IGL - Update - Sep 14 - HDFC Sec

COMPANY UPDATE 1 SEP 2014
Indraprastha Gas
BUY
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Ready for take-off
IGL faced tough times in FY13-14 led by (1) PNGRBs
decision to cut network tariff & compression charges
by ~60%, matter is sub-judice (2) Shortage of
domestic gas led to rise in RLNG share which resulted
in CNG prices rising by ~60% between Dec 11 (Rs
32/kg) and Dec 13 (Rs 50/kg) (3) No major addition
of new buses by DTC post Commonwealth 2010.
We feel that the worst is behind & there are multiple
triggers ahead for IGL (1) Govts decision of 100%
allocation of cheaper gas to CNG/domestic PNG
(75/5% for IGL) led to fall in their prices by 30/17% in
Feb 14. Now even after the rise in gas price (our base
case is $ 7.2/mmbtu from 4.2), CNG price will be at
~Rs 48/kg, below its previous peak (2) DTC has issued
a tender for ~1.4k CNG busses (currently ~19.5k are
running) (3) Investments in fast growing CGD players.
IGL purchased 50% stake in two CGD companies,
Central UP Gas Ltd (CUGL) and Maharashtra Natural
Gas Ltd (MNGL) for Rs 0.7bn & Rs 1.9bn respectively.
They will have a combined volume of ~0.7 mmscmd
by FY16 and will add ~10% to IGLs consolidated PAT.
Muted volume growth in FY15/16 is a key overhang
for IGL. However, pickup in economic activity, lower
spot LNG prices, clarity on new domestic gas prices
and strong returns from investments will improve
investor confidence. We upgrade IGL to BUY with a
TP of Rs 455/sh (13x dividend adj stand FY16E EPS of
Rs 32.3 and 10x EPS from Investments ie Rs 3.5/sh).
Strong returns from investments
Central UP Gas Ltd : IGL acquired 50% stake at Rs
690mn. CUGL is operating in Kanpur/Bareilly and has
plans to spread across Unnao and Jhansi. Current
volume is ~0.2 mmscmd and FY15E PAT is ~250mn.
Availability of 100% cheaper gas will lead to robust
volume growth. Please refer page 2 for details.
Maharashtra Natural Gas Ltd : IGL acquired 50% stake
at Rs 1.9bn. MNGL is operating in Pune and nearby
areas. Current volume is ~0.4 mmscmd and FY15E PAT
is ~Rs 600mn. Please refer page 2 for details.
Gas price hike not to impact demand : Our base case for
new gas price is US$ 7.2/mmbtu. Revised CNG price will be
~Rs 48/kg which is 44/28% cheaper than petrol/diesel. Spot
LNG prices have corrected from $ 20 to $ 12/mmbtu. Pickup
in industrial activities will lead to sharp rebound in demand.
Regulatory risks : (1) The dispute with PNGRB on reduced
network tariff/compression changes. (2) DDA raised Rs
1.6bn demand on account of rise in licence fee on leased
land. Both the matters are sub-judice.
FINANCIAL SUMMARY
(Rs mn) FY12 FY13 FY14 FY15E FY16E
Net Sales 25,173 33,670 39,222 42,180 49,441
EBITDA 6,331 7,581 7,824 7,930 8,364
APAT 3,064 3,541 3,603 4,225 4,571
EPS (Rs) 21.9 25.3 25.7 30.2 32.6
P/E (x) 17.3 14.9 14.7 12.5 11.6
P/BV (x) 4.3 3.5 3.0 2.5 2.2
RoE (%) 27.4 26.0 22.1 21.9 20.1
Source: Company, HDFC sec Inst Research
INDUSTRY OIL & GAS
CMP (as on 28 Aug 2014) Rs 378
Target Price Rs 455
Nifty 7,954
Sensex 26,638
KEY STOCK DATA
Bloomberg/Reuters IGL IN/IGAS.BO
No. of Shares (mn) 140
MCap (Rs bn) / ($ mn) 53/871
6m avg traded value (Rs mn) 179
STOCK PERFORMANCE (%)
52 Week high / low Rs 394/235
3M 6M 12M
Absolute (%) 20.5 49.1 45.4
Relative (%) 12.0 23.0 (2.6)
SHAREHOLDING PATTERN (%)
Promoters 45.00
FIs & Local MFs 21.72
FIIs 14.92
Public & Others 18.36
Source : BSE

