Indraprastha Gas Ltd: Strong Fundamentals, Buy on every Dip !!!

Scrip Code: 532514 / IGL

CMP:  Rs. 316.70; Buy at current levels.
Short term Target: Rs. 360, 6 month Target – Rs. 415; STOP LOSS – Rs. 291.40; Market Cap: Rs. 4,433.80 cr; 52 Week High/Low: Rs. 454 / Rs. 285

Total Shares: 14,00,00,160 shares; Promoters : 6,30,00,080 shares –45.00 %; Total Public holding : 7,70,00,080 shares – 55.00 %; Book Value: Rs. 71.70; Face Value: Rs. 10.00; EPS: Rs. 20.97; Div: 50.00 % ; P/E: 15.10 times; Ind. P/E: 20.45; EV/EBITDA: 9.68.

Total Debt: 346.49 Cr; Enterprise Value: Rs. 4,894.96 Cr.

INDRAPRASTHA GAS LTD: Indraprastha Gas Ltd was incorporated in 1998 and is based in Delhi, India. IGL provides natural gas for automobile, domestic & commercial use in Delhi, India. The company is a joint venture of GAIL (India) Limited, Bharat Petroleum Corporation Limited & the Government of the National Capital Territory of Delhi. In the year 1999 IGL took over Delhi City Gas Distribution Project from GAIL (INDIA). The company is the supplier of Compressed Natural Gas (CNG) to the automotive sector in the National Capital Territory of Delhi (NCT of Delhi). The company operates 241 CNG stations, provides PNG to 1,82,000 domestic & 355 commercial customers.  The company also markets and distributes Piped natural Gas (PNG) for domestic and commercial users in NCT of Delhi. The Company is supplying Re-LNG to 21 industrial consumers in Delhi. As of March 2011, the company had an installed & licensed capacity of 2.70 million metric standard cubic meters per day natural gas. CNG is a fuel for transport sector; it’s replacing traditional fossil fuels of petrol and diesel. PNG is used for household kitchens as well as commercial users such as hotels, hospitals, embassies & restaurants. PNG is supplied to the domestic and commercial sectors in the areas of Kaka Nagar, Bapa Nagar, Pandara Road, Pandara Park, Sunder Nagar and Sujan Singh Park. The company has entered in JV with Siti Energy to set up City Gas Distribution Projects at Sonepat and Paniat located at Haryana. IGL was awarded Golden Peacock Eco Innovation Award. BPCL holds 3,15,00,080 shares (22.5 %) & GAIL holds 3,15,00,000 shares (22.5 %) in Indraprastha Gas Limited. IGL is compared to Gujarat Gas Company Ltd, Confidence Petroleum India Limited & Gujarat State Petronet Ltd.

Investment Rationale:

The CNG is an environment friendly and one of the most economical fuels for transport sector. It is replacing traditional fossil fuels of petrol & diesel, as in running cost of the vehicles is comparatively low, it is more than 65 % cheaper than petrol and more than 20 % cheaper than diesel at the current prices. Metropolitan cities have already adopted the use of CNG at large scale but other cities of India are yet to follow the same. However, Petrol which is widely used as fuel for cars is getting dearer day by day and because of this the demand for other economical fuel like Diesel also increases. However, the diesel vehicles may be in demand for some period but due to environmental concern and excess demand, the auto users will seek out other cheaper and more environment friendly options like CNG. The price difference of CNG and alternate liquid fuel will also continue to drive the large scale conversion of petrol driven private vehicles into CNG mode. Introduction of more CNG variant models by car manufactures will also provide a fillip to CNG sales in coming years. Indraprastha Gas LTD commands monopolistic situation to sell and supply CNG & PNG services in Delhi and NCR region. IGL has taken number of price hikes in last few years. Last time company has hiked the price of CNG by Rs. 2.00/kg in Delhi & NCR region on 31 Dec 2011. Imported gas is over four times costlier than the D6 gas which is sold at $4.20 per unit. IGL had raised PNG rates on 1^st Sept 2011 from Rs. 18.95 per unit to Rs. 22 per unit. Due to the monopoly of company, IGL easily manages to pass on the raise in the price of CNG or PNG onto its customers and thus able to maintain the gross profits margins. Indraprastha Gas Ltd is looking to buy stake in Mumbai base gas retailer MAHANAGAR GAS LTD (MGL). MGL offers piped natural gas to around 5 lakhs domestic customers and around 1200 small commercial and industrial establishments in Mumbai and adjoining across Mumbai, Thane, Mira Road – Bhayander and Navi Mumbai. This acquisition will help to expand its existence in another metropolitan city of the country.

