Governor Olli Rehn: Dialling back monetary restraint
Indraprastha Gas Ltd.- Company Update-June 22, 2010
1. Company Update | Oil & Gas
June 22, 2010
Indraprastha Gas BUY
CMP Rs255
Turning a new leaf Target Price Rs301
Investment Period 12 months
The hike in CNG prices have eliminated key headwinds for IGL viz. expected margin
contraction and reduction in earnings and return ratios, to a large extent. Relative
Stock Info
ease in pass through of the APM gas price hike indicates absence of regulatory
Sector Oil & Gas
risks in the near term. This coupled with strong CNG conversions and growth in
newer geographies would result in strong earnings growth and re-rating of the Market Cap (Rs cr) 3,575
stock. We revise our target price on the stock to Rs301 (Rs210) owing to the upward Beta 0.5
revision in earnings estimates and lower WACC estimates (to reflect lower risk). 52 Week High / Low 266/126
We upgrade the stock to Buy from Reduce earlier.
earlier. Avg Daily Volume 178384
Margin erosion risk subsides: We had concerns over sustainability of IGL's Face Value (Rs) 10
high margins, which we believed were fueled by lower gas costs (subsidised gas). BSE Sensex 17,750
Also, post end of marketing exclusivity in CY2011 we believed a level playing field Nifty 5,317
would emerge and IGL would have to source gas at higher prices in turn squeezing Reuters Code IGAS.BO
its marketing margins. However, with the hike in CNG prices, our assumption of
Bloomberg Code IGL@IN
margin fall no longer holds good. It also points at the absence of regulatory risks in
the near term. Going ahead, given that KG-D6 and APM gas prices are freezed till Shareholding Pattern (%)
FY2014, IGL would not be required to make significant CNG price hikes. Thus, the
Promoters 45.0
margin erosion risk has subsided substantially.
MF / Banks / Indian FIs 32.4
Volumes to propel profitability: We expect strong growth in CNG conversion in FII / NRIs / OCBs 11.9
IGL's area of operation driven by discretionary CNG demand due to better
Indian Public / Others 10.7
economics. This coupled with strong growth expected in the domestic PNG segment
is likely to drive the company's volume growth going ahead. We expect CNG and Abs. (%) 3m 1yr 3yr
PNG volumes to register a CAGR of 14.4% and 36.2% over FY2010-12E respectively,
Sensex 1.9 23.9 22.7
resulting in overall volumes CAGR of 16.9% during the mentioned period. Thus,
strong volume growth coupled with stable EBDITA/scm are likely to drive the IGL 14.0 95.6 110.8
company’s profitability (CAGR of 17.5% over FY2010-12E) going ahead.
Key Financials
Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E
Total operating Income 853 1,084 1,612 1,985
% chg 20.8 27.1 48.7 23.1
Profit
Net Profit 172 215 244 298
% chg (1.1) 24.9 13.4 21.9
OPM (%) 35.2 35.7 29.3 30.5
EPS (Rs) 12.3 15.4 17.5 21.3
P/E (x) 20.7 16.6 14.6 12.0 Pareek
Deepak Pareek
P/BV (x) 5.2 4.3 3.6 3.0 +91 22 4040 3800 Ext: 340
deepak.pareek@angeltrade.com
RoE (%) 27.4 28.6 27.0 27.6
RoCE (%) 34.8 38.1 33.8 31.6
Vora
Amit Vora
EV/Sales (x) 3.9 3.2 2.2 1.9
+91 22 4040 3800 Ext: 322
EV/EBITDA (x) 11.1 8.9 7.7 6.3 amit.vora@angeltrade.com
Source: Company, Angel Research
Please refer to important disclosures at the end of this report
2. Indraprastha Gas | Company Update
Investment Arguments
Margin erosion risks subside substantially
CNG rates in Delhi have increased by Following increase in the APM gas prices, IGL has hiked the prices of compressed
Rs21.9/kg.
Rs5.6/kg to Rs27.5/kg from Rs21.9/kg. natural gas (CNG) by over 26%. The CNG rates in Delhi have increased by Rs5.6/kg
The hike has come as a positive surprise to Rs27.5/kg from Rs21.9/kg. Similarly, the prices in Noida, Greater Noida and
as we had been building in 50% pass Ghaziabad stand increased at Rs30.6/kg. The hike has come as a positive surprise as
through of the APM as well as non-APM we had been building in 50% pass through of the APM as well as non-APM gas price
gas price hike in our estimates hike in our estimates. Earlier statements by the Petroleum Secretary and the government
had also indicated that IGL may not be able to fully pass through the price hike
needed to offset the impact on margins.
