Indraprastha Gas-SIHL 09 Mar 2011 - breport.myiris.combreport.myiris.com/SIHL/INDGAS_20110309.pdf · Indraprastha Gas th 9 March 2011 2 | P a g e Branch Office: Shah Investor’s

Indraprastha Gas 9th March 2011

1 | P a g e Branch Office: Shah Investor’s Home Ltd.164-C, 16th Floor, Mittal Tower, Nariman Point, Mumbai-400021 PH: 91 22 22040782/83/84 Fax: 91 22 22040722 E-Mail: [email protected] Web: www.sihl.in

Sector: Gas Distribution Key Data Market Capital (Rs mn) 47,985.0 Market Capital (US$ mn) 920.8 O/S Shares, cr 140.00 Face Value, Rs 10 Avg Vol (000’s) 411.50 52 wk High 374.0 52 wk Low 206 Rs/US$ 45.04 Bloomberg IGL IN Reuters IGAS.BO NSE IGL BSE 532514

Shareholding Pattern

% Q3 FY 10 Q3 FY 11 Promoters 45.00 45.00 FII 10.93 17.03 DII 25.93 22.36 Public 18.14 15.61

Ameya Hardas [email protected] Siddharth Rajpurohit [email protected]

Investment Rationale Marketing exclusivity makes IGL a monopoly player until Jan 2012 In January 2009 PNGRB (Petroleum and Natural Gas Regulatory Board) has allotted to the company marketing exclusivity for Compressed Natural Gas Distribution for 3 years in the NCT of Delhi, Also the company was allotted network exclusivity for 25 years. Strong demand for CNG in NCT-Delhi The Government of NCT of Delhi has directed all Light Commercial Vehicles (LCVs) operating in NCT of Delhi to convert to CNG mode. The Company has drawn up plans to augment its infrastructure to meet the growing demand of CNG. Ability to pass on cost inflation In the past the company has successfully been able pass on the incremental cost to the end users. It has gradually hiked the CNG prices from Rs 19/kg in June 2009 to Rs 29/Kg currently. Even post price hike, CNG is much cheaper than Petrol and Diesel retail prices. Robust Capex plan to tap the market Indraprastha Gas has 3 years marketing exclusivity and also has 25 years of network exclusivity. Hence the company has taken an aggressive capex plan. The company has planned a capex of Rs 6.0billion in FY 11 and also Rs 6 billion each in FY 12 and FY 13E for the expansion of its CNG as well as its PNG network. Margin differential to remain a key entry barrier for new players The government has allocated 2MMSCMD of gas to Indrapratha Gas ltd at APM rate of USD 4.2 per MMBTU. The current market rate for natural gas is around USD 12 to 13 per MMBTU. Post the lapse of the marketing exclusivity clause in NCT-Delhi for Indrapratha gas it will continue to be a margin differentiator between IGL and the new players. Valuation We have valued the stock on weighted average of stock price arrived based on three different valuation parameters. On a PE basis we arrived at a value of Rs 370/share @ 25% weight; On Discounted Cash Flow based analysis we arrived at value of Rs 365/share @ 50% weight. On the third parameter EV/EBITDA we arrived at a value of Rs 360/share @ 25% weight. Based on the weighted average target stock price thus arrived, at Rs. 365 per share, We recommend BUY on Indraprastha Gas Ltd. with an investment horizon of 12 to 15 months.

CMP Rs. 296.2 Recommendation: BUY Target Price Rs. 365



Company Description Incorporated in 1998, IGL took over Delhi City Gas Distribution Project in 1999 from GAIL (India) Limited (Formerly Gas Authority of India Limited). The project was started to lay the network for the distribution of natural gas in the National Capital Territory of Delhi to consumers in the domestic, transport, and commercial sectors. With the backing of strong promoters – GAIL (India) Ltd. and Bharat Petroleum Corporation Ltd. (BPCL) – IGL plans to provide natural gas in the entire capital region. The transport sector uses natural gas as Compressed Natural Gas (CNG), the domestic and commercial sectors use it as Piped Natural Gas (PNG) and R-LNG is being supplied to industrial establishments.