Outlook and Valuation:

India’s oil and gas sector holds strategic importance in the economy as it meets around 42 % of the country’s primary energy demand and contributes over 15 % to the gross domestic product (GDP). With an interesting mix of private and government companies, the industry is scaling new heights in domestic and international markets. With a strong resource position, India ranks second (behind Australia and ahead of Vietnam), in BMI’s upstream Business Environment ratings while the country shares first place with China in BMI’s downstream Business Environment ratings. The recently released BMI forecasts states that India will account for 12.4 % of Asia Pacific regional oil demand by 2015, while satisfying 11.2 % of the supply. Due to increasing refining capacities, India is set to be a top exporter of petro-products in Asia, surpassing South Korea. India’s exports of refined products stood at 0.95 million barrels per day (b/d) as of June 2011 and US$ 4.6 billion worth of petroleum products were exported during July 2011. Recently, the Company signed long term supply agreement with Delhi Transport Corporation, which contributes approximately 25 % of CNG Sales. Net Sales and PAT of the company are expected to grow at a CAGR from 25 % in 2010 to 41 % by 2013E. During the quarter, the company reported an increase in Net Profit to Rs. 77.22 Cr from Rs. 66.27 Cr in previous year same quarter. IGL plans to expand its network to other part of Delhi and NCR regions and to other metropolitan cities like Mumbai. It has plans to invest around Rs. 600 cr by FY13. The capex amount will be equally divided between CNG & PNG product services and from which has already spent around Rs. 300 cr in first half of FY12. Company is going to add new CNG pump stations to its network between FY12 -13. Out of these around 50 stations are likely to be operational by FY12, while 35 more stations are in construction mode, which will be ready to use by FY13. Due to raising prices of other fuels like Petrol & diesel, the demand for CNG equipped vehicle is expected to rise in coming years. Actually the prices of mostly used fuel Petrol vehicles like cars has been increased rapidly in the last few years, now passengers are looking for other cheaper options and CNG is a good option. Company is expecting more than 50,000 cars which are likely to be converted into CNG on an annual basis in Delhi and DTC i.e. Delhi Transport Corporation, a big consumer of CNG is likely to launch additional 4,000 buses over the period of next couple of years. At the current market price of Rs. 316.70, the stock is trading at a PE of 13.51 x FY12E and 10.60 x FY13E respectively. The company can post Earnings per share (EPS) of Rs. 23.44 in FY12E and Rs. 29.87 in FY13E. One can buy IGL with a target price of Rs. 415.00 for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 360.00

KEY FINANCIALS	FY10	FY11	FY12E	FY13E
SALES (Rs. Crs)	1,083.83	1,750.46	2,406.88	3,008.60
NET PROFIT (Rs. Crs)	215.50	259.76	328.09	418.24
EPS (Rs.)	15.39	18.55	23.44	29.87
PE (x)	20.84	19.73	15.62	12.25
P/BV (x)	5.44	5.10	3.85	2.93
EV/EBITDA (x)	11.17	10.21	7.68	6.14
ROE (%)	26.11	25.88	24.63	23.90
ROCE (%)	39.30	29.54	31.09	31.24

I would buy IGL with a price target of Rs. 415 for Medium to Long term and Rs. 360 for the Short term players. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 291.50 on every purchase.


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INDRAPRASTHA GAS: Accumulate on every dip.Better positioned,Good stock.

Scrip Code: 532514 / IGL

CMP:  Rs. 337.45; Buy at Rs. 310-325.
Short term Target: Rs. 350, LT – Rs. 450. 

Market Cap: Rs. 4,724.30 cr. 52 Week High/Low: Rs. 374.00 / Rs. 256.70. Total Shares: 14,00,00,160 shares; Promoters : 6,30,00,080 shares –45.00 %; Total Public holding : 77,00,00,080 shares –55.00 %; Book Value: Rs. 58.96; Face Value: Rs. 10; EPS: Rs. 17.29; Div: 45 %. P/E: 19.49 times; Ind P/E: 20.88; EV/EBITDA: 11.59.

