IGL - Buy Target Price: Rs426 Upside: 18.2% :: Centrum

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IGL

Buy

Target Price: Rs426

CMP: Rs360             

Upside: 18.2%

Yet another CNG Price hike to safeguard margins  

IGL raised its CNG prices in Delhi, Noida, Greater Noida and Ghaziabad by Rs1.70-1.90/kg yesterday. Surprising this is the second price hike in Q4 after Rs1.75/kg increase on January 1, 2012. CNG price in Delhi now stands at Rs35.45/kg while in other areas it is Rs39.80/kg. The price hike comes into effect due to steep rise in natural gas sourcing cost due to rising dependence on spot LNG purchases.  The company had taken such price rises earlier to safeguard its margins and once again it has demonstrated its ability to pass on the input cost rise to the customers to protect its margins. We had earlier indicated that due to the marketing margin issue the stock has been derated yet we maintained a ‘Buy’ on the stock given its volume growth and ability to protect margins. We continue to remain optimistic on the volume growth of IGL and the current price hike gives us confidence that the company will be able to protect its margins. Maintain ‘Buy’.

m  Second price hike in CNG during Q4, sixth in FY12: IGL’s dependence on spot LNG for its incremental volume growth gas led to six CNG price hikes during the last 11 months. Additionally, rupee depreciation has added to the woes as all the gas sourcing is dollar denominated. Hence, the company has resorted for a second price hike in Q4 with Rs1.75/kg in Delhi taking the CNG price to Rs35.45/kg and Rs1.90/kg in Noida, Greater Noida and Ghaziabad taking the CNG price to Rs39.80/kg.

m  Gas sourcing cost jumps by over 25% from Q1 to Q3: Due to rising spot LNG prices and rupee depreciation, IGL’s average gas sourcing cost has jumped significantly over the past three quarters rising from Rs10.9/kg during Q1 to Rs13.8/kg in Q3. Additionally, supplies of about 0.15mmscmd from RIL KG D6 were curtailed during the period thus increasing the dependence on spot LNG. Incrementally, sourcing cost is likely to jump due to higher reliance on spot LNG for additional volume growth.

m  Price hike gives confidence on protecting margins: We believe that the surprising CNG price hike has elevated our confidence in IGL as the company would be able to protect its margins despite rising gas sourcing cost. We had earlier indicated that the marketing margin issue has impacted the stock price with a derating and thus had reduced our target P/E multiple from 17x earlier to 15x. However, we were optimistic on the volume growth and the ability of the company to pass on the input cost rise to its consumers to protect its margins and hence maintained ‘Buy’ on the stock. Based on the CNG price hike we have tweaked our numbers and maintain ‘Buy’ on the stock with a revised price target of Rs426 (earlier Rs 408).