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January 04, 2013

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Analyst: Priyank ChandraTel : +9122 4096 9737E-mail: [email protected]

Coming out of the Woods...!!!

CGD

City Gas Distribution

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Index

Executive Summary 3

Regulatory Development 5

Gujarat Gas Company 9

Indraprastha Gas 19

CGD Sector 29

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Executive Summary

City gas distribution (CGD), one of the rising sectors in the India energypie, had seen an action packed CY12. In particular, the regulatory frontplayed a key overhang on the sector and players’ valuations. Further, inthe wake of regulatory issues being taken up at the Supreme Court level,the bidding for new areas took a back seat, and put to rest long term plansof government to promote CGD.

We still believe that City gas distribution (CGD) space is an attractive longterm investment option in the oil & gas space. The dynamism is fuelled byaspects as:

Demand potential: Driven by

Gas economics in comparison to alternate fuels

Expanding gas grid network

Acceptance of high prices by end users

Environment friendly nature of gas

Rising supplies: Fuelled byRLNG supply (though dearer)Energy majors looking to develop more LNG terminalsAny new domestic finds would improve supply situation

The two listed players in the CGD space, Indraprastha Gas (IGL) andGujarat Gas Company (GGCL), are the pioneers of the segment in India.They will reap long term benefits of being the first movers. We are positiveon the CGD space and like both IGL and GGCL as a structural play.

Valuation MatrixCompanies Net Sales EBITDA PAT EPS (`̀̀̀̀)

FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15EIGL 25,151 34,405 42,198 55,901 6,345 7,925 8,979 10,209 3,064 3,765 4,206 4,849 21.9 26.9 30.0 34.6Gujarat Gas* 23,819 31,459 34,591 39,535 3,952 4,169 5,258 5,851 2,739 2,927 3,281 3,607 21.4 22.8 25.6 28.1

* December Year EndingFY13 = CY12

Companies Mkt Cap CMP Target Upside Rating P/E(x) RoE(%) RoCE(%)(`̀̀̀̀ bn) (`̀̀̀̀) (`̀̀̀̀) (%) FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E

IGL 36 256 379 48 Buy 11.7 9.5 8.5 7.4 27.4 27.4 25.2 24.5 29.5 29.9 28.6 28.9Gujarat Gas* 39 306 363 20 Buy 14.3 13.4 12.0 10.9 33.9 36.0 35.7 33.3 35.0 35.7 37.0 35.3

* December Year EndingFY13 = CY12

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Key events which impacted the sector were:

MoPNG asking PNGRB to look into fixing marketing marginscharged by gas distribution companies

PNGRB issuing order fixing the Network Tariff and CompressionCharges for IGL and the same to be applicable to its customers

The latter, is pending with the Supreme Court, after the High Court struckdown the order issued by the PNGRB. In the interim, we learn from ourinteractions with the industry that the relevance of marketing margins atthe regulatory front has taken a back seat. We expect this marketingmargin matter to ultimately turn irrelevant in the scheme of things, implyingplayers will be free to fix the same as per their P&L dynamics.

Our View:We maintain our earlier view, based on the understanding of thePNGRB Act, that PNGRB does not have the rights to fix NetworkTariff and Compression Charges to be charged to an end user bya CGD company. We still maintain this view.

Marketing Margin fixation is unlikely because :

If it comes, no fresh investments will come in the CGDspace.

Government still has ambitious plans for CGD space and ifthis has to move ahead there could be no capping ofmarketing margins.

Should not be regulated as it can be determined bycompetition and alternative fuel prices

If there is no cap on marketing margins and PNGRB does not wantto control the final selling price, the outcome of the PNGRB – IGLcase would not have any impact on financials of CGD companies.

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Regulatory Development:Since December 2011, there has been lot of Regulatory (PNGRB)developments that had weighed down the CGD sector and made investorsweary. IGL and Gujarat Gas (listed companies) stock prices are down bymore than 40%. Fresh investments – bidding for new areas are frozen.Industry participants feel that with the current stance of PNGRB, the industryis very likely to stagnate at current levels.

Chronology of Events:

Time Line Event Dolat ViewDecember 26, 2011 Ministry of Petroleum asks This got initiated due to fertilizer ministry asking to

PNGRB to initiate process for look in the marketing margins charged by gas sellingdetermining marketing margin companies.charged by gas companies CGD does not deal with fertilizer or power sector but

got covered as they distribute gasStakeholders become apprehensive as it could impactprofitability.Bidders for CGD license in Round 1 and Round 2were relying heavily on marketing margin to makeprofits.Will discourage entities from entering CGD space.

February 14, 2012 PNGRB issues 21 days notice This was done to ascertain type of data that entitiesseeking preliminary data from will provide for calculating marketing marginsall entities

April 9, 2012 PNGRB issues order for IGL fixing PNGRB is not authorized to fix network tariff andits Network tariff and compression compression charges for IGL’s own consumers.charges & Imposes retrospective PNGRB is authorized to fix Network tariff for a thirdliability party – selling gas in an existing CGD network.

Retrospective liability is not justified as IGLhas not charged that amounts.

April 10, 2012 IGL takes a stay on PNGRB order Matter of time and IGL very likely to win the case

May 7, 2012 PNGRB refuses to entertain the Indicates that PNGRB would like to avoid themarketing margin matter.Reason marketing margin issue.given – Gas as a product is not Lack of clarity between MoPNG and PNGRB.formally notified by Government Data submitted by companies was too less for any

meaningful calculation.

June 1, 2012 Delhi Court says that PNGRB is Hangover would continue as PNGRB can approachnot authorized to fix tariffs for IGL Supreme Court.consumers

July 27, 2012 PNGRB approaches Supreme On expected lines but this may take long time for aCourt verdict

November 21, 2012 Supreme Court gives next date of We were told that PNGRB asked for an extension andhearing – January 4, 2012. wanted to submit some additional data.

December 19, 2012 Hearing date gets postponed toMarch 18, 2012

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Build up of the Selling PriceThere are four major components that define the final selling price for theend consumer.

Network Tariff:Network Tariff is the charge for utilizing the existinginfrastructure of the authorized CGD operator.

Compression Charge:Compression charge is levied on compression ofnatural gas and is applicable only on CNG segment.

The authorized entities are expected to recover the huge investments madein the infrastructural development primarily through levying of network tariffand compression charges. The network tariff and compression charge isapplicable to the new entities entering the CGD business in a city after thecompletion of marketing exclusivity period.

Gas Cost: Denominated in US dollars and there is a constant increase inLNG proportion in sourcing mix.

Marketing Margin: Not defined but is considered to be the differencebetween the final selling price and summation of Network Tariff,Compression Charge and Gas cost.

PNGRB says it has thepower to fix network tariffand compression chargesthat are charged by CGDentity to its consumers.

We feel that PNGRB is notauthorized to do so.

Pass throughcomponent

Marketing Marginis built as the CGDentity takes therisk of marketingthe gas to retailconsumers.

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Marketing Margin – It’s the key to returns in CGD business

Based on the above there could be 3 possible outcomes for a CGD entity:

PNGRB control - Network tariff, Compression Charge, Marketing Margin

Inference - Sector become stagnant and no fresh investments. Listedcompanies (IGL and GGCL) stock prices would further fall.

Dolat view - Likelihood of this scenario is negligible.

PNGRB control - Network tariff, Compression Charge does not control - Marketing Margin, Final selling price

Inference - Financials of CGD companies are not impacted. Investorsentiment would improve and new geographical areas will come up forCGD.

Dolat View - likelihood of this scenario is low.

