Indraprastha Gas - Amidst Uncertainties, Lies Value:: Karvy

Amidst Uncertainties, Lies Value
The ongoing legal conflict on authorization of a regulatory body for CGD
(City Gas Distribution) entities between PNGRB and Indraprastha Gas Ltd
(IGL) post tariff cut, has hit IGL’s valuation severely in the last 3 quarters.
Currently trading at 11x FY14E as against historical band of 17‐18x and
immediate peer Gujarat Gas trading at 15x, we see rerating potential in the
stock. This valuation gap is unwarranted as the regulatory uncertainties
are not as grave as it has been priced in. We believe earnings are unlikely
to take a major hit, even though Apex court goes in favor of PNGRB.
Supreme Court Hearing to Address the Authorization Issue: The hearing
scheduled in March is going to address the authorization of PNGRB for
determining tariff of CGD entities, which had been challenged by IGL at the
High Court. However, the tariff cut is scheduled to be reviewed every five
years (scheduled next year) and can also be challenged at the Tribunal Level.
Currently IGL’s tariff doesn’t seem to be violating regulatory requirements.
As Per the HC Hearing, PNGRB’s Authorization to Determine Tariff is
Limited to Gas Transporters: The PNGRB Act authorizes PNGRB to regulate
tariffs of transporters/carriers of natural gas (e.g: Gail India, GSPL) and not
the marketers of natural gas, who own the distribution network, buy natural
gas and sell it in compressed form. PNGRB’s authorization over CGD entities
demands amendment in the Act. As per the existing Act, the tariff cut should
be applicable to the third party carriers using IGL’s network, which
contributes negligible portion of IGL’s earnings currently.
Irrespective of Supreme Court Judgment; there lies value: Retrospective
implication of tariff cut even if the Apex court favors PNGRB seems to be
unfeasible, thus a major hit to the cash flow is ruled out. Similarly
earnings/tariff is unlikely to take a major hit based on existing provisions in
the Act. IGL seems to be attractively valued at 11x due to regulatory
uncertainties vis‐à‐vis Gujarat Gas at 15x. However, we believe the
uncertainties are not as worrying as it is being factored in stock price. Our
valuation arrives at 320 at 14x (EPS Rs. 23/share), with EBITDA of Rs. 4.5/scm
(Rs. 6/scm in 2QFY13). We assign BUY rating to IGL with a target price of Rs.
320 viewing regulatory uncertainties as an opportunity for value pick.

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