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INDRAPRASTHA GAS (IGL)
PRICE: RS.447 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.469 FY12E P/E: 17.6X
PNG price hike & Change in consumption Slab - Double Bonanza
Indraprastha Gas Ltd (IGL) has time and again demonstrated its pricing
power in both the segments - Compressed natural gas (CNG) and Piped
natural gas (PNG).
Following the increase in the RLNG and LPG prices (on 24th June'11 by
Rs.50/Cylinder), IGL has hiked the price of PNG from 1st Sep'11 in Delhi,
Noida, Greater Noida and Ghaziabad. The PNG rates in Delhi have increased
by Rs.3.05/SCM and Rs.8/SCM to Rs.22/SCM for consumption up to 30 SCM
per two months and to Rs.34/SCM for consumption above 30 units in two
months (refer table below) resulting in over 16% and 30% hike respectively.
Similarly, the price in Noida, Greater Noida and Ghaziabad also increased to
Rs.23.5/SCM for consumption up to 30 SCM in two months and Rs.34/ SCM
beyond consumption of 30 SCM in two months. The prices are higher in
Uttar Pradesh due to differential tax structure. In April'11, IGL has also
increased CNG prices by 1% to Rs.29.3/Kg.
Along with the price revision, IGL has also revised the PNG consumption slab. The
consumption slab has been reduced from 45/SCM to 30/SCM. However, we believe
this will marginally increase the revenue of IGL as the average house hold consumption
of PNG is ~30SCM in two months.
It has been seen that the end consumers have accepted price hikes mainly due to
costlier substitutes (Petrol, Diesel and LPG) which ensures that IGL can easily manage
to maintain its gross spreads. IGL is currently pricing its products at a discount to
alternative fuels in both the CNG and PNG segment. In the CNG segment, IGL has
priced its gas at a discount to diesel prices and in domestic PNG segment it is at a
discount to domestic LPG (14.2 kg) Cylinders.
In Q1FY12, the PNG segment contributed ~23% to overall revenues. IGL expects to
add 50k domestic users annually. In CY12, PNG connections are expected to cross
13,000 in Noida from ~8,000 connections.
We expect FY12E EPS of Rs.25.4. The management believes that the strong trends
in CNG and PNG segment will continue and IGL is best placed to benefit from rising
gas consumption in India.
Based on our estimates, the stock at current market price of Rs.447 is trading at 9.6x
EV/EBIDTA and 17.6x P/E earnings on the basis of FY12 earnings estimates.
We have assumed WACC of 12.3% and growth rate of 5% for terminal value.
We have revised our 12 month target from Rs.450 to Rs.469 mainly due to strong
CNG & PNG conversions, growth in newer geographies, strong capex plan and IGL's
ability to pass-on the rising cost. In FY12E, IGL will be investing ~Rs.5.5 Bn in Delhi
and NCR to expand its network. However, looking at the limited upside and the
recent outperformance, we recommend Accumulate.
Segment wise sales break-up:
IGL has strong focus on PNG segment. Revenue contribution from PNG segment has
increased by 7.7% from 9.4% (FY08) to 17.1% (FY11). PNG segment revenue has
grown at a CAGR of 63.74% in the last three years (FY08-11). The company's aggressive
expansion will continue in FY12 and the management is confident of strong
growth in the PNG segment. The new usages, such as gas water heaters in the
domestic segment, will further add to the strong volume growth.
In FY11, the number of industrial customers increased from 14 in FY10 to 68 in
FY11. The commercial segment also witnessed decent growth, with the number of
customers increasing from 355 in FY10 to 463 in FY11.
The management has guided that in addition to catering to the demand of households,
the thrust would be on tapping industrial and commercial customers who
have huge demand potential.
PNG economics for domestic consumers
Even after this price hike, the PNG user enjoys a marginal advantage of~3.8% over
the domestic users. Hence, we believe the price hike won't impact the volume
growth of the Company as consumers will not be induced to switch to domestic
LPG.
Further, we have tried to gauge the impact of price hike of PNG on the monthly
budget of an average family.