We had estimated the required increase in the CNG prices on account of the APM gas
price hike at around Rs3.4/kg (in FY2011E). Hence, the price hike of Rs5.6/kg more
than offsets the increase in the APM gas price (refer Exhibit 1). According to
According to management, the increase management, the increase could be further segregated into Rs5.0/kg on account of
could be further segregated into increase in gas cost, and the balance to the increase in operating expenditure. It may
Rs5.0/kg on account of increase in gas be noted here that IGL has changed over from the gas-based compressors to electric
cost, and the balance to the increase in compressors, which has resulted in reduction in the repairs and maintenance costs.
operating expenditure However, the same has increased the company's operating expenditure.
Exhibit 1: APM gas prices break-up
Particulars FY10 FY11E FY12E
Consumer Gas Price (TSCM) (10,000) Cal. 3,840 6,322 6,818
Consumer Gas Price(TSCM) (8,300) Cal. 3,187 5,247 5,659
Royalty (@10%) (TSCM) 266 623 623
Purchase tax (TSCM) 117 274 274
Gas marketing margins (TSCM) 200 200 200
HBJ Transportation charges
(including service tax) (TSCM) 1,061 1,061 1,061
DESU Maruti Transportation charges
(including service tax)(TSCM) 614 633 652
Total Price (TSCM) 5,445 8,038 8,469
Price per SCM 5.4 8.0 8.5
Price per Kg (1 SCM = 1.31 kg) 7.1 10.5 11.1
Required Increase in CNG prices per Kg 3.40 0.56
Source: Company, Angel Research
We believe that the increase of Rs5.0/kg on account of increase in gas cost captures
the increase in the APM gas prices (Rs3.4/kg), higher costs incurred in procuring
KG-D6 gas and R-LNG and higher gas costs for the domestic PNG segment.
June 22, 2010 2
3. Indraprastha Gas | Company Update
Exhibit 2: Weighted Average gas prices
Particulars FY10 FY11E FY12E
APM gas purchased (mmscm) 748 767 803
as % of the total gas (%) 89.8 77.3 70.5
Cost of APM gas (Rs/scm) 5.4 8.0 8.5
Non-APM Gas purchased (mmscm) 85 225 336
as % of the total gas (%) 10.2 22.7 29.5
Cost of Non-APM gas (Rs/scm) 11.9 12.1 11.8
Weighted average cost of gas (Rs/scm) 6.1 9.0 9.4
Price per Kg (1 SCM = 1.31 kg) 8.0 11.7 12.4
Required Increase in CNG prices per Kg 3.74 0.65
Source: Company, Angel Research
The PNG prices have been left unchanged by IGL as any hike in the same would hit
the economics or inducement to switch from domestic LPG to domestic PNG.
Currently, the new PNG user enjoys a marginal advantage of 3.4% over the domestic
LPG users.
Exhibit 3: PNG economics for domestic consumers
Cost of Domestic LPG (14.2kg cylinder, Rs) 310
Rs/ kg 21.9
Calorific value of LPG (Kcal) 11,007
Price for Rs/10,000Kcal 19.9
Cost for new PNG connection (Rs/scm) 15.9
Calorific value of PNG sold (Kcal) 8,300
Price for Rs/10,000Kcal 19.2
Price advantage over LPG (Rs) 0.68
Advantage (%) 3.4
Source: Company, Angel Research
Earlier, we had harbored concerns over sustainability of the company's high-margin
business model, as the margins were fueled largely by the lower gas costs (subsidised
gas). IGL charged its CNG and PNG customers based on the prices of alternative
liquid fuel, while it procured subsidised gas. Thus, IGL enjoyed the benefits of subsidy
rather than passing it on to customers. We held that post end of IGL's marketing
exclusivity in CY2011 a level playing field would emerge wherein IGL would be
required to source gas at higher prices in turn squeezing its marketing margins.
However, with the current hike in CNG prices by a significant 25.6%, our assumption
of margin compression no longer holds good. It also points at the absence of
regulatory risks in the near term.
KG-D6
Going ahead, given that KG -D6 and Going ahead, given that KG-D6 and APM gas prices are freezed till FY2014, IGL
APM gas prices are freezed till FY2014, would not be required to make significant CNG price hikes barring a minor increase
IGL would not be required to make due to change in the procurement mix and increase in operating expenditure. Thus,
significant CNG price hikes the margin erosion risk has subsided substantially. Moreover, in spite of the recent
increase in the CNG prices in the NCT, the CNG prices in the region are the least in
the country owing to the lower taxes levied by the Delhi government (refer Exhibit
4 & 5). Therefore, further increase in the CNG prices would not be a tough task.