IGL continues to augment its infrastructure so as to meet the increasing demand of CNG arising out of growing number of CNG vehicles in Delhi. The growth drivers for increase in demand of CNG are - car manufacturers coming up with CNG variants (Mahindra Logan and Hyundai Accent) and Delhi Government’s directive making it mandatory for all LCVs operating in Delhi to run on CNG. The company is in the process of enhancing its compression capacity (which enables faster filling) at its existing stations and by setting up new stations. IGL CNG Outlets 2008 2009 2010 2011E 2012E CNG Stations 163 181 241 281 311 CNG vehicles 225,000 250,000 350,000 - -

Source: Company

On the PNG front, IGL has planned to expand its business activities in the National Capital Regions (NCR) of Noida, Greater Noida and Ghaziabad.

PNG customer segmentation 2008 2009 2010 2011E 2012E 2013E Domestic (Residential Homes) 122,000 138,000 182,000 232,000 282,000 332,000 Commercial (Eating joints and Restaurants) 300 315 355 425 505 605 Industrial (Fabrication and other industrial use) 16 15 21 26 31 36

Source: Company

IGL also supplies of PNG for non cooking applications like Geysers in the NCR region. IGL is also working towards expanding its PNG network to cover all “charge areas” or CA of Delhi by 2012.

PNGRB* has divided the NCT of Delhi into 70 charge areas, which correspond to the Assembly constituencies

As of Dec 2010, 51 charge areas (CAs) have already been covered with PNG.

Industrial and commercial segments would be the focus areas for the organization in the future. *PNGRB-Petroleum and Natural Gas Regulatory Board



Investment Rationale

Marketing exclusivity makes IGL a monopoly player till January 2012 In Jan 2009 PNGRB (Petroleum and Natural Gas Regulatory Board) has allotted to the company marketing exclusivity for CNG Distribution for 3 years in the NCT of Delhi; i.e. no other player will be allowed in that region. Also the company was allotted network (pipeline) exclusivity for 25 years. Post marketing exclusivity the new entrants will have to use the pipeline network of IGL and pay charges for the usage. Till year 2034 no other City Gas distributor will be allowed to lay a parallel pipeline network in the region where Indraprastha Gas is present. Strong demand for CNG in NCT-Delhi

CNG being an eco-friendly and economical fuel, a large number of car manufacturers are introducing their CNG variants. Due to wide acceptance of CNG, there has been a large-scale conversion of private cars into CNG mode. This segment will give a boost to CNG sales in the coming years. Currently about 5,000 vehicles are converted monthly to CNG variants in the NCR region.

The Government of NCT of Delhi has directed all Light Commercial Vehicles (LCVs) operating in NCT of Delhi to convert to CNG mode. The Company has drawn up plans to augment its infrastructure to meet the growing demand of CNG. The estimated number of vehicles running on CNG in Delhi and NCR towns as on 31st March 2010 was around 3,50,000 including 14,000 buses and over 200,000 private vehicles.

Ability to pass on cost inflation.

The company has limited 2MMSCMD of gas available under APM (Administered Price Mechanism) available at USD 4.2MMBTU and the excess gas it has to source from market which is at much higher rates (in the range of USD 12-14MMBTU) than APM rates.

In the past the company has successfully been able pass on the incremental cost to the end users. It has gradually hiked the CNG prices from Rs 19/kg in June 2009 to Rs 29/Kg currently. Even post price hike, CNG is much cheaper than Petrol and Diesel retail prices. Hence we expect the company will be able to pass on the subsequent incremental cost to its customers.

Based on the price hike effected by IGL in June & Aug 2010, and in Jan 2011, we have assumed an average realisation price of Rs 28/kg. We expect the company to gradually hike the CNG prices to Rs. 32.6/kg by FY12 and Rs. 36/kg by FY13 to maintain its margins.

The CNG prices in Delhi are still one of the lowest in the country. The CNG prices in Gujarat is between Rs 34 to 35.45 per Kg, the prices in Hyderabad, Rajmundari, Lucknow, Agra, Ujjain, Kanpur, Pune etc are in the rage of Rs 35 to Rs 40 per kg Hike history of CNG Prices by IGL in NCT-Delhi Date of Price Hikes Price (Rs/kg) % Change 19-Mar-10 21.7 - 16-May-10 21.9 1% 17-Jun-10 27.5 26% 01-Oct-10 27.8 1% 01-Jan-11 29.0 4%



Robust Capex plan to tap the market

Indraprastha Gas has 3 years marketing exclusivity and also has 25 years of network exclusivity. So from January 2012 new players will be allowed in the market but they will not be allowed to lay their own pipeline and have to use the network of Indraprashta Gas, hence it will be a new revenue stream for the company. To tap this opportunity, the company has taken an aggressive capex plan of Rs 6 billion each in FY 11, FY12, FY13 (total Rs 18 billion) for the expansion of its CNG as well as its PNG network. The funding for the expansion will be both from debt and equity.