PNGRB does not control - Network tariff, Compression Charge Marketing Margin, Final selling price

Inference - Financials of CGD companies are not impacted. Strong casefor re-rating of listed companies (IGL and GGCL). CGD space would seelot of investment activities.

Dolat View - Likelihood of this scenario is high.

Scenario – 1

Scenario – 2

Source: Industry, Dolat Research

Scenario – 3

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9January 04, 2013 Gujarat Gas Company

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FinancialsYear Net Sales % Growth EBIDTA OPM % PAT NPM % EPS (`̀̀̀̀) % Growth PER (x) ROANW(%) ROACE (%)CY11 23,819 31.3 3,952 16.4 2,739 11.3 21.4 5.9 14.3 33.9 35.0CY12E 31,459 32.1 4,169 13.1 2,927 9.2 22.8 6.9 13.4 36.0 35.7CY13E 34,591 10.0 5,258 15.1 3,281 9.4 25.6 12.1 12.0 35.7 37.0CY14E 39,535 14.3 5,851 14.7 3,607 9.1 28.1 9.9 10.9 33.3 35.3Figure in .̀ mn

BSE Sensex 19,784NSE Nifty 6,016

Scrip DetailsEquity ` 257mnFace Value ` 2/-Market Cap ` 39bn

USD 721mn52 week High / Low ` 437 / 270Avg. Volume (no) 85283BSE Code 523477NSE Symbol GUJRATGASBloomberg Code GGAS INReuters Code GGAS.BO

Shareholding Pattern as on Sept’12(%)

Promoter 65.12MF/Banks/FIs 6.25FIIs 17.47Public / Others 11.47

Gujarat Gas Company

CMP: `̀̀̀̀ 306 Target Price: `̀̀̀̀ 363 Buy

Gujarat Gas Company (GGCL) will exploit its incumbency advantage byriding the volume growth potential of key Gujarat industrial belts. Fueleconomics of gas as a fuel across all segments, will provide long termdemand sustainability. Availability of RLNG in the spot market will supportvolume growth.

GSPC buying the stake of British Gas in Gujarat Gas would bring strategiclong term advantages for Gujarat Gas growth prospects. GGCL will ridethe CGD evolvement (CNG for automobile and PNG for households &commercial) with its extensive coverage of Surat, Bharuch andAnkleshwar. Pricing power will ensure long term sustainability of margins.We recommend a Buy with a DCF-based target price of ` 363.

Investment RationaleGSPC buying stake of British GasGSPC buying stake of British Gas (BG) in GGCL would ensure long termsustainable growth. GSPC, being a government company, would bringin faster approvals required for infrastructure expansion of GGCL. RLNGsourcing would change and the gas price would be marginally lower ascompared to prices of RLNG which was supplied by BG trading arm.

Pioneer in City Gas DistributionGGCL has been the pioneer in the city gas distribution space for 21 yearsand is at the forefront of promoting gas culture in Gujarat, India’s highestgas consuming state. It has to its credit development of over 3,700km ofgas pipelines involved in retail delivery. With increased availability of RLNGgas, GGCL is well-set to capitalise on growth opportunities driven byusage of gas.

Business Model: Maximising risk-adjusted growthGGCL’s business model is based on a cost plus basis. To its credit,GGCL has developed a franchise that sells energy saving solutions toindustrial retail segment (81% of GGCL’s volumes). This segment reducesthe gas price risk as the hike is passed on to end users, thereby protectingprofitability.

GGCL will also benefit from the natural exclusivity (industrial retail requiringless than 50,000 SCMD comes under the CGD purview of providingexclusivity). Other segments are CNG and PNG, which are seeing decentgrowth, considering the economic advantage over alternate fuels. These

GGAS relative to Sensex

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India Researchsegments have also absorbed the regular price hikes by GGCL to negaterising input cost.

Promising triggers of concurrent geographical expansionAs a strategy, GGCL is not keen on unrelated geographic expansion. It iskeen on exploring its existing territory in Gujarat better. GGCL has got theCGD license in its existing areas of operation. These regions offer significantdemand and optimum utilisation of the existing pipeline network. Theexclusivity in its existing areas of operation will enable GGCL to becomethe sole supplier of industrial segment (for less than 50,000 SCMD). GGCLhas started expansion in areas - Bardoli in Surat and Jambusar in Bharuch.These two areas offer significant industrial potential.

Changing revenue mix to improve profitabilityWith impending competition from large scale GAS utilities like GAIL, GGCLhas identified the bulk segment as a bad apple and withdrawn. This enabledit to cater the demand from other segments with higher margins. Thechange in revenue mix, wider/ deeper pipeline coverage, and increasedexposure to the commercial segment will result in better profitability. CNGand PNG segment growth rates are considerably higher than the industrialsegment.

ValuationGGCL will ride on its existing coverage of key industrial regions as well asgrowth from the CNG and PNG segments. The capex will be throughinternal accruals only. The risk to our call remains the slow execution ininfrastructure growth – that can restrict the volume growth. GGCL stockprice has been impacted due to BG selling stake to GSPC and regulatorydevelopments. On the business front, volume growth has stagnated.However, we believe that GSPC coming in would bring faster expansion –required for volume growth. Interaction with industry participants reinforcesour opinion that regulatory concerns will improve in favour of CGD space.At CMP of ̀ 306, the stock trades at 12x CY13E and 10.9x CY14E earnings.We recommend Buy rating, with a DCF-based target price of ` 363.

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India ResearchPioneer in City Gas DistributionGGCL has pioneered the city gas distribution (CGD) space for 21 years. Ithas promoted the gas culture in Gujarat, India’s highest gas consumingstate. It has now started operations in the heavily-industrialised Ankleshwarand Bharuch and expanded to Surat, India’s diamond and textile hub. Thefirst CNG station in India was set up in Surat by GGCL.

Gujarat is the second-most industrialised state of India with nearly 270industrial clusters. It has been the primary origination and entry point forboth domestic natural gas and imported LNG. Availability of gas has beenthe key driver of consumption as an industrial fuel along with CGDdevelopments. Gujarat accounts for nearly 40% of India gas consumption.GGCL has developed over 3,700-km of pipeline network to provide retailaccess in Ankleshwar, Bharuch and Surat — located in southern Gujarat.The three cities offer huge potential for gas consumption as they areindustrial centres. They also have significant potential for CGD development(CNG and PNG).

Going forward, we feel the upcoming Delhi Mumbai Industrial Corridor(DMIC) project will augur well for GGCL. DMIC will be passing throughGGCL areas of operation and increased industrial activities will result inhigher gas volumes for GGCL.

GGCL presence in DMIC (in Gujarat)

Source : Company, Dolat Research

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India ResearchGGCL has evolved a CGD model which is considered a benchmark bygas regulator PNGRB. Increased availability of RLNG ensures smoothersupply of gas, though at higher price. On the demand side, the industrial,CNG and PNG are gas hungry segments, driven by economic benefits ofusing gas as a fuel. We feel GGCL is ideally placed to capitalise on thepotential with assured profitability.

Business Model: Maximising risk-adjusted growthGGCL’s business model has evolved over a period of time and caters toindustrial, commercial, CNG and PNG segment.


GGCL operates in the highly industrialised belts of Ankleshwar, Bharuchand Surat. These have a large number of industries that require gas lessthan 50,000 SCMD of gas. Under PNGRB guidelines, supplies of less than50,000 SCMD will be under the purview of CGD licence. This makes GGCLthe sole supplier of gas to these industries. It has taken adequate steps topromote a gas culture by pushing development of combine heat & powersolution and making consumers aware of the savings from gas usage.