June 22, 2010 3
4. Indraprastha Gas | Company Update
Exhibit 4: Comparative Taxes on CNG prices
State NCT of Delhi Pradesh
Uttar Pradesh Haryana Gujarat Mumbai Thane Pune
Taxes
Applicable Taxes
Service Tax on
City Gas Network (%) 10.30 10.30 10.30 10.30 10.30 10.30 10.30
Excise Duty +
Educational Cess (%) 14.42 14.42 14.42 14.42 14.42 14.42% 14.42
VAT (%) N.A. 13.50 12.50 12.25 12.50 12.50 12.50
Additional Vat N.A. N.A. N.A. 2.50 N.A. N.A. N.A.
Octroi N.A. N.A. N.A. N.A. N.A. 5% of Gas Cost 2.50
Source: Infraline, Angel Research
Exhibit 5: Comparative CNG prices across key cities in India
Name of the City Price
CNG Price (Rs/kg)
Delhi 27.5
Rajahmundry 28.0
Kanpur 29.0
Bareilly 29.0
Surat, Bharuch, Ankleswar 30.0
Noida 30.6
Greater Noida 30.6
Ghaziabad 30.6
Lucknow 31.0
Mumbai 31.5
Mira Bhayandar 31.7
Navi Mumbai 31.8
Thane 32.4
Agra 35.0
Pune 35.4
Source: Infraline, Angel Research
With the recent increase in the CNG IGL's profitability and fair value estimates are highly sensitive to the per unit change in
prices, the pricing risk has subsidised to its gross margins. To put things in perspective, if the gross margins are reduced by
Factoring
a greater extent. Factoring the same, we Rs1.0/scm from FY2011E onwards, our fair value estimates would decline by a
rate/WA
have reduced our discount rate/WACC whopping 26% to Rs221/share. Similarly, our earnings estimates also stands reduced
(weighted average cost of capital) by by 25.4% and 23.9% for FY2011E and FY2012E respectively under the same scenario.
50bp to 11.5% from 12.0% However, with the recent increase in the CNG prices, the pricing risk has subsidised to
a greater extent. Factoring the same, we have reduced our discount rate/WACC
(weighted average cost of capital) by 50bp to 11.5% from 12.0% earlier.
Volumes to propel profitability
The conversion economics continues to remain strong irrespective of the recent hike in
CNG prices, as CNG vehicle continue offer savings of around 57.3% over the petrol
driven vehicles (largely on account of lower taxes on CNG compared to Petrol prices).
Moreover, in Delhi penetration of the CNG vehicles is still at lower levels and launch
of the newer CNG variants cars by the automotive companies could keep conversions
in high growth orbit.
June 22, 2010 4
5. Indraprastha Gas | Company Update
Exhibit 6: CNG saving over Petrol
Particulars FY2007 FY2008 FY2009 FY2010 Current
Petrol (Rs/litre) 45.37 43.65 47.25 43.93 47.43
CNG (Rs/kg) 18.98 19.18 18.90 20.55 27.50
Equivalent petrol prices (Rs/kg) 62 59 64 60 64
Savings (Rs/kg) 43 40 45 39 37
Savings over petrol (%) 69.2% 67.6% 70.5% 65.5% 57.3%
Source: PPAC, Angel Research
We expect strong growth in CNG conversion in IGL's area of operation driven by
discretionary CNG demand due to better economics. This coupled with strong growth
expected in the domestic PNG segment is likely to drive the company's volume growth
going ahead. We expect CNG volumes to register a CAGR of 14.4% over
FY2010-12E. The growth would be driven by additional 2,000 buses expected to hit
the road in FY2011E on account of the Commonwealth games along with strong
conversion of private vehicles. We expect private vehicle conversion at 4,250/month
for FY2011E and FY2012E. Moreover, given talks of possible deregulation of the auto
fuel prices, the conversion trend could further gather momentum from current levels
and pose upside risk to our estimates. To keep pace with increasing CNG demand,
IGL is likely to commission additional 53 CNG stations over the period.
Exhibit 7: CNG stations
250
219
191
200 181
163
146 153
150 134
100
50
-
FY2006 FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E
Source: Company, Angel Research
Exhibit 8: Strong vehicle conversions
500,000
400,000
300,000
200,000
100,000
-
FY2006 FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E
CNG Buses Auto RTV (LCVs) Others
Source: Company, Angel Research
June 22, 2010 5
6. Indraprastha Gas | Company Update
We expect the PNG volumes to post a The company's PNG segment contributes a mere 13% to overall revenues. Lower
CAGR
robust CAGR of 36.2% over FY2010-12E contribution is however due to greater focus on development of the CNG infrastructure
in the past adhering to the judicial verdict. However, now with most of IGL's CNG
infrastructure in place, it has turned its focus towards the fast-growing PNG segment.
IGL expects to add 50,000 domestic users annually. Given the relatively lower
penetration of PNG in the region, we believe the targets can be achieved and aid
volumes. With this, we expect the PNG segment volumes to post a robust CAGR of
36.2% over FY2010-12E.
