COMPANY UPDATE Sumit Pokharna sumit.pokharna@kotak.com +91 22 6621 6313 Summary table (Rs mn) FY15 FY16E FY17E Sales 40,480 39,808 41,548 Growth (%) -6.5-1.7 4.4 EBIDTA 7,930 8,241 8,745 EBIDTA margin (%) 19.6 20.7 21.0 PBT 6,490 6,793 7,324 Net profit 4,377 4,619 4,980 EPS (Rs) 31.3 33.0 35.6 Growth (%) 21.5 5.5 7.8 CEPS (Rs) 41.9 44.2 47.7 BV/Share (Rs.) 149.9 176.2 204.7 DPS (Rs) 6.0 6.0 6.0 ROE (%) 22 20 18 ROCE (%) 21 20 19 Net Debt/(Cash) (861) (3,708) (6,729) EV/Sales (x) 1.6 1.5 1.4 EV/EBIDTA (x) 8.0 7.3 6.6 P/E (x) 14.7 13.9 12.9 P/BV (x) 3.1 2.6 2.2 P/CEPS (X) 11.0 10.4 9.6 Source: Company, Kotak Securities - Private Client Research INDRAPRASTHA GAS (IGL) PRICE: RS.459 RECOMMENDATION: ACCUMULATE TARGET PRICE: RS.485 FY17E P/E: 12.9X We expect a sharp cut in domestic gas price, due for revision in Oct'15, reflecting a steep correction in regional gas prices used in the government suggested formula. From the current price of $5.2/mmbtu the domestic gas price can correct to ~$3.9/mmbtu on net calorific value (NCV). We believe city gas distribution (CGD) companies are best placed (in the oil and gas sector) to benefit from the lower gas prices as they are in the priority list in the domestic gas allocation policy. Additionally, the recent correction in crude oil prices and resultant fall in RLNG prices augurs well for IGL as RLNG constitutes ~14% of IGL's gas mix and APM is ~68% of gas mix. We expect FY16E EPS of Rs.33 & Cash EPS of Rs.44 and for FY17E EPS of Rs.36 & cash EPS of Rs.48. Based on our estimates, the stock at current market price of Rs.459 is trading at 6.6x EV/EBIDTA and 12.9x P/E on FY17E earnings. Post our previous sell recommendation, the stock has corrected meaningfully. Now, we recommend ACCUMULATE (BUY on dips) rating on the stock. Based on our DCF valuation model, the fair value of IGL is Rs. 485 (including investments in MNGL and CUGL). Expansion in network: IGL has acquired 50% stake in two city gas distribution companies. We believe IGL's investment in Maharashtra Natural Gas (MNGL) is positive, giving it access to industrial gas demand in Pune. IGL has also acquired 50% stake in Central UP Gas Limited (CUGL). CUGL is engaged in the CGD in the cities of Kanpur and Bareilly, Unnao and Jhansi in Uttar Pradesh. With this, IGL will get access to other CGD markets. We conservatively expect IGL to book CNG gas volume of ~837 Mn Kgs and PNG 340 MSCMPA of natural gas in FY16E and CNG gas volume of ~883 Mn Kgs and PNG 358 MSCMPA of natural gas in FY17E. The management believes that the strong trend in CNG and PNG segment will continue. IGL is best placed to benefit from rising gas consumption in India, we opine. Domestic gas price to be revised lower: We expect domestic natural gas price to be lowered in H2FY16 from current US$5.22/mmbtu to US$ 3.9/ mmbtu. We believe IGL will partly pass on the benefit of lower gas price to its end consumers to boost volume growth. We believe that in the medium to long term, growth prospects of city gas distribution company in India is bright mainly on account of government focus on CNG and PNG, lower current RLNG prices, expected fall in domestic gas price, etc. More specifically, the Delhi government is planning to bring the entire city under the PNG pipeline connectivity in the next five years. As part of government's smart city project, it may add over 15 lakh new piped natural gas users to the network. Aggressive plans of Delhi Integrated Multi Modal Transit to add buses and the Delhi government's move to introduce new blue-line buses for Delhi Metro will aid CNG volume growth going forward. IGL's core operations in NCR offer good demand potential due to lower CNG and PNG penetration and due to the Supreme Court's directive to have all public transport vehicles necessarily run on CNG. One of the key beneficiaries of the same will be IGL, we opine. Key risk remains in terms of 1). Cost and time run in project execution 2). Any major regulation by PNGRB on marketing margin and 3). Lower crude oil prices resulting in competition from substitute fuels. 4) Change in gas pricing formula may impact our valuation Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group. The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target price of the Institutional Equities Research Group of Kotak Securities Limited. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2