GGCL supplies nearly 19% of the total gas consumption to CNG and PNG(along with the commercial) segment. This segment has been growingdue to infrastructure expansion and enviable economics of gas usage.

The Porter 5 Forces model signifies the inherent strength of GGCL’sbusiness model.

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India ResearchPorter 5 Forces Model


Promising triggers of concurrent geographical expansionAs a strategy, GGCL prefers focusing on its existing geographic territory inGujarat rather than exploring new ones. GGCL has an extensive coveragein Ankleshwar, Bharuch and Surat, developed over years.

GGCL has got the formal licence in its existing areas of operation and hasbid for Bhavnagar, which is in close proximity to GGCL’s existing areas ofoperation. Besides offering significant demand potential, this will result inbetter utilisation of pipelines for gas transportation. GGCL will be the solesupplier of gas to the industrial segment that consumes gas less than50,000 SCMD.

During CY09, volumes declined due to non availability of gas. Demandwas there but with decline in domestic supplies, GGCL could not supplythe gas to full potential. Market of spot RLNG was not conducive for CGDsector. Things changed and with improved availability of RLNG, GGCLvolumes started moving up during CY10- CY11. Increase in global RLNGprices and INR depreciation, resulted in a sharp hike in RLNG prices. Thisis resulting in a volume loss again in CY12.

GGCL has decided not to pursue customer segments which are not readyto pay the higher prices. This is being witnessed in the current year CY12.GGCL has started expanding infrastructure in uncovered areas to achievevolume growth.

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Source : Dolat Research

Changing revenue mix to improve profitabilityImpending competition in the bulk segment, coupled with low profitability,makes it a bad apple for GGCL, leaving it to focus on more profitablesegments with considerable volume potentials.

CNG segment has been growing double digits for GGCL and consideringthe usage economics we expect this segment to continue to grow strongly.At the current level of prices, CNG supplied by GGCL is cheaper by 45% incomparison to Petrol and 11% cheaper as compared to diesel.


In terms of profitability, industrial retail is far better than the bulk segment.GGCL’s decision to exit the bulk segment was due to the focus onprofitability. It will divert volumes to more profitable segments of industrialretail, CNG and PNG (domestic & commercial). This change would boostprofitability.

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India ResearchFinancial AnalysisProfitability margins would remain stable and absolute profitabilityremains strongWith disruptions in domestic supplies and volume growth on rise, RLNGproportion will increase. As the incremental volume is catered by highcost RLNG, blended cost of GGCL is on a rise. Profitability margins wouldtake a beating in CY12E due to delay in increasing the selling price toprotect spreads. Going forward, we expect GGCL not to compromise onmargins. We expect margins to remain stable. GGCL would be able toexpand its absolute spreads on a per unit basis due to changing revenuemix.


GGCL’s ability to hike prices will result in operating and net profitabilitygrowing in absolute terms. We expect GGCL’s operating profitability togrow 14% CAGR in CY11-CY14E and net profit to grow 9.6% CAGR inCY11-CY14E.


Revenue growth driven by volume, realisationGGCL will see volume CAGR of 7.1% during CY12-CY14E driven by all thesegments. Revenue growth will be driven by volumes as well asrealisations.

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ValuationGGCL has undergone a structural change in the past couple of years.Earlier the issues were of gas supply, which are sorted due to availabilityof RLNG. Now the concern is for the volume growth, which would go awayas GGCL expands its infrastructure in the uncovered areas of its licensedterritories. We believe that GSPC coming in would bring faster expansion– required for volume growth.

GGCL will ride on its existing coverage of key industrial regions as well asgrowth from the CNG and PNG segments. The capex will be throughinternal accruals only. GGCL stock price has been impacted due to BGselling stake to GSPC and regulatory developments. On the business front,volume growth has stagnated.. Interaction with industry participantsreinforces our opinion that regulatory concerns will improve in favour ofCGD space. At CMP of ` 306, the stock trades at 12x CY13E and 10.9xCY14E earnings. We recommend Buy rating, with a DCF-based targetprice of ` 363.

DCF CY13E CY14E CY15E CY16E CY17E Profit After Tax (PAT) 3,281 3,607 3,955 4,604 5,154 Depreciation 751 865 984 1,115 1,256 Interest (1-T) 136% 136% 136% 136% 136% Gross Cash Inflow 4,034 4,473 4,939 5,720 6,411 Capex 2,080 2,140 2,240 2,620 2,640 Increase in Non Cash Working Capital 418 (314) 1,649 (142) (631) Gross Cash Outflow 2,498 1,826 3,889 2,478 2,009 Free Cash Flow 1,535 2,647 1,050 3,242 4,402

Discount Factor 91% 83% 75% 68% 62% PV of Free Cash Flow 1,397 2,190 790 2,219 2,741 PV of Cumulative Free Cash Flow 1,397 3,587 4,377 6,596 9,337

Assumed Terminal Year (n) 2,017 Cash Flow at N+1 4,534 Growth Rate (in %) 3.0% WACC (in %) 9.9%

Terminal Value 65,361 Discounted Terminal Value 40,701 Present Value of Firm till Terminal Year 9,337 Total Discounted Value of Firm 50,038 Current Debt of Firm & Pref Equity 3,514 Present Value of Equity 46,524 No of Equity Shares 128 Fair Value of Equity Share (in `̀̀̀̀) 363

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India ResearchINCOME STATEMENT `̀̀̀̀ mnParticulars Dec11 Dec12E Dec13E Dec14ENet Sales 23,819 31,459 34,591 39,535Other Operational income 340 270 240 240Total Income 24,159 31,729 34,831 39,775Total Expenditure 20,208 27,559 29,573 33,923Raw Material 18,397 25,486 27,309 31,378Employee Expenses 604 647 697 795Other Expenses 1,207 1,426 1,567 1,750Other Income 545 628 320 320EBIDTA (Excl. Other Income) 3,952 4,169 5,258 5,851EBIDTA (Incl. Other Income) 4,497 4,797 5,578 6,171Interest 1 2 2 2Gross Profit 4,495 4,796 5,576 6,169Depreciation 593 643 751 865Profit Before Tax & EO Items 3,902 4,153 4,825 5,305Profit Before Tax 3,902 4,153 4,825 5,305Tax 1,163 1,226 1,544 1,698Net Profit 2,739 2,927 3,281 3,607

BALANCE SHEETParticulars Dec11 Dec12E Dec13E Dec14ESources of FundsEquity Capital 257 257 257 257Non Convertible Preference Shares 144 144 144 144Stock Options 49 49 49 49Other Reserves 7,346 8,010 9,478 11,271.9Net Worth 7,795 8,459 9,927 11,720.9Unsecured Loans 2,564 3,064 3,514 3,964Loan Funds 2,564 3,064 3,514 3,963.9Deferred Tax Liability 801 600 500 400Total Capital Employed 11,160 12,123 13,941 16,084.7

Applications of FundsGross Block 10,607 12,407 14,407 16,507Less: Accumulated Depreciation 3,867 4,510 5,261 6,125.6Net Block 6,740 7,897 9,146 10,381.3Capital Work in Progress 1,535 720 800 840Investments 5,206 5,556 5,856 6,156Current Assets, Loans & AdvancesInventories 158 215 237 270.8Sundry Debtors 1,839 2,586 2,843 3,249.4Cash and Bank Balance 93 2,039 1,810 2,692.5Loans and Advances 148 354 390 428.7Other Current Assets 34 132 146 160.2sub total 2,272 5,327 5,425 6,801.6Less : Current Liabilities & ProvisionsCurrent Liabilities 2,658 5,027 5,387 6,189.5Provisions 1,934 2,349 1,899 1,904.2sub total 4,592 7,377 7,286 8,093.7Net Current Assets (2,320) (2,050) (1,861) (1,292.1)Total Assets 11,159.6 12,123 13,941 16,084.7E-estimates

