Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Indraprastha Gas
Secular growth story
IGL should sustain its market dominance and high growth rates
Indraprastha Gas (IGL) is a retail city gas distribution company operating in Delhi
and the National Capital Region (NCR). We forecast a 21% CAGR for sales in
FY10-13 as we expect a higher penetration of compressed natural gas (CNG)/bulk
piped natural gas (PNG) and greater competitiveness for gas. We think a potential
resolution of the Faridabad/Gurgaon dispute and the addition of new licensed areas
could provide upside. Management is aiming for US$1bn revenue by 2015-16 (an
implied CAGR of 34%). We believe IGL can sustain its market dominance in
Delhi through term agreements and infrastructure exclusivity.
Good execution, reasonable pricing power, sourcing expansion
We believe IGL has strong execution ability—it scaled up from 154 CNG stations
in FY08 to 254 stations currently (206 are operational). The company plans to
expand its gas sourcing to support growth. It has reasonable pricing power, having
successfully implemented price hikes to retain margins.
Strong earnings growth and balance sheet; assume returns will normalise
We forecast an EPS CAGR of 18.8% in FY10-13. IGL has a healthy balance sheet;
we estimate peak leverage in FY12 at 0.42x and high ROE (29% in FY11).
Investor concerns on the regulator capping returns should ease in the medium term,
as we think for ROE to lower to 18%, end-user gas prices will only have to fall
6%. The economics for gas is strong. We assume IGL’s long-term returns will
normalise gradually.
Valuation: initiate coverage with a Buy rating and Rs400.00 price target
We derive our Rs400.00 price target from a DCF-based methodology and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool. We
assume a WACC of 10.8% and a terminal sales growth rate of 2%.
Investment Thesis
We initiate coverage of IGL—a retail city gas distribution company operating in
Delhi and the NCR towns of Noida, Greater Noida and Ghaziabad—with a Buy
rating and a Rs400.00 price target. We believe IGL’s largely secular growth
from the robust CNG/PNG expansion in Delhi, its high asset utilisation rates,
favourable gas economics and strong balance sheet will support its share price
performance and premium P/BV valuations. We view IGL as a value and
growth stock. Management is aiming for a US$1bn top-line after the next five
years (implied CAGR of 34%). While we assume long-terms returns will
normalise, there might be limited regulatory intervention in the medium term.
This is because in order for IGL’s ROE to lower to 18%, end-user gas prices
need to fall only 6%, indicating minimal benefit for end-consumers.
IGL supplies CNG to the auto sector and PNG to the domestic, industrial and
commercial segments. We expect its CNG business to dominate (around 88.8%
of sales in FY10), and its share of PNG to rise. IGL has 254 commissioned CNG
stations (206 are operational), and this is likely to increase to about 400 stations
in five years. IGL operates in 53 ‘charge areas’ in Delhi and is set to cover all 70
over the next few years.
Its marketing exclusivity will end in December 2011. IGL is signing long-term
agreements with Delhi Transport Corporation (DTC), oil marketing companies
(OMC) and bulk PNG consumers to retain its leadership in Delhi. It aims to
continue strengthening its sourcing. IGL is also likely to raise prices periodically
to pass on its higher gas costs to customers (it has demonstrated reasonable
pricing power).
City gas distribution (CGD) pricing is currently partly regulated in India, with
regulated network/compression tariffs (14% returns on capital employed
(ROCE) post-tax) and unregulated marketing margins. It has strong ROCE/ROE
from its high asset utilisation rates, a lower capital base from its head start in
Delhi and partly regulated pricing. We assume returns will gradually normalise
from any potential regulatory caps and competitive forces. We forecast an EPS
CAGR of 18.8% in FY10-13. IGL has a healthy balance sheet with good asset
utilisation rates, low leverage (we estimate 0.42x in FY12) and negative
working capital.
IGL is trading at a discount to its peer group at 14.4x FY12E PE and 12.2x
FY13E (global peer median at 15.5x FY12E PE and 14x FY13E PE). On P/BV,
IGL is trading at premium valuations of 3.8x FY12E and 3.2x FY13E (global
peer median of 2.3x FY12E and 2.1x FY13E) due to its high asset utilisation.