1). Domestic gas price revision: In Oct'14, the Government had announced a new pricing formula for natural gas that led to rates rising by ~33% from US$4.2 per million British thermal unit (mmbtu) for a period up to March 31, 2015. From April 2015, the rates, on net calorific value (NCV) basis, dropped to $5.05/mmbtu for six month period. As per the system the domestic natural gas price is to be revised every six months by using weighted average or rates prevalent in gas-surplus economies of US/ Mexico, Canada and Russia. Now, the domestic gas price is due for revision from 1st Oct'15. As per the committee-recommended formula for natural gas, the domestic gas price would be computed based on the average of: P = VHH*PHH + VAC*PAC + VNBP*PNBP + VR*PR (VHH + VAC + VNBP + VR) Where (a) VHH = Total annual volume of natural gas consumed in USA & Mexico. (b) VAC = Total annual volume of natural gas consumed in Canada. (c) VNBP = Total annual volume of natural gas consumed in EU and FSU, excluding Russia. (d) VR = Total annual volume of natural gas consumed in Russia. (e) PHH and PNBP are the annual average of daily prices at Henry Hub (HH) and National Balancing Point (NBP) less the transportation and treatment charges. (f) PAC and PR are the annual average of monthly prices at Alberta Hub and Russia respectively less the transportation and treatment charges. Quarterly Trend Net gas Net gas Adjustments Gross gas Volume weighted price price Transportation & price on NCV average price on GCV on NCV Treatment charges $/mmbtu $/mmbtu Gross CV NET CV Assumed 4.9 5.3 1.5 6.8 6.6 4.3 4.8 1.5 6.3 5.5 3.9 4.3 1.5 5.8 4.8 3.6 3.9 1.5 5.4 4.7 Source: Bloomberg. Note: These are tentative prices and actual prices may be different. We expect a sharp cut in domestic gas price, due for revision in Oct'15, reflecting steep correction in regional gas prices used in the government suggested formula. From the current price of $5.2/mmbtu the domestic gas price can correct to ~$3.9/mmbtu on net calorific value (NCV), if gas price remains here. Lower domestic gas price will also be positive for Power and Fertilizer sector. 2). CGD sector will become more competitive, post downward revision in gas prices. Post the expected correction in domestic gas price, gas sourcing costs for CGD players will reduce meaningfully. Lower domestic price will be big positive for city gas distribution companies as they can compete with substitute fuels such as petrol and diesel. We have worked-out the cost-benefit analysis of natural gas over alternative fuels. Post correction in CNG prices, the benefit of CNG over other liquid fuels will improve. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 3
Cost-benefit analysis of natural gas over alternative fuels Fuel CNG Diesel Petrol Comments Maruti Ertiga Unit Kg ltrs ltrs Fuel Cost -Delhi Rs/unit 38.0 45.0 63.2 Mileage Kms/unit 22.8 20.8 16.0 Fuel Operating Cost Rs/Km 1.67 2.16 3.95 % compared to petrol 58% 45% - % compared to Diesel 23% - - Average vehicle running per day Kms/day 50 50 50 Fuel cost Rs/day 83.3 108.2 197.3 Savings per day Rs/day 89.0 113.9 No. of days in a year Days/year 360 360 Assumed Annual Savings with CNG Rs. 32,056 41,011 Cost of conversion kit Rs 35,000 35,000 one-time cost Pay-back period Months 13 10 Break-even Kms 19653 15362 Source: Kotak Securities - Private Client Research IGL's CNG stations and PNG domestic connections CNG Outlets Set up by IGL PNG Domestic Connection in Delhi & NCR 350 300 250 200 150 100 50 0 308 324 325 326 278 241 