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UBS Investment Research
Indraprastha Gas
F ully priced—downgrade to Sell
Event: rich valuations lead to lower rating despite defensive qualities
Indraprastha Gas’s (IGL) share price has risen 24% YTD, outperforming the
Sensex by 34%. We attribute this to IGL’s defensive nature, the merging of APM
allocation (lower gas costs and need to raise prices), strong gas economics and
higher returns. We believe IGL is fully priced on FY13E, with historically high PE
valuations of 19.4x/17.2x FY12E/FY13E (some might argue on PE, as pricing is
partly regulated) and P/BV of 4.8x/4.0x FY12E/FY13E, albeit with high ROEs.
Impact: maintain estimates; raise PT to Rs420.00 as we roll forecasts
We broadly maintain our EPS estimates for FY11-14E, assuming 20-22% yearly
gas sales growth, flat EBITDA margins from FY13E at Rs4.94/scm (higher RLNG
use offset by price hikes), high capital intensity and net debt for the next three to
four years. We raise our price target from Rs400 to Rs420 (implied P/BV of 4x
FY13E), as we roll over our forecasts.
Action: stock looks priced for perfection; downgrade rating to Sell
We like IGL’s track record and the strong gas economics, and expect the company
to retain leadership in Delhi after the expiration of marketing exclusivity.
However, regulations are evolving in India, incremental gas sourcing is expensive
(weaker rupee expands gas costs), and capital intensity will remain high. We
therefore find it difficult to continue to increase our target valuations for the stock.
IGL is a gas utility, making P/BV an important benchmark for our valuation
analysis.
Valuation: Rs420 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 assume a WACC of
11%.
Downgrade to Sell on strong share price
performance; stretched valuations
IGL’s share price has risen 24% YTD, outperforming the Sensex by 34%. We
attribute the outperformance to the merging of APM allocation, the structural
growth story, its ability to raise prices, the stock’s defensive nature and higher
than peer ROE. We downgrade our rating to Sell from Buy on the current rich
valuations, which we think are fully pricing in FY13E.
Post the solid rally in the stock YTD, we believe valuations look quite stretched
at a PE of 19.4x FY12E and 17.2x FY13E and P/BV of 4.8x FY12E and 4.0x
FY13E, despite the higher than peer ROEs. Charts 2, 3 and 4 on the next page
show that the stock is trading at historically high valuations on PE, EV/EBITDA
and P/BV. Though we may argue that since pricing is partly regulated in India
leading to higher returns for IGL, which could make investors look at PE, we
continue to benchmark our valuation on P/BV as IGL is a gas utility and
regulations are only evolving in India.
We like the company’s strong track record, competent management and strong
gas economics compared to other auto fuels in India. We also do not expect any
material competition in Delhi and NCR post the expiration of marketing
exclusivity in December 2011. We think the benchmarking of network tariffs
could be a non-event, as end pricing of gas is not regulated in India. However,
regulations are evolving (no perceived risk currently) in India. Further, IGL’s
business model is incrementally evolving to source a higher proportion of spot
LNG, until term LNG and cheaper domestic gas is available. We also continue
to forecast high capital intensity for IGL, and expect this to lead to a net debt
position for the next few years. We therefore find it difficult to continue to
increase our target valuations for the stock.
Maintain estimates, raise price target slightly
to Rs420
We have broadly maintained our EPS estimates for FY11-14E. Our key
assumptions are outlined below.
We assume 20-22% yearly overall growth in gas sales volumes in FY11-13,
supported by a 14-16% growth in CNG sales (aided by cluster concept buses,
new Gramin Seva vehicles and net conversion of 65-70k passenger vehicles per
year, expected Chief Controller of Explosives approval for 50 constructed
stations in six to eight months, and strong gas economics versus auto fuels). We
also expect 40% growth in the PNG segment, supported by the robust growth of
the industrial and commercial segment. IGL has continued to display pricing
power by regularly raising prices.
We expect EBITDA margins to increase to Rs5.15/scm in FY12 from
Rs4.93/scm in FY11, due to the merging of APM allocation (immediate easing
of gas costs) leading to an availability of approximately 2.5mmscmd of gas.
However, we think the weaker rupee and a rising proportion of spot LNG at
high prices (purchases at about US$17-18/mmbtu; we estimate 14% of gas sales
through spot in FY12) will limit the upside in EBITDA margins. In line with the
management outlook, we do not forecast any material increase in EBITDA
margins and forecast a flat Rs4.94/scm from FY13E onward. Current gas
sourcing is about 2.5mmscmd of APM gas, 0.1mmscmd of KG-D6,
0.44mmscmd of term RLNG from GAIL and BPCL and the rest through spot,
out of a total estimated 3.5mmscmd of purchases. Overall, we forecast an FY11-
13 EPS CAGR of 15.1% growth.
IGL turned net debt in FY11, and cash levels are also now negligible given the
company expects to incur substantial capex of Rs5.0-6.5bn/year over the next
three to four years. We forecast IGL to stay net debt at least for the next three
years (debt to equity should remain below 0.4x though).
We have slightly raised our price target from Rs400 to Rs420, as we roll over
our forecasts to FY13. 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 11% and terminal sales
growth of 2%.
We like IGL’s strong track record of execution, highly competent management
and government parentage. However, we believe the stock is fully priced on
FY13 estimates following the robust rally in the price over the past six to nine
months. We therefore downgrade our rating from Buy to Sell on the rich
valuations resulting from robust stock performance over the past year.
