Indraprastha Gas - Steady As She Goes; Visit Note :: Edelweiss, report

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Our interaction with senior management of Indraprastha Gas (IGL) at Delhi left us enthused with the company’s growth prospects and margin trajectory. Organic volumes are set to revive after hiatus of 2 years as competitiveness of CNG versus alternate liquid auto fuels remains favourable (double the threshold level), while PNG penetration in households is on the rise due to convenience of usage. However, industrial PNG (13% of sales), a minor business, appears vulnerable in the near term, given the steep fall in furnace oil prices. We anticipate the favourable regulatory policy action—according top priority to the city gas distribution (CGD) sector for allocating cheap domestic gas—to enhance margins. Entry into higher growth Pune and Central UP markets will further drive consolidated earnings. We expect favourable judgement from the Supreme Court against the harsh PNGRB tariff order, which will lift major overhang from the stock. At 12x FY16E EPS, valuations are undemanding and at 30% discount to regional peers, despite superior returns.

City gas distribution spurt to fuel growth

At current levels, CNG is 55% more competitive than petrol and 25% than diesel (refer Chart 4) which will sustain fuel conversions. Addition of DTC buses and private bus clusters (DIMMTS) will further drive CNG volumes. The domestic PNG segment will continue to post stellar growth, as convenience of usage will drive penetration. IGL expects volume growth of 5% in overall business, which we believe is conservative.

Regulatory action favours margin expansion

Margins will expand on favourable change in policy according top priority to city gas for allocating cheap domestic gas, which is currently priced at USD5.6-6.0/mmbtu versus LNG at USD9-14/mmbtu. We expect a favourable Supreme Court judgement against PNGRB order (~60% cut in IGL’s margin), which will lift major overhang from the stock.

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