It is expected that the price hike of PNG is estimated to push up the monthly cooking
bill of a household by just Rs.33, assuming an average consumption of 10.8 SCM
(14.2 kg) of gas per month.
Note: In the domestic PNG segment, IGL index the fuel price to the administered
retail selling price of domestic LPG (14.2 Kg) cylinder in the NCT, as applicable from
time to time, taking into account the respective heating values
n In order to keep pace with the increasing CNG demand, IGL is likely to commission
additional CNG station which will boost its volume growth going ahead.
Currently, IGL has 278 CNG outlets in Delhi, Uttar Pradesh & Haryana. Out of
this, 224 are currently operational and the rest 54 CNG stations are awaiting
statutory clearances from various authorities.
n In FY12, it is planning to set-up 32 more CNG stations in order to meet the increasing
demand of CNG, thereby taking the number of commissioned stations
to 310. Thereafter, IGL plans to add ~35 stations every year.
IGL’s CNG station
Location CNG Station
Delhi 240
Uttar Pradesh (Gautam Budh Nagar & Ghaziabad) 35
Haryana (Gurgaon & Faridabad) 03
Total 278
Source: PIB
Demand side:
Recently, IGL has signed following agreements with the State Transport Corporation
and Railways:
n As per the agreement, IGL would be setting up CNG fueling facilities in all the
existing and upcoming Delhi Transport Corporation (DTC) Depots. The Company
has already established its CNG fueling facilities at 34 Depots of DTC in Delhi
and one in Noida.
n IGL has also signed an agreement with Uttar Pradesh State Road Transport Corporation
(UPSRTC) for setting up CNG facilities in their depots located in NCR
town in Noida, Gautam Budh Naga. At present, IGL has established its CNG facility
at UPSRTC Depot in Noida.
n In an agreement with Northern Railways, IGL has set up a CNG facility exclusively
on the premise owned by Northern Railways i.e. Shakurbasti Diesel Shed
for refueling CNG for dual fuel (CNG/ Diesel) DEMUs.
CNG price hike by Rs.0.30/kg
In April'11, IGL has increased the CNG price in the National Capital Territory of
Delhi by Rs.0.30/kg to Rs.29.30/kg and by Rs.0.35/kg to Rs.32.85/kg in Noida,
Greater Noida and Ghaziabad due to increase in operating expenses as a result of
revision of minimum wages by the Government.
Other Updates
n Domestic natural gas supply is a constraint: In Aug'11, the gas production
from RIL's eastern offshore KG-D6 block has dipped below 45 MMSCMD. The
output comprised 37.7 mmscmd from Dhirubhai-1 and 3 gas fields and 7.1
mmscmd from MA oil field in the KG-DWN-98/3 or KG-D6 block. During 8-4
Aug'11, 16 wells were put on production as two wells (B2 and B13) were kept
closed due to high water cut. IGL is currently getting 0.15 MMSCMD of KG-D6
gas out of the designated 0.308 MMSCMD.
n The natural gas supply from domestic source has fallen significantly. However,
the demand of gas risen both in CNG and PNG segment. Hence, to meet the
rising demand it has imported more of costlier RLNG which has increased its raw
material cost. Further to ensure supply of gas, IGL has signed agreement with
GAIL & BPCL and further entered into an agreement with Shell, British Gas and
GSPC.
n In June'11, the government granted approval to IGL for use of unutilized APM
allocations for Gurgaon/Faridabad for its own operations. This has resulted in
lower raw material cost for IGL. The full benefit will be reflected in next three
quarters. IGL was earlier getting domestic gas to the extent of about 2.3 mscmd,
this has now increased to about 2.6 mscmd. (APM gas Allocation: 2 mscmd of
APM gas for Delhi, 0.15 for Noida/Greater Noida, and 0.15 of KG gas)
n With the crude trading in the range of $110-120/bbls, OMCs are again in red
with regard to retail fuel sales. Hence, the possibility of further fuel price hike
(petrol) cannot be ruled out. This will provide an opportunity to IGL to hike CNG
prices to ring-fence its margins.
n As mandated by Delhi government, LCVs will be converted into CNG which will
boost the CNG sales.