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
We believe the key risks are potential regulatory caps 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
F ully priced—downgrade to Sell
Event: rich valuations lead to lower rating despite defensive qualities
Indraprastha Gas’s (IGL) share price has risen 24% YTD, outperforming the
Sensex by 34%. We attribute this to IGL’s defensive nature, the merging of APM
allocation (lower gas costs and need to raise prices), strong gas economics and
higher returns. We believe IGL is fully priced on FY13E, with historically high PE
valuations of 19.4x/17.2x FY12E/FY13E (some might argue on PE, as pricing is
partly regulated) and P/BV of 4.8x/4.0x FY12E/FY13E, albeit with high ROEs.
Impact: maintain estimates; raise PT to Rs420.00 as we roll forecasts
We broadly maintain our EPS estimates for FY11-14E, assuming 20-22% yearly
gas sales growth, flat EBITDA margins from FY13E at Rs4.94/scm (higher RLNG
use offset by price hikes), high capital intensity and net debt for the next three to
four years. We raise our price target from Rs400 to Rs420 (implied P/BV of 4x
FY13E), as we roll over our forecasts.
Action: stock looks priced for perfection; downgrade rating to Sell
We like IGL’s track record and the strong gas economics, and expect the company
to retain leadership in Delhi after the expiration of marketing exclusivity.
However, regulations are evolving in India, incremental gas sourcing is expensive
(weaker rupee expands gas costs), and capital intensity will remain high. We
therefore find it difficult to continue to increase our target valuations for the stock.
IGL is a gas utility, making P/BV an important benchmark for our valuation
analysis.
Valuation: Rs420 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 assume a WACC of
11%.
Downgrade to Sell on strong share price
performance; stretched valuations
IGL’s share price has risen 24% YTD, outperforming the Sensex by 34%. We
attribute the outperformance to the merging of APM allocation, the structural
growth story, its ability to raise prices, the stock’s defensive nature and higher
than peer ROE. We downgrade our rating to Sell from Buy on the current rich
valuations, which we think are fully pricing in FY13E.
Post the solid rally in the stock YTD, we believe valuations look quite stretched
at a PE of 19.4x FY12E and 17.2x FY13E and P/BV of 4.8x FY12E and 4.0x
FY13E, despite the higher than peer ROEs. Charts 2, 3 and 4 on the next page
show that the stock is trading at historically high valuations on PE, EV/EBITDA
and P/BV. Though we may argue that since pricing is partly regulated in India
leading to higher returns for IGL, which could make investors look at PE, we
continue to benchmark our valuation on P/BV as IGL is a gas utility and
regulations are only evolving in India.
We like the company’s strong track record, competent management and strong
gas economics compared to other auto fuels in India. We also do not expect any
material competition in Delhi and NCR post the expiration of marketing
exclusivity in December 2011. We think the benchmarking of network tariffs
could be a non-event, as end pricing of gas is not regulated in India. However,
regulations are evolving (no perceived risk currently) in India. Further, IGL’s
business model is incrementally evolving to source a higher proportion of spot
LNG, until term LNG and cheaper domestic gas is available. We also continue
to forecast high capital intensity for IGL, and expect this to lead to a net debt
position for the next few years. We therefore find it difficult to continue to
increase our target valuations for the stock.
Maintain estimates, raise price target slightly
to Rs420
We have broadly maintained our EPS estimates for FY11-14E. Our key
assumptions are outlined below.
We assume 20-22% yearly overall growth in gas sales volumes in FY11-13,
supported by a 14-16% growth in CNG sales (aided by cluster concept buses,
new Gramin Seva vehicles and net conversion of 65-70k passenger vehicles per
year, expected Chief Controller of Explosives approval for 50 constructed
stations in six to eight months, and strong gas economics versus auto fuels). We
also expect 40% growth in the PNG segment, supported by the robust growth of
the industrial and commercial segment. IGL has continued to display pricing
power by regularly raising prices.
We expect EBITDA margins to increase to Rs5.15/scm in FY12 from
Rs4.93/scm in FY11, due to the merging of APM allocation (immediate easing
of gas costs) leading to an availability of approximately 2.5mmscmd of gas.
However, we think the weaker rupee and a rising proportion of spot LNG at
high prices (purchases at about US$17-18/mmbtu; we estimate 14% of gas sales
through spot in FY12) will limit the upside in EBITDA margins. In line with the
management outlook, we do not forecast any material increase in EBITDA
margins and forecast a flat Rs4.94/scm from FY13E onward. Current gas
sourcing is about 2.5mmscmd of APM gas, 0.1mmscmd of KG-D6,
0.44mmscmd of term RLNG from GAIL and BPCL and the rest through spot,
out of a total estimated 3.5mmscmd of purchases. Overall, we forecast an FY11-
13 EPS CAGR of 15.1% growth.
IGL turned net debt in FY11, and cash levels are also now negligible given the
company expects to incur substantial capex of Rs5.0-6.5bn/year over the next
three to four years. We forecast IGL to stay net debt at least for the next three
years (debt to equity should remain below 0.4x though).
We have slightly raised our price target from Rs400 to Rs420, as we roll over
our forecasts to FY13. 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 11% and terminal sales
growth of 2%.
We like IGL’s strong track record of execution, highly competent management
and government parentage. However, we believe the stock is fully priced on
FY13 estimates following the robust rally in the price over the past six to nine
months. We therefore downgrade our rating from Buy to Sell on the rich
valuations resulting from robust stock performance over the past year.
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
We believe the key risks are potential regulatory caps on returns/pricing,
execution delays, competition post marketing exclusivity, difficulty in gas
sourcing and new areas at reasonable returns.
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