We prefer GAIL among the large cap gas utilities and Petronet LNG among the
mid cap gas utilities as a key medium-term beneficiary. We like IGL for its
long-term structural growth story.
We think the key risks for IGL are regulatory caps on returns/pricing, execution
delays, increased competition following the expiry of its marketing exclusivity
as well as difficulties in gas sourcing and achieving reasonable returns from the
addition of new areas.
Key catalysts
Structural growth and term agreements to retain leadership in Delhi.
We believe the key catalyst for the stock is its largely secular and structural
growth in CNG/PNG sales volumes, which are supported by IGL’s
expansion in Delhi and NCR, continued vehicle conversions and favourable
gas economics. To retain its lucrative market in Delhi, IGL has signed 10-
year exclusivity agreements with DTC, and is likely to sign similar five-year
agreements with OMC and long-term contracts with bulk PNG consumers.
Incremental newsflow on this will be a key positive, in our view.
Gradual deregulation of diesel/LPG or price hikes. As of 2 January 2011,
CNG was 62% cheaper than petrol and 23.1% cheaper than diesel. Any hike
in domestic diesel/LPG prices, diesel deregulation, and higher crude prices
(petrol is now deregulated in India) should further improve the economics for
gas over other fuels.
Resolution of dispute for Faridabad and Gurgoan; winning other areas.
IGL was nominated by the central government to implement CGD projects in
Faridabad and Gurgoan. However, the state government issued a no
objection certificate (NoC) to Haryana City Gas Distribution (in Gurgaon)
and Gujarat Adani Energy (in Faridabad). IGL is working to resolve this
issue. A resolution of this dispute will provide IGL access to a ready
CNG/PNG market and strengthen our sales volume growth outlook.
Furthermore, IGL might bid selectively in the ongoing and upcoming CGD
rounds. While we think returns could be lower in the new areas, any wins
would support volume growth and diversify its business geographically.
Incremental gas allocation and clarity on sourcing. IGL’s rapid expansion
growth will need support from a strong sourcing portfolio. Currently, IGL
sells around 2.75 mmscmd of gas—the bulk is through administered pricing
mechanism gas (APM gas, 2.2 mmscmd), KG-D6 (0.15 mmscmd) and the
remaining through RLNG. Clarity on the incremental allocation of its gas
supply from domestic fields should boost investor confidence on gas
sourcing.
Risks
Potential regulatory hurdles and a cap on returns. We believe India’s
natural gas sector is evolving as CGD networks expand and as Petroleum and
Natural Gas Regulatory Board (PNGRB) will possibly determine the
benchmark tariffs for companies. Following the expiration of its marketing
exclusivity in Delhi in December 2011, we believe IGL will potentially
benchmark tariffs with PNGRB. Any caps on returns and pricing will
adversely impact our estimates, margins and return assumptions for IGL.
While we assume long-terms returns will normalise, medium-term regulatory
intervention risk might be limited. This is because in order for IGL’s ROE to
lower to 18%, end-user gas prices need to fall only 6%, indicating minimal
benefit for end-consumers. Also, higher taxes on CNG/PNG or the
introduction of a value added tax (VAT) in Delhi would impact end prices,
limiting their cost competitiveness against other fuels.
Potentially higher competition after the loss of marketing exclusivity.
IGL will lose its marketing exclusivity in Delhi in December 2011, the key
operating area for the company. This means IGL will have to provide
unbiased access to its network/compression-related equipment to other firms
at a regulated tariff. IGL is signing long-term agreements to retain its
leadership in Delhi so that market entrants will have to establish other
infrastructure and franchises. While we think the risk of new entrants is
limited, potential competition could impact IGL’s business.
Execution risk and delay in approvals. IGL has commissioned 254 CNG
stations, out of which 206 are operational and rest are waiting for CCOE
approval. Any delay in approvals could slow IGL’s sales growth. IGL also
has to deal with multiple municipal authorities such as the Municipal
Corporation of Delhi (MCD) and the New Delhi Municipal Corporation
(NDMC) for matters such as land ownership rights. Any delay in getting the
necessary approvals and the pace of construction work (for CNG stations and
pipe laying) could slow its growth.
