Indraprastha Gas - PNGRB order strikes hard; :: Edelweiss, PDF link

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Indraprastha Gas (IGL IN, INR 347, Under Review)

Today, PNGRB released a tariff order for Indraprastha Gas (IGL), which pegged the regulated tariff for network and compression at INR3.53/scm against IGL’s demand of INR8.95/scm. We see PNGRB’s order as extremely negative for IGL. While we remain unclear on IGL’s actions, FY13E PAT is at risk by as much as 41% and target price by ~15% due to the same. In addition, IGL also faces risk of sustained lower earnings and value in case it is forced to refund the excess charges (retrospectively since Apr-2008) to consumers retrospectively. We are placing the stock UNDER REVIEW but see an immediate correction in the stock price.

PNGRB order open to interpretation; worst case EPS cut by 41%

In case the PNGRB order is followed by cutting consumer prices by INR5.42/scm, IGL will report loss. Assuming that consumers are refunded excess charges at INR5/scm, IGL’s FY12E net worth of INR~12bn stands wiped out. Assuming marketing margins at ~INR 2.5/scm, we get contribution margins at INR6.0/scm and FY13E worst-case EPS at INR13.4/share, a cut of ~41%. In case, IGL management decides to increase marketing margins to offset the cut in regulated margins, there may be no impact in earnings. Since IGL management remained unreachable, we are not sure how the same will be implemented.

We see significant correction tomorrow; rating UNDER REVIEW

Fall in the target price will not be commensurate to fall in earnings and would be lower. This is because any cut in contribution margins will obviate the need of passing on higher gas costs to consumers in future, which we had earlier factored into our assumptions. Assuming that IGL maintains contribution margins of INR6/scm, we arrive at DCF value at INR 296/share (not taking into account lower value due to refund of excess charges retrospectively since April 2008), which is 15% lower than CMP. In absence of management’s view, which we believe is critical to have a view on near term EPS (FY13) and hence target price, we place the stock 'UNDER REVIEW'. We see immediate correction in the stock price tomorrow.

Indraprastha Gas - PNGRB order strikes hard; company update; Under Review

Regards,