CASH FLOWParticulars Dec11 Dec12E Dec13E Dec14EProfit before tax 3,902 4,153 4,825 5,305Depreciation & w.o. 593 643 751 865Net Interest Exp 1 2 2 2Direct taxes paid (1,163) (1,226) (1,544) (1,698)Chg. in Working Capital (Non Cash) 177 1,676 (418) 314Other 36 (201) (100) (100)(A) CF from Operating Activities 3,546 5,046 3,516 4,688Capex {Inc./ (Dec.) in FA n WIP} (1,174) (985) (2,080) (2,140)Free Cash Flow 2,372 4,061 1,436 2,548Inc./ (Dec.) in Investments 486 (350) (300) (300)(B) CF from Investing Activities (688) (1,335) (2,380) (2,440)Issue of Equity/ Preference 11 0 0 0Inc./(Dec.) in Debt 490 500 450 450Interest exp net (1) (2) (2) (2)Dividend Paid (Incl. Tax) (3,314) (2,263) (1,813) (1,813)(C) Cash Flow from Financing (2,814) (1,765) (1,365) (1,365)Net Change in Cash 44 1,946 (229) 883Opening Cash balances 49 93 2,039 1,810Closing Cash balances 93 2,039 1,810 2,692E-estimates

IMPORTANT RATIOSParticulars Dec11 Dec12E Dec13E Dec14E(A) Measures of Performance (%)Contribution MarginEBIDTA Margin (excl. O.I.) 16.4 13.1 15.1 14.7EBIDTA Margin (incl. O.I.) 18.6 15.1 16.0 15.5Gross Profit Margin 18.6 15.1 16.0 15.5Tax/PBT 29.8 29.5 32.0 32.0Net Profit Margin 11.3 9.2 9.4 9.1

(B) As Percentage of Net SalesRaw Material 77.2 81.0 78.9 79.4Employee Expenses 2.5 2.1 2.0 2.0Other Expenses 5.1 4.5 4.5 4.4

(C) Measures of Financial StatusDebt / Equity (x) 0.3 0.4 0.4 0.3Interest Coverage (x) 3,018 2,822 2,789 3,086Average Cost Of Debt (%) 0.1 0.1 0.1 0.1Debtors Period (days) 28 30 30 30Closing stock (days) 2 3 3 3Inventory Turnover Ratio (x) 151.2 146.0 146.0 146.0Fixed Assets Turnover (x) 2.2 2.5 2.4 2.4Working Capital Turnover (x) (10.3) (15.3) (18.6) (30.6)Non Cash Working Capital (` Mn) (2,413) (4,089) (3,671) (3,985)

(D) Measures of InvestmentEPS (`) 21.4 22.8 25.6 28.1CEPS (`) 26.0 27.8 31.4 34.9DPS (`) 22.0 15.0 12.0 12.0Dividend Payout (%) 103.0 65.7 46.9 42.7Profit Ploughback (%) (3.0) 34.3 53.1 57.3Book Value (`) 60.8 66.0 77.4 91.4RoANW (%) 33.9 36.0 35.7 33.3RoACE (%) 35.0 35.7 37.0 35.3RoAIC (%) (Excl Cash & Invest.) 35.2 39.3 43.5 41.6

(E) Valuation RatiosCMP ( )̀ 306 306 306 306P/E (x) 14.3 13.4 12.0 10.9Market Cap. (` Mn.) 39,245 39,245 39,245 39,245MCap/ Sales (x) 1.6 1.2 1.1 1.0EV (` Mn.) 41,716 40,269 40,949 40,516EV/Sales (x) 1.8 1.3 1.2 1.0EV/EBDITA (x) 10.6 9.7 7.8 6.9P/BV (x) 5.0 4.6 4.0 3.3Dividend Yield (%) 7.2 4.9 3.9 3.9E-estimates

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19January 04, 2013 Indraprastha Gas

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FinancialsYear Net Sales % Growth EBIDTA OPM % PAT NPM % EPS (`̀̀̀̀) % Growth PER (x) ROANW(%) ROACE (%)FY12 25,151 44.2 6,345 25.2 3,064 12.2 21.9 18.0 11.7 27.4 29.5FY13E 34,405 36.8 7,925 23.0 3,765 10.9 26.9 22.9 9.5 27.4 29.9FY14E 42,198 22.6 8,979 21.3 4,206 10.0 30.0 11.7 8.5 25.2 28.6FY15E 55,901 32.5 10,209 18.3 4,849 8.7 34.6 15.3 7.4 24.5 28.9Figure in .̀ mn

BSE Sensex 19,784NSE Nifty 6,016

Scrip DetailsEquity ` 1400mnFace Value ` 10/-Market Cap ` 36bn

USD 658mn52 week High / Low ` 394 / 170Avg. Volume (no) 194,643BSE Code 532514NSE Symbol IGLBloomberg Code IGL INReuters Code IGAS.BO

Shareholding Pattern as on Sept’12(%)

Promoter 45.00MF/Banks/FIs 17.50FIIs 16.43Public / Others 21.04

Indraprastha Gas

CMP: `̀̀̀̀ 256 Target Price: `̀̀̀̀ 379 Buy

Indraprastha Gas’s (IGL) business model of playing the role of an enablerin the energy economy with adequate pricing power positions as one ofthe secular plays in the sector. Its role as a facilitator of green fuel cultureand an exclusive supplier in the high-growth National Capital Region (NCR)has been proven over the last decade, however the size of the opportunitycontinues to be big enough for it to sustain growth in high teens next fewyears.

The key strength for IGL comes from its ability to source gas, on the backof its promoter’s strength (GAIL). The aggressive geographical expansionhas enhanced the network coverage and this shall be a key driver of itsvolume growth. Further, IGL’s ability to protect spreads despite anincrease in gas costs ensures profit growth. Of late however, regulatoryconcerns have weighed down on the stock. We believe that theseconcerns may have been overdone. And clearing of these over the nextfew months shall trigger an instant re rating for the sector and IGL inparticular. Notably, the regulatory issues have not impacted financialperformance of IGL, and it continues to sustain volume and operatingperformance.

We recently upgraded the stock to Dolat preferred picks.

Investment RationaleRegulatory Concerns: A case of overdone pessimismThe Supreme Court is due to take up the hearing of the PNGRB – IGLcase in Mar 2013. The matter under contest relates to the fixation ofNetwork Tariff and Compression Charges. Based on our industryinteractions, we believe IGL is on a strong footing, and therefore has fairprobability of winning the case. The other issue that has been an overhangon the stock is the fear of cap on marketing margins. We observe in ourchannel checks that the CGD sector would be kept out of the purview ofmarketing margin. The regulator, PNGRB does not intend to control finalselling prices. Hence, there would be no impact of profitability of IGL.

NCR monopoly to continue: IGL is the exclusive supplier of CNG (fortransport) and PNG (for household, commercial and industrial) in Dehiland the NCR. The company’s marketing exclusivity for Delhi region expiredin December 2011. However, we believe that entry barriers for new playersto establish presence in the region are very high, given the challenges to

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India Researchensure gas supply. The remaining is RLNG. With no improvement indomestic supplies, we feel IGL’s monopoly will continue.

