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Indraprastha Gas (IGAS.BO)
Buy: Top Near-Term Gas Pick; TP Raised to Rs425
Raise TP to Rs425; top near-term pick — IGL is now our top near-term pick in the
gas sector, driven by a possible upside to consensus earnings (we upgrade our FY12E
earnings by 16%, 13% above consensus) on the back of a sharp reduction in its avg
cost of gas and greater comfort on its aggressive vol growth forecasts. Our TP also
goes up from Rs385 to Rs425 on the back of this. IGL is one of the best placed gas
stocks in the current environment, driven by: (i) strong pricing power, boosted by rising
petrol/diesel prices, (ii) high allocation of domestic gas (~85% of current vols), (iii)
robust capex and vol growth, with rising penetration in Ghaziabad and Noida/Gr. Noida
to drive the next leg of growth for the company, and (iv) low regulatory risks due to tie
ups with DTC/OMCs which will ensure minimal loss of mkt share once exclusivity ends.
Lower gas cost to drive EBITDA expansion — The govt's recent approval effectively
granting IGL additional APM allocation of c0.3 mmscmd is a key positive as it will help it
substitute some of the costlier LNG that it was purchasing (to the extent of ~10% of
existing volumes) and hence bring down its blended avg cost (APM gas costs ~Rs9/
scm vs. LNG at >Rs20/scm). The lower gas cost is likely to reflect in 2Q financials
onwards. Our EBITDA/scm for FY12E increases from Rs5.1 to Rs5.5 as a result.
Near-term gas supply concerns alleviated — The additional allocation also
alleviates near-term concerns on gas supplies and adds visibility to our vol growth
forecasts, which stand at 23/18/15% over FY12/13/14E (3-year CAGR of 18%).
Why the change? — While IGL was earlier getting (cheap) domestic gas (priced at
US$4.2) to the extent of ~2.3 mmscmd (2.0 of APM gas for Delhi, 0.15 for Noida/Gr.
Noida, and 0.15 of KG gas) out of total current sales vols of ~3.0, this has now
increased to ~2.6. This follows the govt’s recent (in early June) grant of approval to IGL
for it to use unutilised APM allocations for Gurgaon/Faridabad for its own operations.
Vols of c0.5 mmscmd are allocated for these two areas which are not operated by IGL
– the incumbents there currently utilise only c0.2 mmscmd, and IGL will now be allowed
to use the balance for its own operations till such time as the incumbents ramp up.
Indraprastha Gas
Company description
BPCL and GAIL floated Indraprastha Gas (IGL) with a 22.5% stake each. IGL is the
sole supplier of Compressed Natural Gas (CNG) to the automotive sector and Piped
Natural Gas (PNG) to the domestic and commercial sectors in the National Capital
Territory of Delhi. It has a first-mover advantage in this business in Delhi, as there
are high barriers to entry in the business including sourcing of gas, investment in
building out of distribution networks, and statutory approvals for roll-out of networks.
IGL gets ~2.15 mmscmd of APM gas from GAIL, ~0.15 mmscmd (of an allocated
0.3 mmscmd) of KG gas, with LNG forming the remaining supplies (~0.4 mmscmd
currently). Over 80% of the gas is sold as CNG to the auto sector with the balance
as piped natural gas to domestic and commercial users. IGL's skew towards CNG is
due to the Supreme Court's ruling that makes it mandatory for all public-transport
vehicles in the National Capital Territory to use CNG.
Investment strategy
We rate IGL shares Buy/Low Risk (1L) with a target price of Rs425. IGL’s continued
pricing power in the face of rising gas costs over the last 12 months has taken us by
surprise. In addition, volume growth has remained robust and is likely to sustain
going forward, with the company finally beginning to deliver on its aggressive
expansion targets (capex of Rs4-6bn p.a. over FY12-14E vs. Rs1.7-3.9bn over
FY09-10). Further, access to relatively cheap domestic gas through allocations by
the gov’t and potential exclusivity in tie ups for gas sales are key competitive
advantages, which will ensure minimal loss of volumes once the three-year
marketing exclusivity period ends in 2012. The stock offers access to relatively
steady and low-risk cash flows (FY11-14E EBITDA CAGR of 18%, EPS CAGR of
15%, BVPS CAGR of 21%) and strong ROEs (24-26%).
Valuation
Our target price of Rs425 for IGL is based on DCF. We prefer to use DCF, as it
captures the value of the projects over their lifetime. IGL's near-term cash flow is
affected by its aggressive expansion. In our DCF analysis, we have used explicit
forecasts till FY14E, an intermediate growth rate of 10% till FY17E, and a terminal
growth rate of 4%. We use a WACC of 10.8% (stock beta of 0.7, risk free rate of
8%, market risk premium of 6.0%, target D/V of 25%). Our target price imputes a
P/CEPS of 11x FY12E. We prefer to use P/CEPS as a comparison due to the utility
nature of IGL's business and the high depreciation rates on its assets.
Risks
We rate IGL shares Low Risk in line with our quantitative risk-rating system.