Difficulty in gas sourcing and obtaining new areas. Given IGL’s strong
growth plans, gas allocation and certainty on sourcing is critical. Any
difficulties in gas sourcing and a higher dependence on RLNG could impact
its growth plans and natural gas costs, respectively. Also, an inability to
obtain new areas due to highly competitive bidding or unattractive returns in
new geographies will also hinder its long-term growth potential.
Valuation and basis for our price target
We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. We believe DCF
captures IGL’s targeted PNG/CNG expansion in Delhi and the NCR towns. We
assume a WACC of 10.8%, higher than those for GAIL and the Indian power
utilities under our coverage. Despite the rich parentage (Indian government
utility/oil and gas companies), our higher WACC assumption reflects evolving
regulations in the natural gas sector and any potential cap on returns/pricing.
Over our forecast period, we estimate terminal sales growth at 2%. We also
assume long-terms returns will normalise from evolving regulations,
competitive forces and potential regulatory changes.
UBS versus consensus
We are broadly in line with consensus for FY11 and FY12. However, we are
slightly above consensus for FY13 as we believe there is good potential for
higher sales volume. Management aims for US$1bn in revenue after the next
five years.
Indraprastha Gas
Indraprastha Gas (IGL) was incorporated in 1998 and it took over GAIL's Delhi
city gas distribution project in 1999. IGL is a retail city gas distributor that
supplies compressed natural gas (CNG) to the auto sector and piped natural gas
(PNG) to the residential, industrial and commercial segments. IGL's business is
weighted towards CNG, with CNG generating 88.8% of total revenue in FY10.
It operates in the National Capital Territory (NCT) of Delhi, and in National
Capital Regions such as Noida, Greater Noida and Ghaziabad.
Statement of Risk
Key risks are potential regulatory cap on returns/pricing, execution delays,
competition post marketing exclusivity, difficulty in gas sourcing and new areas
at reasonable returns
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Indraprastha Gas
Secular growth story
IGL should sustain its market dominance and high growth rates
Indraprastha Gas (IGL) is a retail city gas distribution company operating in Delhi
and the National Capital Region (NCR). We forecast a 21% CAGR for sales in
FY10-13 as we expect a higher penetration of compressed natural gas (CNG)/bulk
piped natural gas (PNG) and greater competitiveness for gas. We think a potential
resolution of the Faridabad/Gurgaon dispute and the addition of new licensed areas
could provide upside. Management is aiming for US$1bn revenue by 2015-16 (an
implied CAGR of 34%). We believe IGL can sustain its market dominance in
Delhi through term agreements and infrastructure exclusivity.
Good execution, reasonable pricing power, sourcing expansion
We believe IGL has strong execution ability—it scaled up from 154 CNG stations
in FY08 to 254 stations currently (206 are operational). The company plans to
expand its gas sourcing to support growth. It has reasonable pricing power, having
successfully implemented price hikes to retain margins.
Strong earnings growth and balance sheet; assume returns will normalise
We forecast an EPS CAGR of 18.8% in FY10-13. IGL has a healthy balance sheet;
we estimate peak leverage in FY12 at 0.42x and high ROE (29% in FY11).
Investor concerns on the regulator capping returns should ease in the medium term,
as we think for ROE to lower to 18%, end-user gas prices will only have to fall
6%. The economics for gas is strong. We assume IGL’s long-term returns will
normalise gradually.
Valuation: initiate coverage with a Buy rating and Rs400.00 price target
We derive our Rs400.00 price target from a DCF-based methodology and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool. We
assume a WACC of 10.8% and a terminal sales growth rate of 2%.
Investment Thesis
We initiate coverage of IGL—a retail city gas distribution company operating in
Delhi and the NCR towns of Noida, Greater Noida and Ghaziabad—with a Buy
rating and a Rs400.00 price target. We believe IGL’s largely secular growth
from the robust CNG/PNG expansion in Delhi, its high asset utilisation rates,
favourable gas economics and strong balance sheet will support its share price
performance and premium P/BV valuations. We view IGL as a value and
growth stock. Management is aiming for a US$1bn top-line after the next five
years (implied CAGR of 34%). While we assume long-terms returns will
normalise, there might be limited regulatory intervention in the medium term.
