Citi: Indraprastha Gas (IGAS.BO)Sell: Valuation Prices in the Positives

Indraprastha Gas (IGAS.BO)Sell: Valuation Prices in the Positives
 Maintain Sell with TP of Rs309 — We maintain our Sell rating on IGL as we
believe that, while the business outlook remains sound, the strong run-up in the
stock after the CNG price hike factors in most of the positives. In addition,
despite good pricing power, margins could see a structural decline from 36-
42% earlier to 29-30% going forward as gas prices trend higher. Further, the
end of exclusivity in Delhi in FY12 could lead to competitive pressures. We base
our revised Mar-11E DCF-based TP of Rs309 on a 13% 3-yr volume CAGR. We
prefer GSPL, GAIL, and Petronet LNG, in that order, amongst the gas names.
 Raising earnings to factor higher prices — We raise our FY11/12E EPS
estimates by 63/14% and introduce FY13E factoring in the higher gas prices
post the APM price revision. As evidenced by the steep CNG price hikes after
the APM price increase, we believe that risks on the pricing front are behind us.
On sourcing of gas, we expect supplies from APM, KG, and LNG to be adequate
to help drive gas volumes for IGL to 2.5/2.8/3.0 mmscmd over FY11/12/13E.
 Limited growth opportunities a concern — The court case pertaining to the city
gas license for Ghaziabad is pending with the Supreme Court, with a decision
likely by 8 Nov. While we already factor in contribution from Ghaziabad, a
favorable ruling could be a slight +ve. However, apart from NCR, we see limited
growth opportunities given emergence of GAIL as an aggressive bidder. Further,
value accretion from new cities is likely to be long gestation and not a near-term
stock driver (we ascribe no value to the new cities GAIL has won licenses for).
 Things could get tougher once exclusivity ends — IGL’s exclusivity in Delhi ends
in Jan 12, after which it could face competitive pressures, particularly in the
more lucrative CNG and commercial/industrial sectors. Also, IGL might have to
incur additional capex for the 25% excess capacity to be given out to thirdparty
shippers, further increasing cost pressures.