Enviable user economics: The economics for CNG as transport fuelcontinues to offers unprecedented savings (around 56% against petrol andaround 24% versus diesel). This is inspite of the regular price hikes (20%ytd) taken by IGL while for Petrol and Diesel, the price hikes have been2.4% and 14% respectively. In the household segment, PNG is cheaper by6% at current heavily-subsidised LPG price levels. The latest cap on thenumber of cylinders (if six cylinders per household is retained) has madePNG more attractive. Any further increase in LPG price will further tilt thescale in favour of IGL. For the commercial segment, gas continues to bethe best option. In the industrial segment, PNG is cheaper as compared toliquid fuels. However, it is marginally costlier as compared to solid fuel.

Visible growth with pricing power: IGL has doubled its gross block intwo years (FY10-12). The aggressive expansion is expected to continueand IGL will reap long-term benefits. The infrastructure expansion is acrossCNG stations and pipeline networks for the PNG segment. We expect IGLto clock a volume CAGR of 14.6% over FY12 to FY15E. IGL has shown theability to maintain gross spreads, despite hikes in gas cost, by consistentlyraising selling price. This shows the IGL business model’s resilience.

ValuationIGL’s ability to maintain gross spreads in absolute terms, coupled withdecent volume growth, will drive revenue and profit growth. We believethat current market price is factoring extreme negatives of regulatoryhurdles. We feel that risk reward is highly in favour of IGL. At CMP thestock trades at 9.5x FY13E and 8.5x FY14E earnings. We recommendBuy with a DCF based price target of ` 379.

1 year forward PE Band

DOLAT CAPITAL


India ResearchRegulatory Concerns OverdoneRegulatory hurdles for IGL have emerged on 2 fronts – Network Tariff &Compression Charges and Marketing Margin.

Chronology of Events:

Government asks PNGRB to look in the marketing margin charged by Gasdistribution companies

PNGRB issues an order to IGL fixing the Network Tariff and CompressionCharges.

IGL takes a stay on PNGRB order from Delhi High Court

PNGRB refers the marketing margin issue back to Oil Ministry. Reasongiven – Gas is not a notified product

IGL wins the case in Delhi High Court. Delhi High court says that PNGRBdoes not have any power to fix tatriffs for IGL’s own consumers.

PNGRB moves to Supreme Court

IGL has submitted the data for tariff (Network and Compression) approvalto PNGRB. These were not accepted by PNGRB and were reducedsignificantly by PNGRB.

Proposed by IGL PNGRB Actual by IGL*Compression Charges` / Kg 6.66 2.75 4.50` / SCM 4.93 2.04 3.33

Network Tariff`/ MMBTU 104.05 38.58 66.75` / SCM 3.51 1.30 2.25Total (` / SCM) 8.44 3.34 5.58* Dolat Estimates

Network Tariff and Compression Charge:As per the PNGRB Act, the regulator is authorized to fix network tariffpayable to IGL by any gas distribution company which enters the Delhiregion. This is based on the use of IGL’s infrastructure to move gas. Theimportant aspect of this is that network tariffs can be fixed by the regulatorfor third party. However, IGL stance has been that since it procures andsells gas directly to its customers, therefore there is no applicability ofthird party here as it owns the client.

Marketing Margin:We believe, based on our interaction with the industry participants, thatcity gas distribution (CGD) companies shall be excluded from the purviewof marketing margins. We expect this clarification to emerge over the nextfew months. Our view is further corroborated from the following aspectsof the sector:

December 26, 2011

April 9, 2012

April 10, 2012

May 8, 2012

June 1, 2012

July 27, 2012

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India ResearchGas input costs are not fixed. Incremental volume is catered by highcost imported RLNG. CGD companies cannot be assured of a confirmedoff-take (like Power) with a fixed margin and hence they carry the risk ofmarketing the gas to retail consumers.

Due to availability of alternate fuels, market forces should determinethe marketing margin that can be charged by IGL.

NCR monopoly to continueIGL supplies natural gas in the national capital region (NCR) for transport,industrial and household purposes. Its business model in NCR has been abenchmark for the rest of the country to promote green fuel culture. It hasbeen instrumental in shifting public transport to CNG from conventionalfuels.

‘Porter 5 Forces’ model signifies the inherent strength of IGL’s businessmodel.

IGL has maintained profitability, aided by volume growth and access to gasat APM rates. The dominant market position, entry barriers, favourablebusiness prospects, secure gas tie ups and strong parentage will ensuresteady growth for IGL. We feel that IGL’s monopoly in NCR will remainthough the marketing exclusivity period for Delhi has ended in December2011.

Porter’s 5 Forces Model

DOLAT CAPITAL


India ResearchEnviable user economicsApart from controlling pollution, the use of CNG offers unprecedentedsavings on fuel consumption. The regulatory compulsion of public transportbeing on CNG envisages long-term demand sustainability. The DelhiTransport Corporation (DTC), which runs buses in NCR, is IGL’s biggestcustomer. The tie up with DTC has been at an institutional level and IGLhas created CNG filling stations at DTC depots to facilitate easy filling ofCNG for DTC buses.

The fuel cost of four wheelers is a major cost component of running them.The economics and negligible maintenance of shifting to CNG act as astrong trigger for conversion of private vehicles to CNG. NCR has thehighest population of four wheelers in India, thereby presenting a big revenueopportunity. High prices of conventional fuels and easy availability of CNGwith new CNG stations coming up would drive the shift.


Rationalisation of LPG subsidies : Opportunity for PNGIn the PNG segment for households, PNG is cheaper as compared toLPG, which is heavily subsidised. Considering the under recovery in LPGcylinders, the government may revise prices upwards. The capping of thenumber of cylinders has increased the demand for PNG.

LPG CylinderCost (in `.) 410.5Weight of LPG( in Kg) 14.2Cost per unit (Rs / Kg) 28.9 PNG for Household Cost (in Rs. /SCM) 22Comparable factor of PNG with LPG on energy equivalence (1 SCM / Kg) 0.81Comparable Cost (in Rs / Kg) 27.2% Savings on every unit 6.0


DOLAT CAPITAL


India ResearchIn the commercial and industrial segment, PNG is preferred due to costeconomics and ease of usage. At current prices, PNG is cheaper ascompared to liquid fuels. However, it is marginally costlier when comparedto solid fuels. This segment is catered by high cost RLNG. We expectRLNG prices to go down from the current levels by March. IGL has a flexiblepricing for industrial segment we expect that benefit of decline in RLNGprices would be passed on to the industrial consumers. This would propelthe volume growth in the industrial segment.

Visible Growth with Pricing PowerIGL is extensively upgrading its infrastructure. It has doubled its gross blockin two years FY10-12. We expect capex intensity for another 3 years andIGL will reap the benefits in the long term.


The expansion will come in the form of:

Capacity augmentation at existing CNG stations: This will reducefilling time and waiting time.

Increase in pipeline network: IGL is expanding its pipeline networkacross NCR to reach new residential areas for the PNG segment. It isalso spreading out to new sites for CNG stations. This is aimed atcapturing upcoming residential areas and covering untapped domesticsegment.

CNG station: IGL is aggressively adding CNG stations to cater toburgeoning CNG demand.