This is because in order for IGL’s ROE to lower to 18%, end-user gas prices
need to fall only 6%, indicating minimal benefit for end-consumers.
IGL supplies CNG to the auto sector and PNG to the domestic, industrial and
commercial segments. We expect its CNG business to dominate (around 88.8%
of sales in FY10), and its share of PNG to rise. IGL has 254 commissioned CNG
stations (206 are operational), and this is likely to increase to about 400 stations
in five years. IGL operates in 53 ‘charge areas’ in Delhi and is set to cover all 70
over the next few years.
Its marketing exclusivity will end in December 2011. IGL is signing long-term
agreements with Delhi Transport Corporation (DTC), oil marketing companies
(OMC) and bulk PNG consumers to retain its leadership in Delhi. It aims to
continue strengthening its sourcing. IGL is also likely to raise prices periodically
to pass on its higher gas costs to customers (it has demonstrated reasonable
pricing power).
City gas distribution (CGD) pricing is currently partly regulated in India, with
regulated network/compression tariffs (14% returns on capital employed
(ROCE) post-tax) and unregulated marketing margins. It has strong ROCE/ROE
from its high asset utilisation rates, a lower capital base from its head start in
Delhi and partly regulated pricing. We assume returns will gradually normalise
from any potential regulatory caps and competitive forces. We forecast an EPS
CAGR of 18.8% in FY10-13. IGL has a healthy balance sheet with good asset
utilisation rates, low leverage (we estimate 0.42x in FY12) and negative
working capital.
IGL is trading at a discount to its peer group at 14.4x FY12E PE and 12.2x
FY13E (global peer median at 15.5x FY12E PE and 14x FY13E PE). On P/BV,
IGL is trading at premium valuations of 3.8x FY12E and 3.2x FY13E (global
peer median of 2.3x FY12E and 2.1x FY13E) due to its high asset utilisation.
We prefer GAIL among the large cap gas utilities and Petronet LNG among the
mid cap gas utilities as a key medium-term beneficiary. We like IGL for its
long-term structural growth story.
We think the key risks for IGL are regulatory caps on returns/pricing, execution
delays, increased competition following the expiry of its marketing exclusivity
as well as difficulties in gas sourcing and achieving reasonable returns from the
addition of new areas.
Key catalysts
Structural growth and term agreements to retain leadership in Delhi.
We believe the key catalyst for the stock is its largely secular and structural
growth in CNG/PNG sales volumes, which are supported by IGL’s
expansion in Delhi and NCR, continued vehicle conversions and favourable
gas economics. To retain its lucrative market in Delhi, IGL has signed 10-
year exclusivity agreements with DTC, and is likely to sign similar five-year
agreements with OMC and long-term contracts with bulk PNG consumers.
Incremental newsflow on this will be a key positive, in our view.
Gradual deregulation of diesel/LPG or price hikes. As of 2 January 2011,
CNG was 62% cheaper than petrol and 23.1% cheaper than diesel. Any hike
in domestic diesel/LPG prices, diesel deregulation, and higher crude prices
(petrol is now deregulated in India) should further improve the economics for
gas over other fuels.
Resolution of dispute for Faridabad and Gurgoan; winning other areas.
IGL was nominated by the central government to implement CGD projects in
Faridabad and Gurgoan. However, the state government issued a no
objection certificate (NoC) to Haryana City Gas Distribution (in Gurgaon)
and Gujarat Adani Energy (in Faridabad). IGL is working to resolve this
issue. A resolution of this dispute will provide IGL access to a ready
CNG/PNG market and strengthen our sales volume growth outlook.
Furthermore, IGL might bid selectively in the ongoing and upcoming CGD
rounds. While we think returns could be lower in the new areas, any wins
would support volume growth and diversify its business geographically.