Earnings estimates
We expect IGL to book CNG gas volume of ~885 Mn SCM and PNG 261 Mn SCM
of natural gas in FY12E. We expect IGL to report EPS of Rs.25.4 and CEPS of Rs.34.6
in FY12E. We have assumed a capex of Rs.5.5 Bn in FY12E. Out of this around 50%
will be spent in Delhi and balance in Ghaziabad, Noida and Greater Noida. Similarly,
50% will be invested in CNG and balance in PNG.
Valuation & Recommendation
n The management believes that the strong trends in CNG and PNG segment will
continue and IGL is best placed to benefit from rising gas consumption in India.
n Based on our estimates, the stock at current market price of Rs.447 is trading at
9.6x EV/EBIDTA and 17.6x P/E earnings on the basis of FY12 earnings estimates.
n We have assumed WACC of 12.3% and growth rate of 5% for terminal value.
n We have revised our 12 month target from Rs.450 to Rs.469 mainly due to strong
CNG & PNG conversions, growth in newer geographies, strong capex plan and
IGL's ability to pass-on the rising cost. In FY12E, IGL will be investing ~Rs.5.5 Bn
in Delhi and NCR to expand its network. However, looking at the limited upside
and the recent outperformance, we recommend Accumulate.
n We believe the demand for gas will increase going forward due to mandatory
conversion of LCVs to CNG when they will come for renew of permits and also
cost advantage over alternative auto fuels. In April'11 and June'11, the Company
has again hiked the prices of CNG and PNG which reflects their pricing
power.
Key Risk and Concerns:
n PNGRB has issued regulations for authorization, exclusivity and tariff determination
for City Gas Companies. These regulations have ramifications on the business
of the Company.
n The marketing exclusivity for NCT of Delhi is getting over in 2011 and the field
will be open for competition in this geographical area.
n Key risk remains in terms of gas-supply and further rise in gas prices both domestic
and LNG. However, we expect IGL to pass on increasing input cost in a
phased manner to its customers.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
INDRAPRASTHA GAS (IGL)
PRICE: RS.447 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.469 FY12E P/E: 17.6X
PNG price hike & Change in consumption Slab - Double Bonanza
Indraprastha Gas Ltd (IGL) has time and again demonstrated its pricing
power in both the segments - Compressed natural gas (CNG) and Piped
natural gas (PNG).
Following the increase in the RLNG and LPG prices (on 24th June'11 by
Rs.50/Cylinder), IGL has hiked the price of PNG from 1st Sep'11 in Delhi,
Noida, Greater Noida and Ghaziabad. The PNG rates in Delhi have increased
by Rs.3.05/SCM and Rs.8/SCM to Rs.22/SCM for consumption up to 30 SCM
per two months and to Rs.34/SCM for consumption above 30 units in two
months (refer table below) resulting in over 16% and 30% hike respectively.
Similarly, the price in Noida, Greater Noida and Ghaziabad also increased to
Rs.23.5/SCM for consumption up to 30 SCM in two months and Rs.34/ SCM
beyond consumption of 30 SCM in two months. The prices are higher in
Uttar Pradesh due to differential tax structure. In April'11, IGL has also
increased CNG prices by 1% to Rs.29.3/Kg.
Along with the price revision, IGL has also revised the PNG consumption slab. The
consumption slab has been reduced from 45/SCM to 30/SCM. However, we believe
this will marginally increase the revenue of IGL as the average house hold consumption
of PNG is ~30SCM in two months.
It has been seen that the end consumers have accepted price hikes mainly due to
costlier substitutes (Petrol, Diesel and LPG) which ensures that IGL can easily manage
to maintain its gross spreads. IGL is currently pricing its products at a discount to
alternative fuels in both the CNG and PNG segment. In the CNG segment, IGL has
priced its gas at a discount to diesel prices and in domestic PNG segment it is at a
discount to domestic LPG (14.2 kg) Cylinders.
In Q1FY12, the PNG segment contributed ~23% to overall revenues. IGL expects to
add 50k domestic users annually. In CY12, PNG connections are expected to cross
13,000 in Noida from ~8,000 connections.