The CNG station break up for IGL as on March 31, 2012 is as below:

Station Category IGL DTC / UPSRTC OMC TotalOnline 110 50 67 227Daughter 0 0 1 1Daughter Booster 3 0 77 80Total 113 50 145 308

DOLAT CAPITAL


India ResearchThe PNG network growth for IGL is as below:Category FY08 FY09 FY10 FY11 FY12 CAGR (in %)Steel Pipeline 195 231 299 421 574 31.0MDPE Pipeline 1272 1700 2330 4420 6479 50.2Total 1467 1931 2629 4841 7053 48.1

The company has consumed its allocated quota of APM gas and is goingstrong in terms of volume growth. It has nearly 2.6 MMSCMD of APM gasand the remaining volume is catered to by high-cost RLNG. In the absenceof any increase in domestic gas supplies, IGL will be resorting to RLNG tosupport volume growth. We expect IGL’s volumes to grow at 14.6% CAGRover FY12 to FY15E.

To counter the constant increase in blended gas cost, IGL has been raisingselling prices across segments to maintain absolute gross spreads.Acceptance of the regular price hikes shows the economic advantage ofeven expensive gas.

Increasing proportion of RLNG in gas mix


As the incremental volume growth is catered to by high-cost RLNG, blendedcost of gas will increase constantly. To maintain absolute profitability on aper unit basis, IGL will have to hike prices regularly. Its strategy has been tomaintain or increase gross spreads consistently.


DOLAT CAPITAL


India ResearchFinancial Analysis

Profitability margins to decline but absolute profitability remainsstrongRising input cost has put pressure on operating and net margins. As theincremental volume is catered by high cost RLNG, blended cost of IGL ison a rise. Though IGL would be able to protect its absolute spreads on aper unit basis, margins would remain on a decline trajectory.


IGL’s ability to hike prices will result in operating and net profitability growingin absolute terms. We expect IGL’s operating profitability to grow 17.2%CAGR in FY12-FY15E and net profit to grow 16.5% CAGR in FY12-15E.


Revenue growth driven by volume, realisationIGL will see volume CAGR of 14.6% during FY12-15E driven by the industrialsegment. PNG, which comprises households and commercial & industrial,will be the high growth segment. It is expected to grow at 24.5% CAGRduring FY12-15E. The CNG segment is expected to grow 11.2% CAGRduring FY12-15E. Revenue growth will be driven by volumes as well asrealisations.

DOLAT CAPITAL


India Research

ValuationIGL has undergone a structural change in the past couple of years. Thestrength of the business model was never tested till rising input cost forcedit to revise prices regularly. Pricing power resilience, aggressive pursuit ofgrowth, promotion of new usages of gas and strong demand and supplysides will culminate in cash generation for the foreseeable future.

Regulatory hurdles during FY13 have beaten down the stock significantly.Case is with Supreme Court and regulatory overhang would remain till thedecision of Supreme Court comes. Regarding marketing margin issue,we believe that it would not be implemented on CGD sector. With PNGRBnot interested to control the final selling price, we feel that spreads of IGLare not under threat.

We believe that current market price is factoring extreme negatives ofregulatory hurdles. We feel that risk reward is highly in favour of IGL. AtCMP the stock trades at 9.5x FY13E and 8.5x FY14E earnings. Werecommend Buy with a DCF based price target of ` 379.

DCF FY13E FY14E FY15E FY16E FY17E Profit After Tax (PAT) 3,765 4,206 4,849 5,978 6,787 Depreciation 1,847 2,148 2,489 2,843 3,198 Interest (1-T) 387 411 377 343 309 Gross Cash Inflow 5,999 6,765 7,715 9,163 10,293 Capex 1,397 5,400 5,184 5,616 5,400 Increase in Non Cash Working Capital (75) (112) (704) 567 (112) Gross Cash Outflow 1,323 5,288 4,480 6,183 5,288 Free Cash Flow 4,676 1,477 3,235 2,980 5,005

Discount Factor 91% 83% 75% 68% 62% PV of Free Cash Flow 4,251 1,221 2,431 2,036 3,109 PV of Cumulative Free Cash Flow 4,251 5,472 7,903 9,939 13,048

Assumed Terminal Year (n) 2017 Cash Flow at N+1 5,155 Growth Rate (in %) 3.0% WACC (in %) 10.0%

Terminal Value 73,725 Discounted Terminal Value 45,793 Present Value of Firm till Terminal Year 13,048 Total Discounted Value of Firm 58,841 Current Debt of Firm & Pref Equity 5,818 Present Value of Equity 53,022 No of Equity Shares 140 Fair Value of Equity Share (in `̀̀̀̀) 379


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India ResearchINCOME STATEMENT `̀̀̀̀ mnParticulars Mar12 Mar13E Mar14E Mar15ENet Sales 25,151 34,405 42,198 55,901Other Operational income 36 21 22 22Total Income 25,187 34,426 42,220 55,923Total Expenditure 18,842 26,501 33,241 45,714Raw Material 15,392 22,485 28,430 40,292Employee Expenses 437 506 591 671Other Expenses 929 3,510 4,220 4,752Other Income 67 94 60 80EBIDTA (Excl. Other Income) 6,345 7,925 8,979 10,209EBIDTA (Incl. Other Income) 6,412 8,019 9,039 10,289Interest 479 575 614 563Gross Profit 5,933 7,445 8,425 9,726Depreciation 1,432 1,847 2,148 2,489Profit Before Tax & EO Items 4,501 5,597 6,277 7,237Profit Before Tax 4,501 5,597 6,277 7,237Tax 1,437 1,832 2,072 2,388Net Profit 3,064 3,765 4,206 4,849

BALANCE SHEETParticulars Mar12 Mar13E Mar14E Mar15ESources of FundsEquity Capital 1,400 1,400 1,400 1,400Other Reserves 10,889 13,841 16,745 19,967Net Worth 12,289 15,241 18,145 21,367Secured Loans 3,375 3,425 3,675 2,675Unsecured Loans 2,443 3,143 3,543 3,943Loan Funds 5,818 6,568 7,218 6,618Deferred Tax Liability 627 692 300 300Total Capital Employed 18,735 22,501 25,663 28,285

Applications of FundsGross Block 22,673 27,473 32,857 38,057Less: Accumulated Depreciation 6,877 8,724 10,872 13,361Net Block 15,796 18,748 21,984 24,695Capital Work in Progress 3,787 384 400 384Investments 984 1,084 1,184 1,284Current Assets, Loans & AdvancesInventories 374 566 809 1,072Sundry Debtors 1,298 1,885 2,543 3,369Cash and Bank Balance 320 4,511 4,433 4,964Loans and Advances 575 675 775 875Other Current Assets 95 100 120 140sub total 2,661 7,737 8,680 10,420Less : Current Liabilities & ProvisionsCurrent Liabilities 3,623 4,638 5,284 6,871Provisions 870 814 1,302 1,627sub total 4,493 5,452 6,586 8,498Net Current Assets (1,832) 2,285 2,095 1,922Total Assets 18,735 22,501 25,663 28,285E-estimates

CASH FLOWParticulars Mar12 Mar13E Mar14E Mar15EProfit before tax 4,501 5,597 6,277 7,237Depreciation & w.o. 1,432 1,847 2,148 2,489Net Interest Exp 479 575 614 563Direct taxes paid (984) (1,832) (2,072) (2,388)Chg. in Working Capital (54) 75 112 704Other (14) 65 (392) 0(A) CF from Operating Activities 5,361 6,327 6,687 8,605Capex (6,117) (1,397) (5,400) (5,184)Free Cash Flow (756) 4,929 1,287 3,421Inc./ (Dec.) in Investments 760 (100) (100) (100)Other 61(B) CF from Investing Activities (5,296) (1,497) (5,500) (5,284)Inc./(Dec.) in Debt 1,947 750 650 (600)Interest exp net (484) (575) (614) (563)Dividend Paid (Incl. Tax) (814) (814) (1,302) (1,627)Other (979)(C) Cash Flow from Financing 650 (1,618) (1,265) (2,790)Net Change in Cash 715 3,212 (78) 531Opening Cash & Cash Equivalents 585 1,299 4,511 4,433Closing Cash & Cash Equivalents 1,299 4,511 4,433 4,964E-estimates

