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Eroding Pricing Power
We believe the margins of Indraprastha Gas (IGL) peaked out in 1QFY12 and
henceforth its growth will be a function of volume expansion as high-cost
RLNG will gradually erode the company’s pricing power. With the gap
between the prices of gas and competing liquid fuels narrowing, the
company will have limited leeway to hike prices. With earnings growth
expected to moderate gradually over FY13/14, we assign a Sell rating to the
stock with FV of Rs363.
Pricing power fading: IGL’s leverage to hike prices will erode as the cost
competitiveness with other liquid fuels narrows. In order to maintain volume growth
from existing and newer geographies, the company’s propensity to hike prices amid
rising costs will gradually fade. On account of moderating pricing power, we have
assumed EBITDA margin at Rs5.00/4.84/4.57 per scm for 12E/FY13E/FY14E,
respectively.
Gas costs to maintain uptrend on rising RLNG contribution: With static APM
supply and dwindling supply from the KG-D6 block, we believe the next leg of volume
growth will be led by higher contribution from high-cost RLNG. We have assumed
RLNG proportion to total gas supply to touch ~22.6%/34.8%/42.9% in FY12E/13E/14E,
respectively, compared to 17% contribution in FY11. In our assumption we have
considered gas costs at Rs12.63/15.47/18.37 per scm for FY12E/13E/14E,
respectively.
Volume growth likely to peter out: We have assumed volume of
1230/1455/1695mmscm for FY12E/13E/14E, respectively. CNG volume contribution
will gradually decline to 77%/74%/70% in FY12E/13E/14E from 81% in FY11. Volume
growth in FY13/14E is likely to come down to 18%/16% compared to 19%/28% in
FY10/11, respectively.
Prospects of curb on marketing margin weaken with moderation in RoACE:
Market fears IGL is most likely to be impacted by curbs on marketing margin, with
RoACE standing at over 21% in the previous financial years. With diminishing pricing
power, we believe the RoACE would be on a downward trajectory and is likely to be
18.3%/16.1%/15.1% for FY12E/13E/14E, respectively.
Outlook and valuation: We value IGL on the basis of DCF methodology with price
target of Rs 363(implying one-year forward 14.53x P/E & 3.1x P/BV). IGL’s stock has,
over the past two years, traded ~30-35% higher than its historical PE of 13.9x on the
back of dual levers of pricing and volume. We believe with the pricing lever out of
picture and volume growth moderating, the premium to historical average should
dissipate.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Eroding Pricing Power
We believe the margins of Indraprastha Gas (IGL) peaked out in 1QFY12 and
henceforth its growth will be a function of volume expansion as high-cost
RLNG will gradually erode the company’s pricing power. With the gap
between the prices of gas and competing liquid fuels narrowing, the
company will have limited leeway to hike prices. With earnings growth
expected to moderate gradually over FY13/14, we assign a Sell rating to the
stock with FV of Rs363.
Pricing power fading: IGL’s leverage to hike prices will erode as the cost
competitiveness with other liquid fuels narrows. In order to maintain volume growth
from existing and newer geographies, the company’s propensity to hike prices amid
rising costs will gradually fade. On account of moderating pricing power, we have
assumed EBITDA margin at Rs5.00/4.84/4.57 per scm for 12E/FY13E/FY14E,
respectively.
Gas costs to maintain uptrend on rising RLNG contribution: With static APM
supply and dwindling supply from the KG-D6 block, we believe the next leg of volume
growth will be led by higher contribution from high-cost RLNG. We have assumed
RLNG proportion to total gas supply to touch ~22.6%/34.8%/42.9% in FY12E/13E/14E,
respectively, compared to 17% contribution in FY11. In our assumption we have
considered gas costs at Rs12.63/15.47/18.37 per scm for FY12E/13E/14E,
respectively.
Volume growth likely to peter out: We have assumed volume of
1230/1455/1695mmscm for FY12E/13E/14E, respectively. CNG volume contribution
will gradually decline to 77%/74%/70% in FY12E/13E/14E from 81% in FY11. Volume
growth in FY13/14E is likely to come down to 18%/16% compared to 19%/28% in
FY10/11, respectively.
Prospects of curb on marketing margin weaken with moderation in RoACE:
Market fears IGL is most likely to be impacted by curbs on marketing margin, with
RoACE standing at over 21% in the previous financial years. With diminishing pricing
power, we believe the RoACE would be on a downward trajectory and is likely to be
18.3%/16.1%/15.1% for FY12E/13E/14E, respectively.
Outlook and valuation: We value IGL on the basis of DCF methodology with price
target of Rs 363(implying one-year forward 14.53x P/E & 3.1x P/BV). IGL’s stock has,
over the past two years, traded ~30-35% higher than its historical PE of 13.9x on the
back of dual levers of pricing and volume. We believe with the pricing lever out of
picture and volume growth moderating, the premium to historical average should
dissipate.
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