Indraprastha Gas (IGL IN, INR 260, Buy)
We recently met the management of Indraprastha Gas (IGL). Post our interaction, we are enthused about IGL’s growth story, driven by: a) volume growth through DIMTS, blue-line buses and new auto rickshaw licenses and b) margins (lower LNG spot prices and strengthening INR). Thus, we are increasing our FY13E/14E EPS to INR23.0/25.0 from INR18.9/20.5 earlier to incorporate higher contribution margins. We maintain ‘BUY’ with a revised target price of INR320/share (INR311).
Management expects 18% CAGR for CNG volume in next 2-3 years
Aggressive plans of DIMTS (Delhi Integrated Multi-Modal Transit) to add buses and the Delhi government’s move to introduce new blue-line buses (last mile connectivity for Delhi Metro) will lead to CNG volume growing at 2-3 year CAGR of 18%. Formation of queues outside CNG stations hints at a volume growth potential (In April 2012, 58 out of total 308 stations were non-operational) hence our model now assumes 14% CAGR growth in CNG sales volume for FY12-FY14. The management indicated that overall EBITDA margins will be maintained at INR4.8-5.0/scm. Recent correction in spot LNG prices and INR appreciation will also assist IGL which may not need to hike CNG prices. We have assumed CNG gross margins at INR9.0/scm against INR8.25/scm earlier while estimating the overall EBITDA margins at INR4.9/scm.
Slowdown in capex post- FY14 to result in positive FCF thereafter
We believe that IGL currently is in a sweet spot as its “super-capex” mode seems to be over (INR6.8 bn/year average during FY11-FY12). Since most of the capex was for expanding network in Ghaziabad and Greater Noida, we believe benefits of higher volume will gradually flow in. Capex guidance for FY13/14 stands at INR4.5/3.5bn. As per management, post FY14, the capex run-rate is likely to fall to ~INR3.5bn levels.
Outlook & valuations: Regulatory uncertainty prevails; maintain ‘BUY’
We have given a higher WACC of 13% in our DCF based target price to incorporate risks of regulation. We have revised our target price upwards to INR320/share (offering 23% upside from CMP levels). We maintain BUY/Outperformer. At CMP, the stock is trading at 11.3x/10.4x of our FY13/FY14 EPS estimates, much below its normal range of 16-17x before the PNGRB order in April 2012.
Regards,
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