Indraprastha Gas - DCF based target price of Rs. 372 - Dolat Capital

Regulatory Concerns overdone: The Supreme Court is due to take up the hearing of the PNGRB - IGL case in July 2013 now, and we expect the verdict to be delivered in Q2FY14. We believe IGL is on strong ground, and therefore has fair probability of winning the case. We expect the CGD sector would be kept out of the preview of marketing margin, based on our interactions with the industry stakeholders.

- NCR monopoly to continue: IGL is the exclusive supplier of CNG (for transport) and PNG (for household, commercial and industrial) in Delhi and the NCR. The company's marketing exclusivity for Delhi region expired in December 2011. However, we believe that entry barriers for new players to establish presence in the region are very high, given the challenges to ensure gas supply at a competitive price as compared to IGL.

- Enviable user economics: The economics for CNG as transport fuel continues to offer unprecedented savings as compared to petrol and diesel. We expect this saving to drive the conversion of private vehicles to CNG. Domestic and Commercial PNG is economical as compared to alternate fuels. Industrial PNG is facing some competition from furnace oil and solid fuels, however, we believe that this is a temporary phenomenon and decline in RLNG prices will make Industrial PNG competitive again.

- Visible growth with pricing power: The aggressive expansion is expected to continue and IGL will reap long-term benefits. The infrastructure expansion is across CNG stations and pipeline networks for the PNG segment. We expect IGL to clock a volume CAGR of 13% over FY13-15E. IGL has shown the ability to maintain gross spreads, despite hikes in gas cost, by consistently raising the retail selling price. This shows the IGL business model's resilience.

Valuation

IGL's ability to maintain gross spreads in absolute terms, coupled with decent volume growth, will drive revenue and profit growth. We believe that current market price is factoring extreme negatives of regulatory hurdles. We feel that risk reward is highly in favor of IGL. At CMP the stock trades at 9.6x FY14E and 8.5x FY15E earnings. We recommend BUY with a DCF based price target of Rs. 372.

Source : Equity Bulls

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