CNG much cheaper fuel than alternatives

After the government has revised the gas prices under APM, Indraprastha gas has hiked prices to maintain its margins. Currently the company is selling CNG at Rs 29/kg in Delhi hiked from Rs 21.7/kg in March 2010. After taking drastic hikes CNG is still a very cheap alternative for fuel as post the rise in crude oil prices the petrol prices are quoting at Rs 60 plus per litre where as diesel is 40 plus per litre. Hence CNG is one of the cheaper sources of fuel available. Also with easy availability of CNG in Delhi due to continuous expansion of network by IGL a number of vehicles are getting converted into CNG. Margin differential to remain a key entry barrier for new players

The government has allocated 2MMSCMD of gas to Indrapratha Gas Ltd. at APM rate of USD 4.2 per MMBTU. The current market rate for natural gas is around USD 12 to 14 per MMBTU.

Post the lapse of the marketing exclusivity clause in NCT-Delhi, the 2MMSCMD will continue to be a margin differentiator between IGL and the new players.

Also the new entrant will have to use the existing network of IGL for gas transmission thus adding a new revenue stream for IGL.

Robust expansion plan for PNG business segment

Currently PNG contributes 10% to the total sales of the company but going forward the company has taken aggressive plans to increase its pipeline network and has jotted down a capex of Rs 3bn (50% of the Rs 6 billion annual Capex Plan) every year till FY13.

In FY10 the company had total domestic household customer base of 182,000 and the company is planning to add 50,000 domestic customers every year till FY13 taking the total count to 332,000 customers. Currently this segment is highly under penetrated and offers great opportunity for business growth. Although, the operating profit margin in PNG is lower than CNG but it will help in diversification of business, where it is currently largely CNG focused.



Industry Analysis

India is the 5th largest energy consumer in the world and is expected to become the 3rd largest energy consumer by 2020 (after US & China). Today about 70% of the India’s Oil requirement is met by imports. Per capita consumption of energy in India is one of the lowest in the world (around 0.3 tonnes of oil equivalent compared to world average of 1.8) but in the long run this will rise and so will the share of natural gas within the energy basket; currently it is 9-10%.

India has made a voluntary commitment to reduce its carbon intensity by 20% by 2020. One of the measures to achieve this includes switch over to clean fuels and therefore, natural gas will get an increased focus to meet the energy requirement of the nation.

India’s gas market is on the threshold of its next phase of accelerated growth, mainly driven by the positive results of the reform initiatives of the Government of India, across the entire gas value chain. Supplies are witnessing a significant jump; inter-state gas pipeline grids are fast taking shape, regulatory reforms in City Gas and Power sectors and pricing reforms in the Fertilizer sector are gathering momentum. With the recent acceptability of market driven gas prices, natural gas is indeed emerging as major driver to spur clean and strong industrial growth in India.

Natural Gas Demand and outlook Globally, natural gas constitutes about 24% of the energy basket, while in India, it accounts for about 9%. The relative low share of gas in India’s energy consumption is attributed mainly to the limited availability of Natural Gas in India. India commenced gas imports in the form of liquefied Natural Gas (LNG), through special ships, from the year 2004. Since then, the last 7 to 8 years have particularly seen significant developments in terms of establishing a reliable domestic market for imported LNG and its price acceptability by consumers across different industries.

Fig: World Energy Consumption 2009

6%

36%

24%

29%

5%

Hydroelectric Oil Natural GasCoal Nuclear Energy

Source: BP Statistics

Fig: India Energy Consumption 2009

6%

31%

9%53%

1%

Hydroelectric Oil Natural GasCoal Nuclear Energy

Source: BP Statistics



The other important demand driver is the success of reforms in the upstream oil & gas sector, adopted by the government of India, between 1999 and 2009, threw open the exploration & production of oil & gas sector for various domestic and international players, and this has yielded exceptional results in terms of multiple discoveries, which are gradually being commercialized and are playing a crucial role in bridging the demand – supply gap of Natural Gas in India. It is estimated that by 2015, Indian gas demand is likely to go up to the level of 300 MMSCMD and meeting this demand requires not only continual investment in the upstream side for increased volumes of the gas supply, but also significant expansion in infrastructure and downstream facilities. CNG in the Capital

In India, Delhi has the largest metropolitan area and is the second-largest metropolis by population. It is the eighth largest metropolis in the world by population with more than 12.25 million inhabitants in the territory. There are nearly 22.2 million residents in the greater National Capital Region (NCR) (which includes Delhi NCT, Noida, Greater Noida, Ghaziabad, Gurgaon and Faridabad along with other smaller nearby towns).