Owing to the significant improvement in gas availability in the country, IGL has also
started tapping the industrial users. IGL's industrial sales volumes constitute less than
5% of its overall sales volumes unlike peer Gujarat Gas, which has higher share of
industrial volumes. Thus, IGL's industrial segment has huge potential to ramp up in
the long run particularly with Delhi and its adjoining areas having demand of around
3-4mmscmd. The company currently supplies to around 25-26 users in the industrial
segment, with the off-take increasing from around 1,600/scm per day per user in
FY2010 to 4,500/scm per day per user now.
Overall volumes are expected to register Overall volumes are expected to register 16.9% CAGR over FY2010-12E on robust
CAGR
16.9% CAGR over FY2010-12E on volume growth expected in CNG and PNG. We estimate revenue to register a robust
robust volume growth expected in CNG CAGR of 35.5% over FY2010-12E on the back of strong volumes and higher realisations
and PNG (on account of the 25.5% hike in CNG prices undertaken in Delhi to pass through the
increase in gas cost). Thus, we expect bottom-line to register 17.5% CAGR over the
mentioned period.
Exhibit 9: EBITDA/scm likely to hold on Exhibit 10: PAT growth trend
7.00 350 35.0
6.00 5.72 300 30.0 30.0
5.48
5.22 4.99 5.12 26.5
4.80 250 24.9 21.9 25.0
5.00 4.55
20.0
200
(Rs/scm)
(Rs cr)
4.00
(%)
14.5 15.0
150 13.4
3.00 10.0
100
2.00 5.0
50 0.0
1.00 (1.1)
0 (5.0)
- FY2006 FY2008 FY2010 FY2012E
FY2006 FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E PAT (Rs Cr) PAT growth (%)
Source: Company, Angel Research Source: Company, Angel Research
Growth beyond NCT - Scalability concerns reducing
Apart from the margin erosion concerns, lack of growth in the newer areas, viz. Noida,
Greater Noida, Ghaziabad, Faridabad and Gurgoan impacted performance of the
stock on the bourses. Pertinently, growth beyond the NCT was restricted for IGL due to
litigation and gas allocation constraints in the earlier years. In case of the NCR towns
of Faridabad and Gurgoan, networks were built by Adani Energy and Haryana City
Gas respectively, which prevented entry of IGL into these regions. Also, gas allocation
initially made to IGL for these regions were given to respective companies on the
directions of the Supreme Court. IGL's expansion plan in Ghaziabad was hit due to
June 22, 2010 6
7. Indraprastha Gas | Company Update
With the regulatory concerns already authorisation issues with the regulator. However, with the regulatory concerns already
addressed by the Delhi High Court, we addressed by the Delhi High Court, we expect growth in Noida, greater Noida and
expect growth in Noida, greater Noida Ghaziabad to take care of the scalability concerns.
and Ghaziabad to take care of the
According to the PNGRB, the demand estimates for Ghaziabad currently stands close
scalability concerns
to 0.5mmscmd (18.4% of IGL's expected throughput for FY2011E), which could rise to
0.94mmscmd in the long run. Similarly, for Noida the demand estimates currently
stand at 0.14mmscmd, which could rise to 0.35mmscmd in the long run. Thus,
expansion in these geographies is likely to drive the company's growth going ahead.
Exhibit 11: Demand potential
Particulars Noida Ghaziabad
Population (2001 Census, in mn) 0.30 0.96
Estimated households (mn) 0.07 0.18
Vehicle Population
Population
Buses 3,150 7,200
Three wheelers 480 11,200
Four Wheelers 2,750 50,500
Estimated Current demand (mmscmd) 0.14 0.50
Estimated demand - 2020 (mmscmd) 0.35 0.94
Source: PNGRB, Angel Research
June 22, 2010 7
8. Indraprastha Gas | Company Update
Financial Analysis
Exhibit 12: Key Operating Assumptions
Particulars FY2009 FY2010 FY2011E FY2012E
Volume break-up
Sales Volume break-up
CNG volumes (mmscm) 605 692 789 907
PNG volumes (mmscm) 54 82 132 152
Total volumes (mmscm) 660 774 922 1,059
Volume break-up
Gas Sourcing Volume break-up
APM Gas (mmscm) 713 748 767 803
KG Gas (mmscm) - 85 225 336
Natural Gas consumed (mmscm) 713 833 992 1,139
Other Assumptions
APM Gas Price (Rs/scm) 5.3 5.4 8.0 8.5
KG Gas Price (Rs/scm) - 11.9 12.1 11.8
Blended cost of Gas sold (Rs/scm) 6.2 6.4 9.6 10.2
Other Operating Expenditure (Rs/scm) 2.2 2.6 2.7 2.9
EBITDA (Rs/scm) 4.5 5.0 5.1 5.7
Capex (Rs cr) 172 386 500 550
Source: Company, Angel Research
Robust top-line on price increase and stable volume growth
We expect IGL to register 16.9% CAGR
CAGR IGL posted CAGR of 18.9% in overall volumes over FY2008-10, with the CNG segment
in volumes over FY2010-12E backed by recording 16.8% CAGR and the PNG segment registering healthy 38.3% CAGR in the
expected strong growth in the CNG and mentioned period. Going ahead, we expect IGL to register 16.9% CAGR in volumes
PNG segment over FY2010-12E backed by expected strong growth in the CNG and PNG segment.
