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Oil & Gas
• We believe that deregulation of diesel shall take back seat as rising crude prices and recent uptick in inflation shall act as
the key impediments Therefore we maintain impediments. Therefore, this delay and the rising subsidy dues to OMCS shall act as a headwind to
valuations for OMCs and upstream players
• Maintain our positive structural stance on gas transportation. The thrust from the regulators has been encouraging for
development of gas grid. The emergence of GSPL as L1 has been encouraging but we wait financial and commercial
details before factoring this in our estimates
• The availability of RLNG has enabled gas distribution companies to cater to industrial retail demand. The strong volume
growth is expected to be driven by CNG as well as PNG demand. However, the profitability would not match the revenue
growth due to the increase in the input (gas) cost. However we remain confident of absolute profitability. We reiterate
our positive view on city gas distribution companies due to pricing power and stable cash flow generation
• We expect strong revenue growth of CGD companies (IGL & GGCL) to continue due to volume growth as well as
realization improvement. The profitability would lag the revenue growth due to hike in input costs. GSPL is expected to
report better profitability than the last quarter, though revenue growth would be small. Castrol India would get the
benefit of price hikes taken in last quarter
Oil & Gas – Top Picks
Indraprastha Gas
• IGL’s exclusivity agreement with OMC’s delays the competition from OMCs for another five years till March 2015. While
private players are free to set up distribution network, we believe IGL has built up strong lead to sustain its growth for
the next few years. IGL has also signed up with DTC for supply of gas for ten years – this helps to sustain volume growth
while keeping entry barriers high for new players
• IGL is catering to the green fuel drive in the geographical areas of National Capital Region (NCR) where public transport
is mandated to run only on CNG. The fuel economics of gas is resulting in a huge opportunity through conversion of
private vehicles. Also NCR regions of Noida, Greater Noida & Ghaziabad are witnessing good traction in industrial
demand. We estimate strong incremental volume growth from these areas next few years
• The benefits of huge capex lined up by IGL in coming years (31% CAGR during FY10 – FY13E) would be reaped by IGL in
years to come. The volume growth would lag the capex growth in these years (23% CAGR during FY10 – FY13E),
however, the real benefits of this aggressive capex would be visible post 2013 when IGL would starting generating free
cash flow again. Valuations at 15xFY2012E sustainable on growth visibility and pricing power
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