Satish Mishra
satish.mishra@hdfcsec.com
+91-22-6171-7334

INDRAPRASTHA GAS : COMPANY UPDATE

Page | 2

Central UP Gas Ltd (CUGL)
Investment by IGL : Rs 690mn, stake 50%
Other promoters : GAIL 25%, BPCL 25%
Geographical area : Kanpur, Bareilly, Unnao, Jhansi
Gas demand : Kanpur - Current demand is 1.16 mmscmd
(domestic 0.20, commercial 0.05, CNG 0.05, Industrial 0.85)
and is projected to be 2.7 mmscmd by 2020 (source: RGCL
EOI submitted in 2008). Jhansi Current demand is 0.05
mmscmd (source: GAIL Gas EOI submitted in 2008).

SUMMARY
(Rs mn) FY12 FY13P FY14P FY15E FY16E FY17E
Volume
(mmscmd)
0.14 0.16 0.18 0.20 0.23 0.25
YoY Gr (%) 13% 15% 12% 12% 12%
EBITDA 358 378 413 440 468 498
PAT (Rs mn) 211 209 230 243 257 271
PAT Margin
(Rs/scm)
4.2 3.7 3.5 3.3 3.1 2.9
DPS (Rs/sh) 0.00 0.13 0.35 0.45 0.50 0.55
PAT to IGL in
cons (Rs mn)
122 128 136
EPS to IGL in
cons (Rs/sh)
0.9 0.9 1.0
Gross Block 981 1,110 NI

Net Worth 957 1,079 1,284 1,496 1,717 1,950
Total Debt 0.0 0.0 NI

Capital
Employed
1,032 1,182 NI

RoE (%) 21% 20% 18% 16% 15%
Source: Company, HDFC sec Inst Research, NI No information
Maharashtra Natural Gas Ltd (MNGL)
Investment by IGL : Rs 1.9bn, stake 50%
Other promoters : GAIL 22.5%, BPCL 22.5%, State govt
5%
Geographical area : Pune and nearby areas (Pimpri-
Chiechwad, Hinjewadi, Chakan and talegaon)
Gas demand : Current demand is 1.2 mmscmd (domestic
0.17, commercial 0.07, CNG 0.30, Industrial 0.65) and is
projected to be 3.5 mmscmd by 2020 (source: RGCL EOI
submitted in 2008).
SUMMARY
(Rs mn) FY12 FY13P FY14P FY15E FY16E FY17E
Volume
(mmscmd)
0.10 0.15 0.24 0.34 0.42 0.53
YoY Gr (%) 52% 59% 40% 25% 25%
Revenues 860 1,993 NI

PAT (Rs mn) 107 354 519 612 719 800
PAT Margin
(Rs/scm)
2.9 6.4 5.9 5.0 4.7 4.2
DPS (Rs/sh) 0.30 0.80 0.90 1.00 1.20 1.30
PAT to IGL in
cons (Rs mn)
229* 360 400
EPS to IGL in
cons (Rs/sh)
1.6* 2.6 2.9
Gross Block 1,667 NI NI

Net Worth 963 1,228 1,646 2,141 2,720 3,368
Total Debt 464 NI NI

Capital
Employed
1,499 NI NI

RoE (%) 32% 36% 32% 30% 26%
Source: Company, HDFC sec Inst Research, * For three quarters


Page | 3

ASSUMPTIONS (IGL Standalone) VALUATION (Based on FY16)

FY14 FY15E FY16E FY17E
Total Volumes (mmscmd) 3.8 3.9 4.2 4.6
Growth (%) 3.5 3.9 6.3 10.0
CNG 2.8 2.9 3.1 3.4
PNG 1.0 1.0 1.1 1.2
Avg Realisation (Rs/scm) 31.3 32.4 35.6 35.9
CNG (Rs/scm) 31.7 32.8 36.0 36.4
CNG (Rs/kg) 42.1 43.5 47.9
48.4
PNG (Domestic+Industrial)
(Rs/scm)
30.2 31.2 34.4 34.7
Avg Gas Cost (Rs/scm) 18.6 19.6 22.4 22.7
Domestic Gas Price (US$/mmbtu) 4.2 5.7 7.2 7.2
LNG Price (US$/mmbtu) 14.0 15.0 15.5 16.0
INR-US$ 60.5 60.0 60.0 60.0

