INDRAPRASTHA GAS: REDUCE TARGET PRICE: RS.223 :: Kotak Securities PDF link

Please Share::  India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

http://www.kotaksecurities.com/pdf/dmb/MorningInsight20042012.pdf

INDRAPRASTHA GAS (IGL)
PRICE: RS.232 RECOMMENDATION: REDUCE
TARGET  PRICE: RS.223 FY13E P/E: 15.8X
IGL hearing adjourned to 3rd May'12.
 The Delhi High court's hearing on IGL's petition challenging the order of
Petroleum Natural Gas Regulatory Board (PNGRB) on the network tariff
and compression charge has been adjourned to 3rd May'12.
 In our previous update we had desisted from giving any recommendation as the matter was pending before the court. With the judgement
being further postponed we have made our assumptions on the probable
RoCE for the company and have arrived at the above mentioned price target. We will review the same once when the final judgement on pricing
is available..
 According to GAIL's management (promoter of IGL - 22.5% stake), Section 22 of the PNGRB Act, 2006 does not empower PNGRB to regulate the
transmission tariff of existing city gas distribution (CGD) companies as
the same is already approved by MOPNG.  They further stated that PNGRB
can regulate the tariff of projects which were awarded through competitive bidding process.
 Pricing of IGL's gas consists of 1). Network tariff, 2). CNG compression
charge and 3). Marketing margin. PNGRB has tried to put a cap on first
two. Though determining marketing margins is out of PNGRB's purview,
concerns of a likely cap on marketing margins have emerged due to the
recent directive by the Petroleum Ministry to PNGRB to compute gas companies' marketing margins.
 The wide variation in the tariff of PNGRB and IGL is mainly on account of
differences in the assumptions regarding volumes, opex and capex.
Management indicated that PNGRB has considered lower capex than
what IGL has submitted to planning commission.
 PNGRB has asked IGL to disclose the network tariff, compression charges
for CNG and charges for the last mile connectivity (if applicable) to the
customer. This will bring more transparency.
Our Take:
 We don't expect the order to be implemented with retrospective effect and accordingly IGL will not be required to pay ~Rs.18.3 Bn. If it is  directed to pay then
that will erode its net worth. Also, it won't be practical to reimburse the amount
to IGL's large base of retail customers. However, we do not rule out prospective
rationalization of tariffs.
 Further, IGL requires funds to meet its capex plans of Rs. 5000 Mn in FY13E) and
is in the process of raising funds.
 PNGRB has the objective to expand city gas distribution business. With these
rules in place we believe the private players would prefer to stay away from the
CGD space as margins will become unattractive.
 Based on our revised estimates, the stock at current market price of Rs.232 is
trading at 7.3x EV/EBIDTA and 15.8x P/E on FY13E earnings.
 We have assumed ROCE of 18% pre-tax for FY13E and beyond (as per PNGRB's
earlier notification). Based on that, we have back calculated Gross Margins of
IGL for FY13E which come to Rs.6.2/Scm as against Rs.7.9/scm for FY12E (fall of
~20.9%). This reduces our earnings estimates to Rs.14.71/Share as against our
earlier estimate of Rs.26.1/share resulting in 44% reduction.