We expect FY12E EPS of Rs.25.4. The management believes that the strong trends
in CNG and PNG segment will continue and IGL is best placed to benefit from rising
gas consumption in India.
Based on our estimates, the stock at current market price of Rs.447 is trading at 9.6x
EV/EBIDTA and 17.6x P/E earnings on the basis of FY12 earnings estimates.
We have assumed WACC of 12.3% and growth rate of 5% for terminal value.
We have revised our 12 month target from Rs.450 to Rs.469 mainly due to strong
CNG & PNG conversions, growth in newer geographies, strong capex plan and IGL's
ability to pass-on the rising cost. In FY12E, IGL will be investing ~Rs.5.5 Bn in Delhi
and NCR to expand its network. However, looking at the limited upside and the
recent outperformance, we recommend Accumulate.
Segment wise sales break-up:
IGL has strong focus on PNG segment. Revenue contribution from PNG segment has
increased by 7.7% from 9.4% (FY08) to 17.1% (FY11). PNG segment revenue has
grown at a CAGR of 63.74% in the last three years (FY08-11). The company's aggressive
expansion will continue in FY12 and the management is confident of strong
growth in the PNG segment. The new usages, such as gas water heaters in the
domestic segment, will further add to the strong volume growth.
In FY11, the number of industrial customers increased from 14 in FY10 to 68 in
FY11. The commercial segment also witnessed decent growth, with the number of
customers increasing from 355 in FY10 to 463 in FY11.
The management has guided that in addition to catering to the demand of households,
the thrust would be on tapping industrial and commercial customers who
have huge demand potential.
PNG economics for domestic consumers
Even after this price hike, the PNG user enjoys a marginal advantage of~3.8% over
the domestic users. Hence, we believe the price hike won't impact the volume
growth of the Company as consumers will not be induced to switch to domestic
LPG.
Further, we have tried to gauge the impact of price hike of PNG on the monthly
budget of an average family.
It is expected that the price hike of PNG is estimated to push up the monthly cooking
bill of a household by just Rs.33, assuming an average consumption of 10.8 SCM
(14.2 kg) of gas per month.
Note: In the domestic PNG segment, IGL index the fuel price to the administered
retail selling price of domestic LPG (14.2 Kg) cylinder in the NCT, as applicable from
time to time, taking into account the respective heating values
n In order to keep pace with the increasing CNG demand, IGL is likely to commission
additional CNG station which will boost its volume growth going ahead.
Currently, IGL has 278 CNG outlets in Delhi, Uttar Pradesh & Haryana. Out of
this, 224 are currently operational and the rest 54 CNG stations are awaiting
statutory clearances from various authorities.
n In FY12, it is planning to set-up 32 more CNG stations in order to meet the increasing
demand of CNG, thereby taking the number of commissioned stations
to 310. Thereafter, IGL plans to add ~35 stations every year.
IGL’s CNG station
Location CNG Station
Delhi 240
Uttar Pradesh (Gautam Budh Nagar & Ghaziabad) 35
Haryana (Gurgaon & Faridabad) 03
Total 278
Source: PIB
Demand side:
Recently, IGL has signed following agreements with the State Transport Corporation
and Railways:
n As per the agreement, IGL would be setting up CNG fueling facilities in all the
existing and upcoming Delhi Transport Corporation (DTC) Depots. The Company
has already established its CNG fueling facilities at 34 Depots of DTC in Delhi
and one in Noida.
n IGL has also signed an agreement with Uttar Pradesh State Road Transport Corporation
(UPSRTC) for setting up CNG facilities in their depots located in NCR
town in Noida, Gautam Budh Naga. At present, IGL has established its CNG facility
at UPSRTC Depot in Noida.
n In an agreement with Northern Railways, IGL has set up a CNG facility exclusively
on the premise owned by Northern Railways i.e. Shakurbasti Diesel Shed
for refueling CNG for dual fuel (CNG/ Diesel) DEMUs.