Public transport in Delhi is provided by buses, auto rickshaws and a metro rail system. Buses are the most popular means of transport catering to about 60% of the total demand. The state-owned Delhi Transport Corporation (DTC) is a major bus service provider for the city. The DTC operates the world's largest fleet of environment-friendly CNG buses. Auto Rickshaws are a popular means of public transportation in Delhi, and all of them run on CNG. Private vehicles account for 30% of the total demand for transport. At 1,922.32 km of road length per 100 Sq.km, Delhi has one of the highest road densities in India. In 1998, the Supreme Court of India ordered all public transport vehicles in Delhi to use compressed natural gas (CNG) as fuel instead of diesel and other hydro-carbons.

This provides a large potential for the growth of CNG industry in the National Capital Region. Also with very low penetration of PNG segment the growth prospects are immense.



Peer Comparison

Company CMP Mcap, Rs mn EPS, Rs PE, (X) EV/EBITDA, (X) ROE, % ROCE, %

Indraprastha Gas 297 41468.0 17.3 17.2 10 28.56 41.17 Gujarat Gas 410 52582.5 20.2 20.3 12 35.06 42.71

Source: Company, AceEquity Valuation

Valuation parameters Target price Weights Per Share value

At PE, 15x based on FY13E EPS of Rs 24.7 370.0 25% 92.5 Discounted Cash Flow 365.0 50% 182.5

EV/EBITDA, of 7.5x based on FY13E EBITDA of Rs 7.4bn 360.0 25% 90.0

Target price 365.0

CMP 297.0

Expected return 22.9%

Source: SIHL Research

Discounted Cash Flow (DCF) based analysis is given the highest weight of 50%, because we believe Indraprastha Gas derives its valuation from factors that are exclusive to the company and the market it operates in. Hence, we believe the Intrinsic value the company derives from these factors, majorly drives the stock price. Further we believe that competitors such as Gujarat Gas, Gail Gas (unlisted), and Mahanagar Gas (unlisted) operate in the same business and similar (although exclusive) markets. We have adopted comparative/Industry PE multiple and EV/EBITDA techniques for relative valuations, and assigned 25% weights to the value arrived from each of them.

Based on the weighted average stock price thus arrived, We recommend BUY on Indraprastha Gas Ltd. with an investment horizon of 12 to 15 months. Key Downside Risk

Unable to pass on cost, as estimated Change in government policies relating to Natural Gas regulations Competition severe than estimated

Key Upside Potential

Natural gas feed prices lower than estimated Increased allocation of gas under APM prices



PE Valuation

Source: SIHL Research At current market price the company is trading at PE multiple of 13.1x the FY12E EPS of Rs 22.1 and 11.8x the FY13E EPS of Rs 24.7. We value the company at 15x its FY13E EPS of Rs 24.7 and arrive at fair price of Rs 370. EV/EBITDA Valuation

Source: SIHL Research At current market price Indraprastha Gas is trading at EV/EBITDA multiple of 6.2x its FY 13E EBITDA of Rs 7.4bn. We value the company at EV/EBITDA multiple of 7.5x its FY13E EBITDA of Rs 7.4 billion and arrive at fair price of Rs 360.



Discounted Cash flow Analysis:-

Cost of Debt 10% Total Enterprise Value (Rs mn) 53,705

Cost of Equity 14% Net Debt 2610.0

Beta (Nifty) 0.55 Equity Value 51,095

Risk Free rate of return 8% Number of Shares (mn) 140

WACC 10.26% Value per share 365

Terminal Growth rate 4% Source: SIHL Research

On Discounted Cash Flow based valuation we arrive at the fair value per share of Rs 365.