CNG volumes are projected to post CAGR of 14.4% over FY2010-12E primarily due
to high addition in private vehicles, which we expect to increase from around 2,13,000
in FY2010 to 3,15,000 in FY2012E. The Commonwealth Games, to be held in FY2011,
is also expected to result in healthy addition of DTC buses. In the PNG segment, we
expect robust consumption growth to continue as the company has fulfilled mandatory
CNG conversions. We expect the PNG segment to post a robust CAGR of 36.2% over
FY2010-12E, with the number of households having PNG connections increasing
from 1,80,000 in FY2010E to 2,80,000 in FY2012E.
We expect the company's Revenue IGL's revenues recorded CAGR of 23.6% during FY2008-10. We expect the company's
CAGR
growth to expand and post robust CAGR Revenue growth to expand and post robust CAGR of 35.5% over FY2010-12E mainly
of 35.5% over FY2010-12E on account of the substantial 25.6% CNG price hike (from Rs21.9 per kg to Rs27.5
per kg) undertaken in Delhi and also in the NCR region to pass through the impact of
substantial increase in gas cost coupled with strong volume growth.
OPMs to contract, EBITDA/scm to hold
IGL has long been under the scanner of various stakeholders due to high RoE and
EBITDA Margins. It managed superior margins compared to other CGD players like
Gujarat Gas as it procured gas from GAIL at APM prices, while the others procured
gas at market prices. However, with the ease with which the company managed to
pass through the increase in gas and operating costs, we expect the company to
June 22, 2010 8
9. Indraprastha Gas | Company Update
maintain its EBITDA margin per unit of sales volume. But, as the same margin per unit
will be earned on higher sales, we estimate EBIDA margins to contract. Thus, we
expect OPMs to hover around 30% levels in FY2011E and FY2012E from around 35%
levels registered in FY2009 and FY2010.
Profit to rise despite higher depreciation
We expect Profit to register 17.5% CAGR
Profit CAGR We estimate depreciation to increase by a whopping 48.6% yoy in FY2011E and
on robust volume growth 34.2% yoy in FY2012E due to estimated capex of around Rs500cr and Rs550cr in
FY2011E and FY2012E, respectively. The company plans to incur capex towards adding
around 53 CNG outlets and expanding its PNG roll out. During FY2008-10, IGL
posted 11.1% CAGR in Bottom-line despite cost pressures. Over FY2010-12E, we
expect Profit to register 17.5% CAGR on robust volume growth.
RoE to stabilise as margin pressures ease
Historically, IGL's RoE has been hovering around 30.0% levels. In FY2009 and FY2010,
the company's RoE stood at 27.4% and 28.6%, respectively. Going ahead, because of
the company's ability to maintain its margins, we expect RoE to be maintained around
similar levels of 27% in FY2011E and 27.6% in FY2012E.
June 22, 2010 9
10. Indraprastha Gas | Company Update
Concerns
Regulatory risks: As per the PNGRB regulations, the regulator can only control
network tariffs, while the end product pricing is not controlled. However, if there is any
change in the regulation, which caps the overall returns to be made by the CGD
entity, there could be a change in our view on the stock. The concerns over fixation of
the overall returns have arisen especially after zero tariff bidding by various entities
such as IOC-Adani Energy for Ghaziabad, making a mockery of the entire bidding
exercise. 'Zero' tariff will be recouped by the bidding companies through the CNG
charges levied on users - household or industries - as they deem fit. So, it is believed
that if the retail prices are not regulated and regulations create monopolies, the
consumer interest is bound to get compromised.
Change in Tax structure of CNG: A large part of the arbitrage between the CNG
Tax CNG:
and petrol prices is primarily fueled due to the differential tax structure. In case of MS
(petrol) and gas oil (diesel), taxes constitute 48.8% and 34.6% of the current selling
price, respectively. While the CNG attracts lower taxation at 14.4%. If the Delhi
government were to change the tax rate on CNG, it could impact margins as well as
the new vehicle conversions.