Downside risks that could prevent the stock from reaching our target price include:
(1) IGL’s inability to increase CNG/PNG prices despite rising gas costs; (2)
Regulatory scrutiny of margins, and (3) Lower-than-expected conversion of vehicles
to CNG and/or penetration of PNG resulting in lower-than-expected volume growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Indraprastha Gas (IGAS.BO)
Buy: Top Near-Term Gas Pick; TP Raised to Rs425
Raise TP to Rs425; top near-term pick — IGL is now our top near-term pick in the
gas sector, driven by a possible upside to consensus earnings (we upgrade our FY12E
earnings by 16%, 13% above consensus) on the back of a sharp reduction in its avg
cost of gas and greater comfort on its aggressive vol growth forecasts. Our TP also
goes up from Rs385 to Rs425 on the back of this. IGL is one of the best placed gas
stocks in the current environment, driven by: (i) strong pricing power, boosted by rising
petrol/diesel prices, (ii) high allocation of domestic gas (~85% of current vols), (iii)
robust capex and vol growth, with rising penetration in Ghaziabad and Noida/Gr. Noida
to drive the next leg of growth for the company, and (iv) low regulatory risks due to tie
ups with DTC/OMCs which will ensure minimal loss of mkt share once exclusivity ends.
Lower gas cost to drive EBITDA expansion — The govt's recent approval effectively
granting IGL additional APM allocation of c0.3 mmscmd is a key positive as it will help it
substitute some of the costlier LNG that it was purchasing (to the extent of ~10% of
existing volumes) and hence bring down its blended avg cost (APM gas costs ~Rs9/
scm vs. LNG at >Rs20/scm). The lower gas cost is likely to reflect in 2Q financials
onwards. Our EBITDA/scm for FY12E increases from Rs5.1 to Rs5.5 as a result.
Near-term gas supply concerns alleviated — The additional allocation also
alleviates near-term concerns on gas supplies and adds visibility to our vol growth
forecasts, which stand at 23/18/15% over FY12/13/14E (3-year CAGR of 18%).
Why the change? — While IGL was earlier getting (cheap) domestic gas (priced at
US$4.2) to the extent of ~2.3 mmscmd (2.0 of APM gas for Delhi, 0.15 for Noida/Gr.
Noida, and 0.15 of KG gas) out of total current sales vols of ~3.0, this has now
increased to ~2.6. This follows the govt’s recent (in early June) grant of approval to IGL
for it to use unutilised APM allocations for Gurgaon/Faridabad for its own operations.
Vols of c0.5 mmscmd are allocated for these two areas which are not operated by IGL
– the incumbents there currently utilise only c0.2 mmscmd, and IGL will now be allowed
to use the balance for its own operations till such time as the incumbents ramp up.
Indraprastha Gas
Company description
BPCL and GAIL floated Indraprastha Gas (IGL) with a 22.5% stake each. IGL is the
sole supplier of Compressed Natural Gas (CNG) to the automotive sector and Piped
Natural Gas (PNG) to the domestic and commercial sectors in the National Capital
Territory of Delhi. It has a first-mover advantage in this business in Delhi, as there
are high barriers to entry in the business including sourcing of gas, investment in
building out of distribution networks, and statutory approvals for roll-out of networks.
IGL gets ~2.15 mmscmd of APM gas from GAIL, ~0.15 mmscmd (of an allocated
0.3 mmscmd) of KG gas, with LNG forming the remaining supplies (~0.4 mmscmd
currently). Over 80% of the gas is sold as CNG to the auto sector with the balance
as piped natural gas to domestic and commercial users. IGL's skew towards CNG is
due to the Supreme Court's ruling that makes it mandatory for all public-transport
vehicles in the National Capital Territory to use CNG.
Investment strategy
We rate IGL shares Buy/Low Risk (1L) with a target price of Rs425. IGL’s continued
pricing power in the face of rising gas costs over the last 12 months has taken us by
surprise. In addition, volume growth has remained robust and is likely to sustain
going forward, with the company finally beginning to deliver on its aggressive
expansion targets (capex of Rs4-6bn p.a. over FY12-14E vs. Rs1.7-3.9bn over
FY09-10). Further, access to relatively cheap domestic gas through allocations by
the gov’t and potential exclusivity in tie ups for gas sales are key competitive
advantages, which will ensure minimal loss of volumes once the three-year
marketing exclusivity period ends in 2012. The stock offers access to relatively
steady and low-risk cash flows (FY11-14E EBITDA CAGR of 18%, EPS CAGR of
15%, BVPS CAGR of 21%) and strong ROEs (24-26%).
Valuation
Our target price of Rs425 for IGL is based on DCF. We prefer to use DCF, as it
captures the value of the projects over their lifetime. IGL's near-term cash flow is
affected by its aggressive expansion. In our DCF analysis, we have used explicit
forecasts till FY14E, an intermediate growth rate of 10% till FY17E, and a terminal
growth rate of 4%. We use a WACC of 10.8% (stock beta of 0.7, risk free rate of
8%, market risk premium of 6.0%, target D/V of 25%). Our target price imputes a
P/CEPS of 11x FY12E. We prefer to use P/CEPS as a comparison due to the utility
nature of IGL's business and the high depreciation rates on its assets.
Risks
We rate IGL shares Low Risk in line with our quantitative risk-rating system.
Downside risks that could prevent the stock from reaching our target price include:
(1) IGL’s inability to increase CNG/PNG prices despite rising gas costs; (2)
Regulatory scrutiny of margins, and (3) Lower-than-expected conversion of vehicles
to CNG and/or penetration of PNG resulting in lower-than-expected volume growth.
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