Incremental gas allocation and clarity on sourcing. IGL’s rapid expansion
growth will need support from a strong sourcing portfolio. Currently, IGL
sells around 2.75 mmscmd of gas—the bulk is through administered pricing
mechanism gas (APM gas, 2.2 mmscmd), KG-D6 (0.15 mmscmd) and the
remaining through RLNG. Clarity on the incremental allocation of its gas
supply from domestic fields should boost investor confidence on gas
sourcing.
Risks
Potential regulatory hurdles and a cap on returns. We believe India’s
natural gas sector is evolving as CGD networks expand and as Petroleum and
Natural Gas Regulatory Board (PNGRB) will possibly determine the
benchmark tariffs for companies. Following the expiration of its marketing
exclusivity in Delhi in December 2011, we believe IGL will potentially
benchmark tariffs with PNGRB. Any caps on returns and pricing will
adversely impact our estimates, margins and return assumptions for IGL.
While we assume long-terms returns will normalise, medium-term regulatory
intervention risk might be limited. This is because in order for IGL’s ROE to
lower to 18%, end-user gas prices need to fall only 6%, indicating minimal
benefit for end-consumers. Also, higher taxes on CNG/PNG or the
introduction of a value added tax (VAT) in Delhi would impact end prices,
limiting their cost competitiveness against other fuels.
Potentially higher competition after the loss of marketing exclusivity.
IGL will lose its marketing exclusivity in Delhi in December 2011, the key
operating area for the company. This means IGL will have to provide
unbiased access to its network/compression-related equipment to other firms
at a regulated tariff. IGL is signing long-term agreements to retain its
leadership in Delhi so that market entrants will have to establish other
infrastructure and franchises. While we think the risk of new entrants is
limited, potential competition could impact IGL’s business.
Execution risk and delay in approvals. IGL has commissioned 254 CNG
stations, out of which 206 are operational and rest are waiting for CCOE
approval. Any delay in approvals could slow IGL’s sales growth. IGL also
has to deal with multiple municipal authorities such as the Municipal
Corporation of Delhi (MCD) and the New Delhi Municipal Corporation
(NDMC) for matters such as land ownership rights. Any delay in getting the
necessary approvals and the pace of construction work (for CNG stations and
pipe laying) could slow its growth.
Difficulty in gas sourcing and obtaining new areas. Given IGL’s strong
growth plans, gas allocation and certainty on sourcing is critical. Any
difficulties in gas sourcing and a higher dependence on RLNG could impact
its growth plans and natural gas costs, respectively. Also, an inability to
obtain new areas due to highly competitive bidding or unattractive returns in
new geographies will also hinder its long-term growth potential.
Valuation and basis for our price target
We derive our price target from a DCF-based methodology and explicitly
forecast long-term valuation drivers using UBS’s VCAM tool. We believe DCF
captures IGL’s targeted PNG/CNG expansion in Delhi and the NCR towns. We
assume a WACC of 10.8%, higher than those for GAIL and the Indian power
utilities under our coverage. Despite the rich parentage (Indian government
utility/oil and gas companies), our higher WACC assumption reflects evolving
regulations in the natural gas sector and any potential cap on returns/pricing.
Over our forecast period, we estimate terminal sales growth at 2%. We also
assume long-terms returns will normalise from evolving regulations,
competitive forces and potential regulatory changes.
UBS versus consensus
We are broadly in line with consensus for FY11 and FY12. However, we are
slightly above consensus for FY13 as we believe there is good potential for
higher sales volume. Management aims for US$1bn in revenue after the next
five years.
Indraprastha Gas
Indraprastha Gas (IGL) was incorporated in 1998 and it took over GAIL's Delhi
city gas distribution project in 1999. IGL is a retail city gas distributor that
supplies compressed natural gas (CNG) to the auto sector and piped natural gas
(PNG) to the residential, industrial and commercial segments. IGL's business is
weighted towards CNG, with CNG generating 88.8% of total revenue in FY10.
It operates in the National Capital Territory (NCT) of Delhi, and in National
Capital Regions such as Noida, Greater Noida and Ghaziabad.
Statement of Risk
Key risks are potential regulatory cap on returns/pricing, execution delays,
competition post marketing exclusivity, difficulty in gas sourcing and new areas
at reasonable returns
No comments:
Post a Comment