Exhibit 13: Break-up of Petrol, Diesel, CNG prices in Delhi
100
80
48.75
65.36
60 85.58
(%)
40
51.25
20 34.64
14.42
0
Petrol Diesel CNG
Taxes Prices without Taxes
Source: PPAC, Angel Research
June 22, 2010 10
11. Indraprastha Gas | Company Update
Outlook and Valuation
Following the recent hike in the CNG prices, the key headwinds for IGL by way of
expected margin contraction and reduction in earnings and return ratios are likely to
dissipate to a large extent. Relative ease in pass through of the APM gas price hike is
indicative of the absence of regulatory risks in the near term. This coupled with strong
CNG conversions and growth in newer geographies is likely to result in strong earnings
growth and result in re-rating of the stock.
We believe that even post end of the marketing exclusivity in CY2011E, IGL will be
able to maintain its margins, as the PNGRB regulations limits network and compression
tariffs with marketing margins being left out presuming it will be self-regulated due to
competitive forces. As for the impact of the end of the marketing exclusivity on volumes
is concerned, we believe that competition is likely to have minuscule impact on IGL's
volumes. On the CNG volumes front, IGL is likely to maintain large market share in
the visible future post end of marketing exclusivity due to its strong parentage (BPCL,
GAIL and Government of Delhi), tie-ups with oil marketing companies (OMCs) for
dispensing CNG, significant expansion of CNG stations till end of the exclusivity period.
Exhibit 14: Change in estimates
Particulars Old estimates New estimates % chg
Rs(cr) FY11E FY12E FY11E FY12E FY11E FY12E
Revenues 1,403 1,636 1,612 1,985 14.9 21.3
EBITDA 367 422 472 606 28.5 43.6
EBITDA Margins(%) 26.2 25.8 29.3 30.5
EPS 13.3 14.5 17.5 21.3 31.2 46.7
Source: Company, Angel Research
At current levels of Rs255, the stock is discounting 14.6x and 12.0x FY2011E and
FY2012E Earnings. IGL has historically traded in the range of 9-13x its one-year
forward earnings. We upgrade our DCF-based target price of the IGL to Rs301 (Rs210)
on the back of upward revision in earnings estimates and lower WACC estimates (to
reflect lower pricing risk). Hence, we upgrade the stock to Buy from Reduce.
Exhibit 15: Comparative Valuation
Company M. Cap Target Rating EBITDA Margin (%)
EBITDA EPS (Rs) RoE (%)
(Rs cr) Price (Rs) FY10 FY11 FY12 FY10 FY11 FY12 FY10 FY11 FY12
IGL 3,575 301 Buy 35.7 29.3 30.5 15.4 17.5 21.3 28.6 27.0 27.6
Gujarat Gas 3,786 306 Neutral 19.7 21.2 20.6 13.6 17.0 20.4 23.6 25.8 25.8
Company RoCE (%) P/E (x) P/B (x) EV/EBITDA (x)
EV/EBITDA
FY10 FY11 FY12 FY10 FY11 FY12 FY10 FY11 FY12 FY10 FY11 FY12
IGL 38.1 33.8 31.6 16.6 14.6 12.0 4.3 3.6 3.0 8.9 7.7 6.3
Gujarat Gas 24.4 27.4 28.0 21.7 17.4 14.4 4.9 4.1 3.4 12.0 9.5 7.6
Source: Company, Angel Research; Note: Gujarat Gas No's are for CY09, CY10, CY11
June 22, 2010 11
14. Indraprastha Gas | Company Update
Exhibit 21: Relative Performance to Sensex - Oil & Gas Induex Exhibit 22: Relative Performance to Peers
450 500.0
400
400.0
350
300 BSE OIL & GAS
300.0
250
200 SENSEX 200.0
150
100 IGL 100.0
50
-
Apr-05
Aug-05
Dec -05
Apr-09
Aug-09
Dec -09
Apr-06
Aug-06
Dec -06
Apr-08
Aug-08
Dec -08
Apr-07
Aug-07
Dec -07
Dec -10
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Apr-05
Oct-05
Apr-06
Oct-06
Apr-07
Oct-07
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
IGL SENSEX BSEOIL Petronet LNG GAIL GGAS IGL
Source: Company, Angel Research Source: Company, Angel Research
Exhibit 23: Underperformance Relative to Sensex Exhibit 24: Underperformance relative to Oil & Gas Index
25 50
20
-
(10)
(25) (40)
(50) (70)
(100)
(75)
(130)
(100) (160)
(190)
(125)
(220)
(150) (250)
Apr-05
Oct-05
Apr-09
Oct-09
Apr-06
Oct-06
Apr-08
Oct-08
Apr-07
Oct-07
Apr-10
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Oct-05
Oct-06
Oct-07
Oct-08
Oct-09
SENSEX IGL BSEOIL IGL
Source: Company, Angel Research Source: Company, Angel Research
June 22, 2010 14
15. Indraprastha Gas | Company Update
Company Background
IGL is in the retail gas distribution business supplying CNG to the Transport sector and
piped natural gas (PNG) to domestic and commercial sectors in the NCT region of
Delhi and NCR region. IGL was incorporated in December 1998 as a joint venture
(JV) between two oil & gas majors - GAIL and BPCL (each holding 22.5% stake) and
government of NCT of Delhi (5% stake) to implement the city gas distribution (CGD)
project in NCT. IGL currently has 193 CNG fuel stations operating in Delhi and NCR.