IMPORTANT RATIOSParticulars Mar12 Mar13E Mar14E Mar15E(A) Measures of Performance (%)Contribution MarginEBIDTA Margin (excl. O.I.) 25.2 23.0 21.3 18.3EBIDTA Margin (incl. O.I.) 25.5 23.3 21.4 18.4Interest / Sales 1.9 1.7 1.5 1.0Gross Profit Margin 23.6 21.6 20.0 17.4Tax/PBT 31.9 32.7 33.0 33.0Net Profit Margin 12.2 10.9 10.0 8.7

(B) As Percentage of Net SalesExcise Duty % of Gross Sales 9.9 9.7 9.4 9.1Raw Material 61.2 65.4 67.4 72.1Employee Expenses 1.7 1.5 1.4 1.2Other Expenses 3.7 10.2 10.0 8.5

(C) Measures of Financial StatusDebt / Equity (x) 0.5 0.4 0.4 0.3Interest Coverage (x) 13.4 14.0 14.7 18.3Average Cost Of Debt (%) 9.2 9.3 8.9 8.1Debtors Period (days) 19 20 22 22Closing stock (days) 5 6 7 7Inventory Turnover Ratio (x) 67.3 60.8 52.1 52.1Fixed Assets Turnover (x) 1.1 1.3 1.3 1.5Working Capital Turnover (x) (13.7) 15.1 20.1 29.1Non Cash Working Capital (` Mn) (2,152) (2,226) (2,338) (3,042)

(D) Measures of InvestmentEPS (`) 21.9 26.9 30.0 34.6CEPS (`) 32.1 40.1 45.4 52.4DPS (`) 5.0 5.0 8.0 10.0Dividend Payout (%) 22.8 18.6 26.6 28.9Profit Ploughback (%) 77.2 81.4 73.4 71.1Book Value (`) 87.8 108.9 129.6 152.6RoANW (%) 27.4 27.4 25.2 24.5RoACE (%) 29.5 29.9 28.6 28.9RoAIC (%) (Excl Cash & Invest.) 29.9 33.9 35.1 35.0

(E) Valuation RatiosCMP ( )̀ 256 256 256 256P/E (x) 11.7 9.5 8.5 7.4Market Cap. (` Mn.) 35,840 35,840 35,840 35,840MCap/ Sales (x) 1.4 1.0 0.8 0.6EV (` Mn.) 41,338 37,897 38,625 37,494EV/Sales (x) 1.6 1.1 0.9 0.7EV/EBDITA (x) 6.5 4.8 4.3 3.7P/BV (x) 2.9 2.4 2.0 1.7Dividend Yield (%) 2.0 2.0 3.1 3.9E-estimates

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The acceptance of the high priced Re-gasified Liquefied Natural Gas(RLNG) has brought a new dynamism to the CGD space, especially in theabsence of any increase in domestic gas supplies. The expanding pipelineinfrastructure, favourable economics of gas and a growing concern overpollution makes a sound investment case in CGD space provided thestrategy to deal with supply side issues and regulatory risks is inplace.

Network BasicsCGD represents the last mile in the gas value chain and gas is supplied atlow / medium pressure to

Residential, commercial consumers and small industrial consumers(Piped Natural gas [PNG])

Transportation segment as vehicle fuels (Compressed Natural gas[GNG])

CGD network involves movement of small volumes of gas through smalldiameter medium to low pressure distribution pipelines by a local distributioncompany to a large number of retail consumers. It is an integrated networkof steel, poly ethylene (PE) and medium density polyethylene (MDPE)pipelines along with CNG dispensing stations.

City Gas Distribution (CGD) – last Part in the Gas value chain - Distribution


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CGD Evolution in IndiaThe gas retail business in India started as early as 1880 when CalcuttaGas Company and Bombay Gas Company commenced operations inKolkata and Mumbai respectively. The sector remained dormant for a verylong time. The formation of Gujarat Gas Company (GGCL), MahanagarGas (MGL) and Indraprastha Gas (IGL), which began operations in thelate 1980 to mid 1990, gave thrust to the CGD sector.

Year City / State Company & Areas CGD Development Phase1880 – 1900 Coal gas supplied in Kolkata and Mumbai Few initiatives, largely dormant phase1962 Assam Gas Company (AGCL) established1972 Vadodara Municipal Corp. commences supply of coal gas1982 -86 Systems tested by ONGC and AGCL in Assam and Tripura1989 -91 GGCL launches PNG supply for industrial consumers Structured Development1992 GAIL did a pilot study in Delhi, Mumbai and Vadodara1998 Supreme Court directive to expand CNG network Gains Momentum2003 Supreme Court directs to introduce clean fuels in 11 cities

other than Delhi and Mumbai2006 CGD network operational in multiple locations CGD becomes a reality and platform2007 Formation of PNGRB being made for massive growth

CGD Entity Year of Incorporation Operating Areas

Gujarat Gas Company Ltd. 1980 Surat, Bharuch and AnkleshwarGSPC Gas 2005 Across all regions of Gujarat, covering Saurashtra,

central, north and southAdani Gas Ltd. 2004 Ahmedabad, Faridabad, VadodaraSabarmati Gas Ltd. 2006 Gandhinagar, Mehsana, SabarkanthaVadodara Mahanagar Seva Sadan 1972 VadodaraAssam Gas Company Ltd. 1965 Duliajan and nearby areasGreat Eastern Energy Corp. Ltd. 1996 Asansol, Kulti and DurgapurSiti Energy 2006 MoradabadIndraprastha gas Ltd. 1998 Delhi, NOIDA, Greater NOIDA and GhaziabadMahanagar Gas Ltd. 1995 Mumbai, Thane, Mira Bhayandar and Navi MumbaiMaharashtra Natural Gas Ltd. 2006 PuneCentral U.P. Gas Ltd. 2005 Kanpur, BareillyGreen Gas Ltd. 2005 Agra, Lucknow and Taj Trapezium zoneGAIL VadodaraHPCL* 2006 AhmedabadBhagyanagar Gas Ltd. 2003 Hyderabad, Vijaywada, Rajahmundry and KakinadaTripura Gas Ltd. 1990 AgartalaAvantika Gas Ltd. 2006 Indore, Ujjain and GwaliorHaryana City Gas 2000 GurgaonGAIL gas Ltd. 2008 Dewas, Kota, Sonepat and MeerutSanwariya Gas MathuraCharotar Gas 1999 Anand/Kheda

Existing CGD Network in India as on October 2012



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CGD Project Cost:On an average, a CGD project for a mid tier city could be developed withan investment of around Rs 4 bn. The main costs for a CGD project arethe pipeline network, which is nearly 60% of the total cost and the landcost required for City Gate stations and CNG stations within the city.

Competitive Bidding for New LicensesThe regulations put a process for selection of a CGD entity for a new cityon the basis of competitive bidding. Over and above the qualifying technicaland certain financial criteria, the bidders are evaluated on certain pre-defined parameters. These parameters have also undergone some changedue to some malpractices witnessed in the earlier rounds of bidding. Therevised parameters are as below:

Network ExclusivityPNGRB has provided Network Exclusivity on the infrastructure for thewinning bidder. The network tariff charged by the owner for the use ofinfrastructure by other players is a biddable parameter. The regulationsprovided exclusivity of infrastructure over its economic life of 25 years(economic life has been taken as 25 years for determining networkexclusivity, the actual economic life of the infrastructure could be morethan 25 years).