Based on FY16E
IGL Standalone EPS (Rs/sh) 32.6
Dividend from associates (Rs mn) 75
EPS from Dividend (Rs /sh) 0.4
IGL Standalone Adj EPS (Rs/sh) 32.3
Target Multiple (x) 13.0
IGL Standalone Fair Price (Rs/sh) 420
EPS from CUGL to IGL (Rs/sh) 0.9
EPS from MNGL to IGL (Rs/sh) 2.6
EPS from CUGL + MNGL (Rs/sh) 3.5
Multiple 10.0
CUGL + MNGL Fair Price (Rs/sh) 35
Final SOTP Target Price (Rs/sh) 455


Gas Volumes to pickup
1.3
1.5
1.8
2.1
2.7
3.3
3.7
3.8
3.9
4.2
4.6
0%
5%
10%
15%
20%
25%
30%
-
1.0
2.0
3.0
4.0
5.0
F
Y
0
7
F
Y
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8
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9
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0
F
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1
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1
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E
F
Y
1
6
E
F
Y
1
7
E
CNG Vol (mmscmd) PNG Vol (mmscmd)
Total Vol (mmscmd) Growth RHS (%)

Margins to remain stable


-
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
F
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0
7
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F
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1
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E
F
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1
7
E
Gross Margin (Rs/scm) EBITDA Margin (Rs/scm)
Rs/scm


Page | 4
STANDALONE INCOME STATEMENT
Revenues 25,173 33,670 39,222 42,180 49,441
Growth (%) 44.2 33.8 16.5 7.5 17.2
Material Expenses 15,392 21,970 26,813 29,218 35,555
Employee Expenses 437 567 596 643 695
Other Operating Expenses 3,013 3,551 3,990 4,388 4,827
EBIDTA 6,331 7,581 7,824 7,930 8,364
EBIDTA Margin (%) 25.1 22.5 19.9 18.8 16.9
Growth (%) 28.1 19.8 3.2 1.4 5.5
Other Income 81 129 211 269 338
Depreciation 1,432 1,867 2,195 1,532 1,628
EBIT 4,980 5,844 5,839 6,668 7,074
Interest 479 562 441 362 252
PBT 4,501 5,282 5,398 6,305 6,822
Tax 1,437 1,741 1,795 2,081 2,251
PAT 3,064 3,541 3,603 4,225 4,571
Minority Interest/EO - - - - -
APAT 3,064 3,541 3,603 4,225 4,571
Growth (%) 17.0 15.6 1.7 17.3 8.2
EPS 21.9 25.3 25.7 30.2 32.6
Growth (%) 17.0 15.6 1.7 17.3 8.2

STANDALONE BALANCE SHEET
SOURCES OF FUNDS

Share Capital 1,400 1,400 1,400 1,400 1,400
Reserves 10,889 13,530 16,232 19,555 23,143
Total Shareholders Funds 12,289 14,930 17,632 20,955 24,543
Long Term Debt 3,375 3,031 2,875 2,075 1,275
Short Term Debt 515 460 337 287 237
Total Debt 3,890 3,491 3,212 2,362 1,512
Deferred Taxes 627 843 963 963 963
Long Term Provisions & Others 54 80 81 81 81
TOTAL SOURCES OF FUNDS 16,861 19,345 21,888 24,362 27,100
APPLICATION OF FUNDS

Net Block 15,796 18,474 18,953 20,421 21,792
CWIP 3,751 2,913 2,623 2,123 1,623
LT Investments - - 692 2,592 2,592
LT Loans & Advances 54 58 110 110 110
Inventories 374 397 371 399 468
Debtors 1,298 1,789 2,196 2,362 2,768
Cash & Equivalents 1,304 1,936 2,996 2,550 4,290
ST Loans & Advances, Others 651 715 581 581 581
Total Current Assets 3,626 4,836 6,143 5,891 8,107
Creditors 1,793 2,115 1,887 2,029 2,379
Other Current Liabilities 3,759 3,916 3,825 3,825 3,825
Provisions 816 905 920 920 920
Total Current Liabilities 6,367 6,936 6,632 6,774 7,124
Net Current Assets (2,740) (2,100) (489) (884) 983
TOTAL APPLICATION OF FUNDS 16,861 19,345 21,888 24,362 27,100