2010 2011 2012 2013 2014 2015 600,000 500,000 400,000 300,000 200,000 100,000-560,752 459467 332,844 386,696 244,924 182,006 2010 2011 2012 2013 2014 2015 Source: Company India's gas demand to increase As per the working group on Petroleum & Natural Gas sector the demand of natural gas by various sectors during the period 2014-15 to 2018-19 as under: India s natural gas demand projection Year Demand of natural gas by various sectors (in MMSCMD) 2014-15 405 2015-16 446 2016-17 473 2017-18 494 2018-19 523 Source: Minister for Petroleum & Natural Gas 3). IGL's natural gas mix: IGL is sourcing gas from various sources such as 1). Firm allocation from Govt. of India for domestic gas -buying from GAIL, 2). Long term RLNG gas from promoter companies GAIL/BPCL and 3). Short term gas from the open market i.e. IOCL, GSPCL & Shell etc. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 4
Higher APM mix and expected cut in domestic gas prices will be positive for IGL RLNG 14% PMT 18% APM 68% Source: Company We believe city gas distribution (CGD) companies are best placed, in the oil and gas sector, to benefit from the lower gas prices as they are in the priority list in the domestic gas allocation policy. Additionally, the recent correction in crude oil prices and resultant fall in RLNG prices augurs well for IGL as RLNG constitutes ~14% of IGL's gas mix and APM is ~68% of gas mix. 4). Expansion through in-organic growth: The Company has highlighted that they are looking for growth through acquisition and by improving existing infrastructure. In this regard, IGL is augmenting CNG infrastructure/stations in Delhi & NCR to meet the additional demand in view of conversion of private cars and improvement in public transport system. It will also improve penetration of PNG business. It is also targeting industrial/commercial customers in both Delhi & NCR. It will also bid for CNG and PNG in new cities. IGL has acquired 50% stake in Central UP Gas Limited (CUGL) for Rs. 690 Mn. CUGL is engaged in the CGD in the cities of Kanpur and Bareilly, Unnao & Jhansi in Uttar Pradesh. IGL has also acquired 50% stake in Maharashtra Natural Gas Limited (MNGL) at a price of Rs.38 per equity share aggregating to Rs. 1.81 Bn. MNGL is engaged in the CGD in the city of Pune and nearby areas. The above has resulted in diversification of geographical areas. We believe this will boost its volume in the medium to long term. We recommend ACCUMULATE on Indraprastha Gas with a price target of Rs.485 Earnings estimates, Valuation & Recommendation We expect FY16E EPS of Rs.33 & Cash EPS of Rs.44 and for FY17E EPS of Rs.36 & cash EPS of Rs.48. Based on our estimates, the stock at current market price of Rs.459 is trading at 6.6x EV/EBIDTA and 12.9x P/E on FY17E earnings. We expect IGL to book CNG gas volume of ~837 Mn Kgs and PNG 340 MSCMPA of natural gas in FY16E and CNG gas volume of ~883 Mn Kgs and PNG 358 MSCMPA of natural gas in FY17E. Post our previous sell recommendation, the stock has corrected meaningfully. Now, we recommend ACCUMULATE (BUY on dips) rating on the stock. Based on our DCF valuation model, the fair value of IGL is Rs. 485 (including investments in MNGL and CUGL). Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 5
Business Background: Indraprastha Gas (IGL) is a City Gas Distribution company with rights to distribute CNG and PNG in Delhi and its adjoining areas. IGL was incorporated in 1998 as a JV between GAIL and Bharat Petroleum Corp. (BPCL). The government of Delhi owns another 5% stake. The company later took over the Delhi gas distribution project from GAIL. At present, IGL's gas distribution network spans over Delhi, Noida and Greater Noida, and Ghaziabad. The company supplies compressed natural gas (CNG) to the auto sector, piped natural gas (PNG) to households and commercial establishments, and R-LNG (re-gasified LNG) to industrial establishments. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 6