Neutral on Indraprastha Gas - Motilal Oswal

Indraprastha Gas (City Gas Distribution player) (IGL IN, M Cap: US$1b, CMP: Rs329, Neutral)

- Volume and earnings growth: IGL expects CNG volume CAGR of 20% and PNG volume CAGR of 50% over the next 2-3 years. However, availability of the gas would be the key to achieve these volumes. The management expects 15-20% PAT CAGR over the next 2-3 years.

- Gas sourcing remains a key challenge: Currently, IGL receives 0.24mmscmd of RLNG, 0.3mmscmd from KG-D6 and the rest from APM allocation. The management is working towards entering into long-term contracts for RLNG.

- Network growth: Currently, IGL has 240 CNG stations, of which 200 are operational and the remaining 40 will be operational once government permissions are received. With the Commonwealth Games approaching, permissions for these 40 stations are expected soon. It plans to spend Rs5b per year over the next 2-3 years to expand its network and will be funding it through internal accruals and term loans.

- Bidding for new cities: IGL plans to bid at least for four new cities, which include Jalandhar and Ludhiana.

- New areas of demand: IGL is witnessing demand from industrial entities (e.g. Moser Baer), malls, and residential complexes. They would be typically using gas for CHP (combined heat and power) generators. It has also tied up with water geyser suppliers like Racold and Venus so as to promote the use of gas for water heaters in bathrooms.

- Evolution of CGD network: A new CGD network would typically achieve 10% of the full potential volumes in the first year of operations. Challenges in network development in the new cities include (1) 'Right of Use' approvals, (2) Dealing with local government bodies, and (3) Dealing with municipal authorities for getting permissions for digging roads.

- Triggers: (1) Gas tie-ups for additional volumes, and (2) Ramp-up of industrial volumes in its network.

Valuation and view: We build total volumes of 2.6/3.1mmscmd in FY11/FY12. The stock trades at 15.7x FY12E EPS of Rs20.9. Maintain Neutral, with a DCF-based (WACC of 10.7% and TGR of 2%) price target of Rs285.

Source : Equity Bulls

Keywords