CNG price hike by Rs.0.30/kg
In April'11, IGL has increased the CNG price in the National Capital Territory of
Delhi by Rs.0.30/kg to Rs.29.30/kg and by Rs.0.35/kg to Rs.32.85/kg in Noida,
Greater Noida and Ghaziabad due to increase in operating expenses as a result of
revision of minimum wages by the Government.
Other Updates
n Domestic natural gas supply is a constraint: In Aug'11, the gas production
from RIL's eastern offshore KG-D6 block has dipped below 45 MMSCMD. The
output comprised 37.7 mmscmd from Dhirubhai-1 and 3 gas fields and 7.1
mmscmd from MA oil field in the KG-DWN-98/3 or KG-D6 block. During 8-4
Aug'11, 16 wells were put on production as two wells (B2 and B13) were kept
closed due to high water cut. IGL is currently getting 0.15 MMSCMD of KG-D6
gas out of the designated 0.308 MMSCMD.
n The natural gas supply from domestic source has fallen significantly. However,
the demand of gas risen both in CNG and PNG segment. Hence, to meet the
rising demand it has imported more of costlier RLNG which has increased its raw
material cost. Further to ensure supply of gas, IGL has signed agreement with
GAIL & BPCL and further entered into an agreement with Shell, British Gas and
GSPC.
n In June'11, the government granted approval to IGL for use of unutilized APM
allocations for Gurgaon/Faridabad for its own operations. This has resulted in
lower raw material cost for IGL. The full benefit will be reflected in next three
quarters. IGL was earlier getting domestic gas to the extent of about 2.3 mscmd,
this has now increased to about 2.6 mscmd. (APM gas Allocation: 2 mscmd of
APM gas for Delhi, 0.15 for Noida/Greater Noida, and 0.15 of KG gas)
n With the crude trading in the range of $110-120/bbls, OMCs are again in red
with regard to retail fuel sales. Hence, the possibility of further fuel price hike
(petrol) cannot be ruled out. This will provide an opportunity to IGL to hike CNG
prices to ring-fence its margins.
n As mandated by Delhi government, LCVs will be converted into CNG which will
boost the CNG sales.
Earnings estimates
We expect IGL to book CNG gas volume of ~885 Mn SCM and PNG 261 Mn SCM
of natural gas in FY12E. We expect IGL to report EPS of Rs.25.4 and CEPS of Rs.34.6
in FY12E. We have assumed a capex of Rs.5.5 Bn in FY12E. Out of this around 50%
will be spent in Delhi and balance in Ghaziabad, Noida and Greater Noida. Similarly,
50% will be invested in CNG and balance in PNG.
Valuation & Recommendation
n The management believes that the strong trends in CNG and PNG segment will
continue and IGL is best placed to benefit from rising gas consumption in India.
n Based on our estimates, the stock at current market price of Rs.447 is trading at
9.6x EV/EBIDTA and 17.6x P/E earnings on the basis of FY12 earnings estimates.
n We have assumed WACC of 12.3% and growth rate of 5% for terminal value.
n We have revised our 12 month target from Rs.450 to Rs.469 mainly due to strong
CNG & PNG conversions, growth in newer geographies, strong capex plan and
IGL's ability to pass-on the rising cost. In FY12E, IGL will be investing ~Rs.5.5 Bn
in Delhi and NCR to expand its network. However, looking at the limited upside
and the recent outperformance, we recommend Accumulate.
n We believe the demand for gas will increase going forward due to mandatory
conversion of LCVs to CNG when they will come for renew of permits and also
cost advantage over alternative auto fuels. In April'11 and June'11, the Company
has again hiked the prices of CNG and PNG which reflects their pricing
power.
Key Risk and Concerns:
n PNGRB has issued regulations for authorization, exclusivity and tariff determination
for City Gas Companies. These regulations have ramifications on the business
of the Company.
n The marketing exclusivity for NCT of Delhi is getting over in 2011 and the field
will be open for competition in this geographical area.
n Key risk remains in terms of gas-supply and further rise in gas prices both domestic
and LNG. However, we expect IGL to pass on increasing input cost in a
phased manner to its customers.
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