Indraprastha Gas - Higher Gas Cost Reduces Volume Off-take - Karvy

IGL has been immune to the earning uncertainties in Oil and gas segment. Being cheaper than alternative fuels and having lower penetration in CNG market, their earnings have been buoyant. We expect the volume growth to taper off in the near future as the cost of CNG and PNG increases further, however margins will make up for the dip as the competitive fuels are still expensive. Although the earnings are likely to be under pressure, we believe it is still attractively valued due to regulatory uncertainties.

Higher Gas Cost taking a Toll on Volumes

IGL reported 9.3% volume growth in FY13 as against >20% growth in previous couple of years. It has been successfully passing through higher LNG cost as well as weaker rupee. However the pass through has come at the cost of volume growth. The CNG volume growth has come down to 8% vis-à-vis 12 % whereas PNG volume growth was 18% vis-à-vis 57 %.

Although Margins remain Buoyant

The annual margins for FY13 were higher by 9% despite cost pressure on the back of regular pass through to the end users. The dip in the volume growth is offset by higher margins to a large extent. The CNG prices have been increased from Rs 34 /kg to Rs 39.2/kg in last 4 quarters whereas PNG prices have been increased by more than Rs 3/scm.

Irrespective of Supreme court Judgment; there still lies value: We have assumed degrowth in earnings for FY15 vis-à-vis FY13 keeping in mind the uncertainties on Court Hearing. Still due to regulatory uncertainties IGL seems to be attractively valued at 11.5x FY15E as we believe any reduction in volume growth could be made up with buoyant margins. Our valuation arrives at 320 at 13x FY15E, assuming an EPS of Rs. 24.6/share with EBITDA of Rs. 5.3/scm. We reiterate our BUY rating on the stock. However any rally followed by favorable decision by Supreme Court is likely to provide an opportunity to book profits as we don't see upsides further.

Source : Equity Bulls

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