Total Debt: Rs. 55.16 cr; Enterprise Value: Rs. 4,694.06 cr

Indraprastha Gas Ltd was incorporated in 1998, provides natural gas for automobile, domestic & commercial use in Delhi, India. The company is a joint venture of GAIL (India) Limited, Bharat Petroleum Corporation Limited & the Government of the National Capital Territory of Delhi. The company is the supplier of Compressed Natural Gas (CNG) to the automotive sector in the National Capital Territory of Delhi (NCT of Delhi). As on March 31, 2010, the company operated 241 CNG stations, provided PNG to 1,82,000 domestic & 355 commercial customers.  The company also markets and distributes Piped natural Gas (PNG) for domestic and commercial users in NCT of Delhi. As on March 31, 2010, the Company is supplying Re-LNG to 21 industrial consumers in Delhi. PNG was supplied to the domestic and commercial sectors in the areas of Kaka Nagar, Bapa Nagar, Pandara Road, Pandara Park, Sunder Nagar and Sujan Singh Park. BPCL holds 3,15,00,080 shares (22.5 %) & GAIL holds 3,15,00,000 shares (22.5 %) in Indraprastha Gas Limited.

Investment Rationale

Demand still robust in NCT of Delhi and NCR for CNG: Compressed Natural Gas (CNG) volumes (90% of total volumes) grew at a CAGR of 15% between FY07-10 led by private car conversions due to favorable pricing of CNG. Considering the beneficial pricing scenario (CNG being 67% cheaper than petrol and 36% than diesel) as well as robust CNG demand in the operational areas, it is expected that CNG volumes to grow at 18% Y-o-Y from FY10 to FY13. With a view to cater to the increasing demand, IGL plans to add 40 CNG stations by FY11 (241 stations in FY10) and 30 CNG stations in FY12 and FY13 each.

PNG segment set to become the next growth driver: The Piped Natural Gas (PNG) segment which includes the relatively under penetrated domestic households and industrial/commercial customers is expected to be the key catalyst for growth going forward. On the back of strong volume growth from the relatively high margin industrial segment, it is expected that PNG volumes to grow from 87 MMSCM in FY10 to 398 MMSCM by FY13 (CAGR of 66%).

End of Marketing Exclusivity should not pose a hurdle in Delhi: The biggest entry barrier for any new player in CGD business in Delhi is the non-availability of cheap gas (APM gas or KG-D6) gas. The government has allotted 2 MMSCMD of gas to IGL for their Delhi operation which is currently utilized fully. In the event of the government increasing the allocation of APM or KG-D6 gas in Delhi, IGL would get first preference over any new player with its already established network in Delhi.

Ability to pass on high input costs: Historically, IGL has consistently been able to pass on cost increases by way of price hikes of CNG which helped in sustaining its margins. With blended cost of gas expected to be Rs 13.16 per SCM in FY13 as compared to Rs 5.96 per SCM in FY10, gradual price increases (recently hiked prices by Rs. 1.25 per SCM with effect from Jan 1, 2011) would be a key to sustain its margins. With petrol and diesel prices expected to increase going forward, it is believed that IGL should not find it difficult to pass on cost increases by way of price hikes.

Outlook & Valuation: The correct measure to evaluate operating performance for the Consumer Gas Distribution business is at EBITDA level. Drived by robust demand in the CNG segment and increasing revenues from PNG segment led by industrial volumes, IGL’s revenues to grow at an AGR of 45% over FY10-13E. The aggressive expansion plans for establishing the CNG and PNG infrastructure in the operational areas of IGL will reap rich dividends going forward. At current market price of Rs. 300 the stock trades at a P/E of 14.3x and 11.6x for FY12E and FY13E respectively. It will be a good BUY on IGL with a price target of Rs. 350/share.

KEY FINANCIALS	FY09	FY10	FY11E	FY12E	FY13E
SALES (Rs. crs)	852.80	1,078.10	1,723.00	2,414.70	3,304.20
NET PROFIT (Rs. crs)	172.50	215.50	254.30	293.40	363.50
EPS (Rs.)	12.30	15.40	18.20	21.00	26.00
PE (x)	24.40	19.50	16.50	14.30	11.60
P/BV (x)	6.10	5.10	4.20	3.40	2.80
EV/EBITDA (x)	13.60	10.90	8.90	7.40	6.00
ROE (%)	25.20	26.10	25.30	23.90	24.00
ROCE (%)	40.30	43.30	34.80	33.00	35.10

I maintain my accumulation status on IGL with the price target of Rs. 350 in short term. For long term my target is of Rs. 450. As I always say do respect the market and keep a strict stop loss of 8 % on your every purchase.