Financial Statement

P & L Account

Particulars (Rs mn) FY 10 FY 11E FY 12E FY 13E

Net Sales 10876.3 17335.3 23973.4 30081.0 EXPENDITURE : Raw Material Consumed 4948.5 8834.7 13168.4 17042.2 Employee Cost 302.0 494.1 647.3 797.1 Other Op expense 1787.8 2860.3 3883.7 4828.0 Total Expenditure 7038.4 12189.1 17699.4 22667.3 EBITDA 3837.8 5146.3 6274.1 7413.7 Depreciation 774.5 1005.4 1294.6 1654.5 EBIT 3063.3 4140.8 4979.5 5759.2 Other Income 211.1 52.0 119.9 90.2 Interest 30.0 236.2 476.2 668.2 PBT 3244.4 3956.7 4623.2 5181.3 Provision for Tax 1089.4 1321.5 1525.6 1720.2 PAT 2155.0 2635.1 3097.5 3461.1 EPS 15.4 18.8 22.1 24.7

Source: Company, SIHL Research Balance Sheet Statement

Particulars (Rs mn) FY 10 FY11E FY12E FY13E SOURCES OF FUNDS:

Share Capital 1400.0 1400.0 1400.0 1400.0 Total Reserves 6854.5 8699.1 10867.4 13290.1 Shareholder's Funds 8254.5 10099.1 12267.4 14690.1 Secured Loans 0.0 2361.8 4761.8 6681.8 Unsecured Loans 552.2 590.4 1190.4 1670.4 Total Debts 552.2 2952.2 5952.2 8352.2 Total Liabilities 8806.7 13051.3 18219.6 23042.4 APPLICATION OF FUNDS :

Net Fixed Assets 8340.3 13334.8 18040.2 22385.8 Investments 170.2 170.2 170.2 170.2 Total Current Assets 2572.1 2460.2 3519.1 4632.2 Total Current Liabilities 2037.7 2675.7 3271.8 3907.6 Net Current Assets 534.5 -215.5 247.3 724.6 Deferred Tax Assets / Liabilities (238.1) (238.1) (238.1) (238.1) Total Assets 8806.7 13051.3 18219.6 23042.4

Source: Company, SIHL Research



Cash Flow Statement

Particulars (Rs mn) FY 10 FY 11E FY 12E FY 13E

Net Income + Depreciation 2,929.5 3,640.6 4,392.1 5,115.6 Non-Cash Adjustments 286.8 - - - Change in Working Capital 243.8 (120.3) (214.9) (110.3) Cash Flow from Operations 3,460.1 3,520.3 4,177.2 5,005.2 Capital Expenditure 3,905.0 6,000.0 6,000.0 6,000.0 Change in Investment Dec/(inc) (32.6) - - - Other Items 4.0 - - - Cash Flow used in Investing 3,876.4 6,000.0 6,000.0 6,000.0 Issue of Equity - - - - Issue/(Repay Debt) - 2,400.0 3,000.0 2,400.0 Dividend paid 665.1 790.5 929.3 1,038.3 Other financing cash flows - - - - Cash Flow from Financing (665.1) 1,609.5 2,070.7 1,361.7 Net Cash (1,081.4) (870.3) 247.9 366.9

Source: Company, SIHL Research



Key Ratios

Particulars FY 10 FY 11E FY 12E FY 13E

ROCE% 35% 32% 27% 25% ROE% 26% 26% 25% 24% Debt/Equity (X) 0.1 0.3 0.5 0.6 PE (X) 19.2 15.7 13.4 12.0 P/B (X) 5.0 4.1 3.4 2.8 EV/EBITDA, (X) 10.6 8.5 7.4 6.6 Mcap/Sales (X) 3.8 2.4 1.7 1.4 Net Profit Margin 19.8% 15.2% 12.9% 11.5% EBITDA Margin 35.3% 29.7% 26.2% 24.6% Sales Growth 26.4% 59.4% 38.3% 25.5% EPS Growth 24.9% 22.3% 17.5% 11.7%

Source: SIHL Research

Du Pont Analysis

Particulars FY 10 FY 11E FY 12E FY 13E

Profit Margin 19.8% 15.2% 12.9% 11.5%

Asset Turnover 1.2 1.3 1.3 1.3

Equity Multiplier 1.1 1.3 1.5 1.6

ROE 26% 26% 25% 24% Source: SIHL Research



The Technical View Technically IGL on daily charts has been trading with a slight downward – sideways movement but on the monthly chart it has been showing a positive momentum as the reading from RSI is at 65. Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. RSI oscillates between zero and 100. We are of a view that after some more time of consolidation for a month, the stock will start gaining momentum with an uptick in price. Investors can start accumulating the stock from the current market price of 295 levels to 270 levels. The Resistance levels for short term is 325 levels, for medium term it is at 370 levels & for long term it is at 415 to 440.



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Documents

Indraprastha Gas-SIHL 09 Mar 2011 - breport.myiris.combreport.myiris.com/SIHL/INDGAS_20110309.pdf · Indraprastha Gas th 9 March 2011 2 | P a g e Branch Office: Shah Investor’s