Page | 5
STANDALONE CASH FLOW
Reported PAT 3,064 3,541 3,603 4,225 4,571
Non-operating & EO items 55 86 141 181 227
PAT from Operations 3,009 3,455 3,462 4,044 4,344
Interest expenses 479 562 441 362 252
Depreciation 1,432 1,867 2,195 1,532 1,628
Working Capital Change 1,952 199 (611) (51) (126)
OPERATING CASH FLOW ( a ) 6,872 6,082 5,488 5,887 6,098
Capex (5,991) (3,676) (2,256) (2,500) (2,500)
Free cash flow (FCF) 880 2,406 3,232 3,387 3,598
Investments 0 0 (692) (1,900) 0
Other Income 55 86 141 181 227
INVESTING CASH FLOW ( b ) (5,936) (3,590) (2,807) (4,219) (2,273)
Debt Issuance 1,072 (399) (279) (850) (850)
Interest expenses (479) (562) (441) (362) (252)
FCFE 1,473 1,445 2,512 2,175 2,497
Share capital Issuance 0 0 0 0 0
Dividend (814) (901) (901) (901) (983)
FINANCING CASH FLOW ( c ) (221) (1,862) (1,621) (2,113) (2,085)
NET CASH FLOW (a+b+c) 715 631 1,060 (446) 1,741
Closing Cash & Equivalents 1,304 1,935 2,996 2,550 4,290

STANDALONE KEY RATIOS

FY12 FY13 FY14 FY15E FY16E
PROFITABILITY (%)
GPM 38.9 34.7 31.6 30.7 28.1
GPM (Rs/scm) 8.0 8.7 9.0 9.0 9.1
EBITDA Margin 25.1 22.5 19.9 18.8 16.9
EBITDA Margin (Rs/scm) 5.2 5.7 5.7 5.5 5.5
EBIT Margin 19.8 17.4 14.9 15.8 14.3
APAT Margin 12.2 10.5 9.2 10.0 9.2
RoE 27.4 26.0 22.1 21.9 20.1
RoCE 21.6 21.6 18.9 19.3 18.4
Core RoCE 22.7 23.2 21.1 22.9 22.9
EFFICIENCY

Tax Rate (%) 31.9 33.0 33.3 33.0 33.0
Asset Turnover (x) 1.6 1.9 1.9 1.8 1.9
Inventory (days) 5 4 3 3 3
Debtors (days) 19 19 20 20 20
Payables (days) 26 23 18 18 18
Cash Conversion Cycle (days) (2) 1 6 6 6
Debt/EBITDA (x) 0.4 0.2 0.0 (0.0) (0.3)
Net D/E 0.2 0.1 0.0 (0.0) (0.1)
Interest Coverage 10.4 10.4 13.2 18.4 28.1
PER SHARE DATA

EPS (Rs/sh) 21.9 25.3 25.7 30.2 32.6
CEPS (Rs/sh) 32.1 38.6 41.4 41.1 44.3
DPS (Rs/sh) 5.0 5.0 5.5 5.5 5.5
BV (Rs/sh) 87.8 106.6 125.9 149.7 175.3
VALUATION
P/E (x) 17.3 14.9 14.7 12.5 11.6
P/Cash EPS (x) 11.8 9.8 9.1 9.2 8.5
P/BV (x) 4.3 3.5 3.0 2.5 2.2
EV/EBITDA (x) 8.0 6.8 6.7 6.7 6.7
EV/Revenue (x) 2.0 1.5 1.3 1.3 1.1
OCF/EV (%) 13.7 11.8 10.4 11.1 10.9
FCFF/EV (%) 1.7 4.7 6.1 6.4 6.5
FCFE/ M CAP (%) 2.8 2.7 4.7 4.1 4.7
Dividend Yield (%) 1.3 1.3 1.5 1.5 1.5


Page | 6

RECOMMENDATION HISTORY
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Unit No. 1602, 16th Floor, Tower A, Peninsula Business Park, Senapati Bapat Marg, Lower Parel,
Mumbai - 400 013
Board : +91-22-6171 7330
www.hdfcsec.com
Rating Definitions
BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period
NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

Date CMP Reco Target
10-Oct-13 282 NEU 289
7-Nov-13 287 NEU 290
11-Jul-14 360 NEU 380
5-Aug-14 385 NEU 380
1-Sep-14 378 BUY 455

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COMPANY UPDATE 1 SEP 2014

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