It plans to add around 53 CNG stations in FY2011 and FY2012. It has a CNG
compression capacity of 3.64mn kg/day and currently fuels more than 3,40,000
vehicles daily. In the PNG segment, IGL has provided PNG connections to over 1,82,000
domestic and 357 commercial customers. Going forward, IGL plans to add around
50,000 PNG customers every year. IGL is now expanding its network into the NCR
towns of Noida, Greater Noida and Ghaziabad.
Exhibit 25: IGL over the years
Year Event
1997 GAIL started the Delhi City Gas Distribution Project - a CNG pilot project
to establish the viability of the venture and to resolve related technical
and safety issues.
1998 IGL was incorporated on December 23, 1998 under companies Act,
1956.
1999 IGL started its operations in February, 1999 by taking over and executing
Delhi City Gas Distribution Project in Delhi from GAIL(India) Ltd.
2000 Supreme court directive to convert entire city bus fleet (DTC and private)
to CNG by March 31, 2001; Replacement of all pre-1990 autos and
taxis with new vehicles on clean fuels, etc.
2000 Entered into long-term supply contract with GAIL for supply of
0.48 mmscmd APM Natural Gas
2001 MoPNG increased APM gas allocation to 0.98 mmscmd
2002 MoPNG increased APM gas allocation to 2.0 mmscmd to meet IGL's
requirement for NCT of Delhi
2003 Successful completion of IPO at Rs48 per share by Selling shareholders
2004 Marked a foray into NCR by setting up 2 CNG stations in Noida in
December 2004.
2004-05 Secured 0.70mscmd APM gas from MoPNG for expanding its gas
distribution network in Noida including Greater Noida, Gurgaon and
Faridabad.
2005-06 IGL formalized its agreement with GAIL for supply of 2 mmscmd; entered
into agreement with BPCL for supply of RLNG on long-term basis.
2008-09 IGL requested for additional 1.0mmscmd APM gas to meet increasing
demand. Planned addition of 50 more CNG stations over next two years
from 163 stations
2009-10 Received KG -D6 gas from RIL at EGoM approved price of
US $4.2/mmbtu
2010-11 The company's gas cost more than doubled with the government
increasing APM gas price to US $4.2/mmbtu; however IGL has passed
on the impact of higher gas cost by increasing CNG price in Delhi by
whopping 25.6% to Rs27.5/kg (from Rs21.9/kg earlier).
Source: Company, Angel Research
June 22, 2010 15
16. Indraprastha Gas | Company Update
Business Model
Initial phase of conversion was driven IGL as a CGD player is primarily engaged in the business of distribution of CNG (87%
by mandatory users, current conversions of FY2010 Net Sales). IGL's CNG users can be classified into mandatory and
driven by discretionary users discretionary users. The mandatory users (compulsory users as mandated by law)
include DTC and private buses, RTVs and Autos. Discretionary users of CNG include
private cars, which use CNG due to the low running cost. While initial phase of
conversion was driven by mandatory users, current conversions are driven by
discretionary users.
Exhibit 26: Sales break-up
100
95 8.5 9.8 10.8 11.7 12.9 14.0
14.8
90
(%)
85
91.5 90.2 89.2 88.3 87.1 86.0
80 85.2
75
FY2006 FY2007 FY2008 FY2009E FY2010E FY2011E FY2012E
CNG Sales (% of Total) PNG Sales (% of Total)
Source: Company, Angel Research
CNG and PNG selling price is currently IGL is currently pricing its products at a discount to alternative fuels in both the CNG
vis-à-vis
determined vis -à-vis relative prices of and PNG segments. In the CNG segment, IGL has priced its gas at a discount to
alternative fuels petrol and diesel prices. CNG is priced at 57.3% discount to petrol and 40.6% to
diesel. Similarly, in the domestic PNG segment the fuel price is indexed to the
administered retail selling price of domestic LPG (14.2 kg) cylinder in the NCT, as
applicable from time to time, taking into account the respective heating values of
natural gas and LPG. In the small commercial users segment, PNG is indexed to
commercial LPG (19 kg) cylinder in the NCT of Delhi, as applicable from time to time,
taking into account the respective heating values of natural gas and LPG. Large
commercial users (big hotels, etc) are the PNG users replacing LDO and commercial
LPG. Thus, price in the segment is indexed to weighted average price of LDO and
commercial LPG in the NCT taking into account the respective heating values of natural
gas, LPG and LDO.
