Indraprastha Gas - Kotak

Finally, some respite...

- On 1st June'12, the Delhi high court has set-aside Petroleum and Natural Gas Regulatory Board's (PNGRB) order to cut down network tariff. Further, high court has also confirmed that PNGRB has no power to fix any component of network tariff or compression charges for any entity such as IGL having its own distribution network.

- This is a significantly positive development for IGL and all other city gas distribution companies.

- A bench of acting Chief Justice A K Sikri and Justice Rajiv Sahai Endlaw has also quashed the refund of tariff to customers from retrospective effect. However, Delhi HC has yet not uploaded the judgment on its site. So, we need to wait for the fine print.

- In our report dated 15th May'12, we have clearly mentioned that 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. Further, we have also stated that 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 city gas distribution (CGD) space as margins will become unattractive.

- However, we do not rule out the possibility that PNGRB challenging the order in the Supreme Court. This can keep the stock under pressure. If PNGRB does not challenge the same, it will be significantly positive for gas utility companies.

- The recent run up in the stock discounts most of the positive news flow. Further, re-rating will be depended on the PNGRB moving to Supreme Court or not, we opine.

- Now coming back to the CGD growth story. With the regulatory clarity in place, IGL will now focus on its expansion plans. In FY13E, the Company will be investing ~Rs.5 Bn in Delhi and NCR to expand its network.

- IGL is trying to enter into long term LNG supply agreement in order to reduce its dependence on costlier spot cargoes. In this regard, IGL is in talks with its promoters GAIL & BPCL and others.

- IGL's revenues are expected to grow with the increase in realization and huge demand of natural gas both in CNG and PNG segment. Also, as mandated by Delhi government, LCVs will be converted into CNG which will boost its CNG sales.

- The management has guided that in addition to catering to the demand of households, the thrust would be on tapping industrial and commercial customers who have huge demand potential. Also, private vehicles will continue to be a growth driver for CNG sales in the coming years.

- We expect EPS of Rs. 26.9 for FY13E and Rs. 31.9 for FY14E. The management believes that the strong trends in CNG and PNG segment will continue and IGL is best placed to benefit from rising gas consumption in India.

- As mentioned earlier, if PNGRB challenges the matter in Supreme Court and gets a different verdict then we may review our estimates accordingly.

- Based on our estimates, the stock at current market price of Rs.249 is trading at 5.6x EV/EBIDTA and 9.2x P/E on FY13E earnings.

- Based on our DCF based valuation model, the fair value of IGL is Rs. 256 (earlier Rs. 210) and we now recommend ACCUMULATE post the clarity from Delhi high court.

Source : Equity Bulls

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