Marketing ExclusivityThe regulations provide for marketing exclusivity of 5 years and 3 yearsfor new and existing players respectively. Beyond this period, the pipeline


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infrastructure will become a common carrier and open access has to begiven to third parties on payment of network tariff.

Gas Consumption ParametersPNGRB has defined the gas consumption levels of consumers to ensurethat a CGD player does not have to face any competition from bulksuppliers. This was done with a clear objective that consumers up to acertain level of gas consumption would be catered by CGD licensee ofthat area irrespective of the price differential.

Service ObligationsThe regulator has specified certain minimum levels of service obligationsand service standards on matters relating to safety, addressing consumercomplaints, quality of natural gas supplied, issue of new connections, billingand emergency response.

Gas Supply:CGD has been accorded a high priority status for allocating gas fromdomestic supplies. The decline in the KG D6 gas production has been adampener for the country. However, considering the case of 3 major CGDplayers of India, viz. IGL, GGCL and MGL, the CGD users have shownwillingness to accept high cost gas in form of imported RLNG.

RLNG is readily available and all the above mentioned CGD companiesare catering to their incremental volume growth through RLNG. The onlyrisk to this is the prices of RLNG moving upwards sharply from the currentlevels. However, the upcoming global capacity for RLNG and decline inUS imports would keep RLNG prices under check.

Any increase in the domestic supplies in the coming years would be anadded advantage for CGD companies to fuel growth as well as profitability.

Gas PricingThere are several gas prices prevailing in the country. The gas pricedunder Administered Price Mechanism (APM) is for the gas produced fromblocks that were awarded by the government on a nomination basis toONGC and OIL. The price of the gas produced from the fields operated byprivate companies or joint ventures of public and private companies isapproved by the government.

For the gas produced from the NELP blocks, the contractor who developsand produces from the field can propose a selling price of gas. However,the formula or basis for that price has to be approved by the government.

S. No. Gas Consumption Levels Guidelines1 Gas consumption less than 50,000 SCM per day To be under CGD network2 Consumption over 50,000 SCM, but less than Either through CGD network or separate pipeline

100,000 SCM per day3 Consumption over 100,000 SCM per day To be through a separate pipeline not covered under

CGD network


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For the imported RLNG, which is the other source of gas apart fromdomestic supplies, the price is not regulated. This is the only segment inthe gas market that can reflect the short term demand and supply scenarioof India.

In May 2010, the government increased the APM price of gas by 135%from USD 1.79 per MMBTU to USD 4.2 per MMBTU bringing it par withKG D6 prices. This substantial increase in the APM price in one go is anindication of the government’s intent to make the gas market viable forinvestors. It also eliminated the subsidy and brings in a level playing fieldfor various consumers of gas.

Impact on CGD:When the APM prices were increased and CGD companies had to resortto higher cost RLNG in absence of domestic gas supplies, the biggestconcern was the ability of CGD companies to maintain their profitabilityand would any prices hikes be accepted by the end users.

The enviable economics of gas usage as compared to alternate fuels andease of usage enabled CGD companies to pass on the hike in the gasinput cost. The acceptance of the price hikes showcases the resilience inthe business model of CGD companies. The price hikes has become anormal business phenomenon and we feel that all the CGD companiesare working with a strategy to maintain their gross spreads on absoluteterms.

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India Position on Global CGD ScenarioIndia needs to compare the CGD developments in the country with theprogress made by other countries and take lessons on what has driventhe progress of CGD business in the world. US and UK are the benchmarksfor the CGD business.

Low

Regulation

Moderate High

High

Moterate

Low

High

Moterate

Low

Low Moderate High

Malaysia

Pakistan

China

India

South Koriea

Turkey

Japan

All the major countries are clustered around the same position in GlobalCGD Matrix and are trying to benchmark to US and UK for maturation

EnvisagedPositin US

UK

India should concentrate onregulatory/infrastructuraldevelopment first.

Supply

Demand

InfrastructureSource: Industry, Dolat Research

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Gap Areas and Issues pertaining to the CGD business in IndiaGap Areas Areas of Concern ImpactRegulatory Loopholes • Role Ambiguity

• Delay in granting authorising powers• Slowness in conducting the CGD bidding rounds Strong• Increasing number of NOC clashes• Lack of clarity on policy and guidelines among players

Project financing • Financial risks owing to bidding in the scenario of uncertainty ofConcerns gas sourcing and trunk pipeline connectivity Moderate

• Problems in equity pooling for project execution• Issues in getting finance for small and new player in the business

Zero Tariff Bids • Promotes unfair business practices• Undue pressure on recovery of costs Meager• De-incentivises the new entrants in the market

Overbidding • Acts as a deterrent to new entrants in the market• Promotes unethical business practices Meager• Promotes unachievable business proposals in the sector

Marketing Exclusivity • Highly Capital intensive projects with low monopoly gas marketingperiod of only five years

• Insufficient return on investment Moderate• Against the idea of promoting small players for long-term in the

CGD business

Gas Allocation • Low priority allocationPrinciples • Less domestic gas availability

• Increase reliance on R-LNG to meet energy requirements Strong• High Input costs ultimately increases the gas price for the end

consumers

Gas Price Pooling • Negative effect on the growth of exploration activities is speculated Meagerto result in less domestic gas availability

CGD Bidding Rounds • Targets underachieved• Slow coverage of cities under CGD leads to slow spread of clean Moderate

fuel to end users across the country


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Major Risk Factors of CGD business in IndiaRisk factors Major Areas of concern Risk impactGas Availability and • Diminishing domestic natural gas availabilityAllocation Risk • Low priority accorded to CGD sector in Gas Allocation Policy Moderate to high

• Core sector allocation not available for anchor consumer segmentsof CGD sector - Industrial and Commercial

Financial Risk • Huge investments required in the initial years when CGD is typicallya low volume and low margin business

• Underlying uncertainty of gas sourcing will make the funding difficult Moderate• Unrealistic bidding will affect the investment recovery model• Investing in high-interest rates time period will affect the working

capital, pricing of fuels, profitability and re-investments

Marketing Risk • Build-up of gas volumes sales is not easy in the high margincustomers of industrial and commercial

• A lot of inertia from customers is expected in the segment of PNGand CNG High

• Attaining the optimal customer portfolio is a challenge• Pre-mature competition may act as a barrier to reach the desired

penetration level

Regulatory Risk • Legal disputes and delays threatening the authority of PNGRB• Amendments in the regulations may impact the CGD landscape High• Any changes in the CGD bidding parameters also reflect a major risk• Pricing is highly subject to regulatory risk as regulatory changes may

impact the CGD pricing

High

Moderate

Low

Gas Sourcing

Pricing/Taxation

Low Moderate High

Operational

Financial ProjectManagement

BusinessModel

Marketing

Regulatory

Synchronised efforts required from CGD operators,Regulator and Government to reduce the impact andfrequency of the risks

Frequency

Impact

Legal/Statutory

Gas Availability/Allocation

Risk Matrix of CGD business


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This report contains a compilation of publicly available information, internally developed data and other sources believed to be reliable. Whileall reasonable care has been taken to ensure that the facts stated are accurate and the opinion given are fair and reasonable, we do not takeany responsibility for inaccuracy or omission of any information and will not be liable for any loss or damage of any kind suffered by use of orreliance placed upon this information. For Pvt. Circulation & Research Purpose only.

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