APM gas, which was available at Gas sourcing is an important aspect of the CGD business. GAIL is the sole supplier of
subsidised APM prices of around US APM natural gas to IGL. The company has gas purchase agreement for 2.2mmscmd
$1.8/mmbtu, is now aligned with RIL's with GAIL. Gas is received at various points of the Hazira-Bijaipur-Jagdishpur (HBJ)
KG-D6
KG-D6 price of US $4.2/mmbtu pipeline around Delhi. As the gas cost is denominated in Rupee terms, IGL is insulated
from exchange rate risks. The gas, which was available at subsidised APM prices of
around US $1.8/mmbtu, is now aligned with RIL's KG-D6 price of US $4.2/mmbtu. In
the previous fiscal, IGL entered into a gas sales and purchase agreement (GSPA) with
RIL for supply of 0.31mmscmd of gas from the KG-D6 fields scalable to 0.5mmscmd.
IGL is using RIL's gas for expanding its presence in the Delhi. IGL has also entered into
a gas transportation agreement (GTA) with Reliance Gas Transportation Infrastructure.
June 22, 2010 16
17. Indraprastha Gas | Company Update
Profit & Loss Statement Rs crore
Y/E March FY2007 FY2008 FY2009 FY2010 FY2011E FY2012E
Gross sales 706 810 962 1,213 1,804 2,225
Less: Excise duty 92 104 109 135 198 246
Net Sales 614 706 853 1,078 1,606 1,979
Other operating income - - - 6 6 6
Total operating income 614 706 853 1,084 1,612 1,985
% chg 15.0 20.8 27.1 48.7 23.1
Total Expenditure 359 406 553 697 1,140 1,379
Purchase of gas 268 303 411 495 888 1,076
Staff expenditure 14 15 24 31 38 46
Other operating expenditure 77 88 118 172 213 256
EBITDA
EBITDA 255 300 300 387 472 606
% chg 17.6 0.0 28.8 22.0 28.5
(% of Net Sales) 41.6 42.5 35.2 35.7 29.3 30.5
Depreciation and amortisation 60 63 67 77 115 155
EBIT 195 237 233 309 357 451
% chg 21.5 (2.0) 32.8 15.4 26.6
(% of Net Sales) 31.8 33.6 27.3 28.7 22.2 22.8
Interest & other Charges - - - - 12 28
Other Income 10 23 26 15 24 26
(% of PBT) 5.0 9.0 10.1 4.7 6.5 5.7
Share in profit of Associates - - - - - -
Recurring PBT 206 261 259 324 369 449
% chg 26.9 (0.8) 25.3 13.6 21.9
Extraordinary Expense/(Inc.) - - - - - -
PBT (reported) 206 261 259 324 369 449
Tax 68 86 86 109 124 151
(% of PBT) 32.9 33.1 33.4 33.6 33.7 33.7
PAT (reported) 138 174 172 215 244 298
Add: Share of earnings of asso. - - - - - -
Less: Minority interest (MI) - - - - - -
Prior period items - - - - - -
PAT after MI (reported) 138 174 172 215 244 298
ADJ. PAT
ADJ. PA 138 174 172 215 244 298
% chg 26.5 (1.1) 24.9 13.4 21.9
(% of Net Sales) 22.5 24.7 20.2 20.0 15.2 15.0
Basic EPS (Rs) 9.9 12.5 12.3 15.4 17.5 21.3
Fully Diluted EPS (Rs) 9.9 12.5 12.3 15.4 17.5 21.3
% chg 26.5 (1.1) 24.9 13.4 21.9
June 22, 2010 17
18. Indraprastha Gas | Company Update
Balance Sheet Rs crore
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 328 436 543 685 844 1,037
Funds
Shareholders Funds 468 576 683 825 984 1,177
Minority Interest - - - - - -
Total Loans - - - - 150 350
Net Deferred Tax Liability 30 24 21 17 13 13
Deposits from customers 5 7 27 48 73 98
Total Liabilities 503 607 731 890 1,219 1,637
APPLICATION OF FUNDS
APPLICATION
Gross Block 613 668 817 1,105 1,535 2,060
Less: Acc. Depreciation 250 310 378 455 570 725
Net Block 363 358 439 650 965 1,335
Capital Work-in-Progress 31 59 82 180 250 275
Goodwill - - - - - -
Investments 128 109 104 35 35 35
Current Assets 106 228 259 217 259 328
Cash 40 140 146 85 73 102
Loans & Advances 25 41 55 59 88 109
Other 40 47 58 73 97 117
Current liabilities 125 146 154 192 289 335
Net Current Assets (19) 82 106 25 (31) (8)
Mis. Exp. not written off - - - - - -
Total Assets 503 607 731 890 1,219 1,637
June 22, 2010 18
