg 26.5 (1.1) 24.9 (13.5) 9.1
(% of Net Sales) 22.5 24.7 20.2 20.1 13.3 12.4
Basic EPS (Rs) 9.9 12.5 12.3 15.4 13.3 14.5
Fully Diluted EPS (Rs) 9.9 12.5 12.3 15.4 13.3 14.5
% chg 26.5 (1.1) 24.9 (13.5) 9.1
May 26, 2010 6
7. IGL I 4QFY2010 Result Update
Balance Sheet (Rs cr)
Y/E March FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E
SOURCES OF FUNDS
Equity Share Capital 140 140 140 140 140 140
Preference Capital - - - - - -
Reserves & Surplus 328 436 543 685 793 906
Shareholders Funds 468 576 683 825 933 1,046
Minority Interest - - - - - -
Total Loans - - - - 50 100
Net Deferred Tax Liability 30 24 21 17 14 14
Deposits from customers 5 7 27 27 28 30
Total Liabilities 503 607 731 870 1,025 1,190
APPLICATION OF FUNDS
Gross Block 613 668 817 959 1,249 1,549
Less: Acc. Depreciation 250 310 378 455 558 686
Net Block 363 358 439 504 691 863
Capital Work-in-Progress 31 59 82 140 150 150
Goodwill - - - - - -
Investments 128 109 104 104 104 104
Current Assets 106 228 259 314 358 386
Cash 40 140 146 172 182 184
Loans & Advances 25 41 55 70 91 106
Other 40 47 58 73 85 97
Current liabilities 125 146 154 192 277 314
Net Current Assets (19) 82 106 122 81 73
Mis. Exp. not written off - - - - - -
Total Assets 503 607 731 870 1,025 1,190
Cash Flow Statement (Rs cr)
Y/E March FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E
Profit before tax 206 261 259 324 281 307
Depreciation 60 63 67 77 103 128
Deposits accepted during the year 1 1 20 1 1 1
Change in Working Capital 29 (2) (18) 9 51 10
Less: Other income (10) (23) (26) (15) (21) (21)
Direct taxes paid (73) (93) (89) (113) (98) (104)
Cash Flow from Operations 213 207 212 284 317 321
(Inc.)/ Dec. in Fixed Assets (58) (83) (172) (200) (300) (300)
(Inc.)/ Dec. in Investments (85) 19 5 - - -
Other income 10 23 26 15 21 21
Cash Flow from Investing (133) (41) (141) (185) (279) (279)
Issue of Equity - - - - - -
Inc./(Dec.) in loans - - - - 50 50
Dividend Paid (Incl. Tax) (39.9) (49) (66) (74) (79) (90)
Others (10.1) (18) 0 - - -
Cash Flow from Financing (50.0) (67) (65) (74) (29) (40)
Inc./(Dec.) in Cash 29.4 99 6 26 10 2
Opening Cash balances 11.0 40 140 146 172 182
Closing Cash balances 40.4 140 146 172 182 184
May 26, 2010 7
9. IGL I 4QFY2010 Result Update
Research Team Tel: 4040 3800 E-mail: research@angeltrade.com Website: www.angeltrade.com
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Disclosure of Interest Statement IGL
1. Analyst ownership of the stock No
2. Angel and its Group companies ownership of the stock No
3. Angel and its Group companies’ Directors ownership of the stock No
4. Broking relationship with company covered No
Note: We have not considered any Exposure below Rs 1 lakh for Angel and its Group companies.
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Tel: (022) 3952 4568 / 4040 3800
Angel Broking Ltd: BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / PMS Regn Code: PM/INP000001546 Angel Securities Ltd:BSE: INB010994639/INF010994639 NSE:
INB230994635/INF230994635 Membership numbers: BSE 028/NSE:09946
Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798 Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM /
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May 26, 2010 9
