Indraprastha Gas Limited- SWOT Analysis

Indraprastha Gas Ltd ACMIIL 1

C O M P A N Y R E P O R TAn ISO 9001:2008 Certified Company

INVESTMENT INTERRMEDIATES LTD.

1

Indraprastha Gas Ltd (IGL) is in the City Gas Distribution (CGD) business supplying compressed natural gas (CNG) to the transport Sector and piped natural gas (PNG) to domestic and commercial sectors in the National Capital Territory (NCT) region of Delhi. It has a CNG compression capacity of 3.52mn Kg per day and fuels more than 400,000 vehicles daily. In the PNG segment, IGL provides natural gas to over 210,000 domestic and 300 commercial customers. It also supplies re-gasified liquid natural gas (R-LNG) to 58 industrial consumers. We initiate our coverage on IGL with a “Buy” recommendation and a price target of ` 357.

Investment RationaleRobust demand for CNG in Delhi and NCR, a major boost for IGL:Delhi Government introduced 2,000 new buses & ~20,000 new radio taxis during the Common Wealth games. In addition, introduction of CNG models by car manufacturers along with conversion to CNG by private car owners provides significant opportunity for the company. In line IGL has consistently increased the number of CNG stations from 181 in FY09 to 241 stations by the end of FY10 and it plans to further strengthen its CNG stations count to 281 by the end of FY11. Compression capacity will also increase to over 3.9mn Kg per day (addition of 11% over the current level of 3.52mn kg per day) by FY13E.PNG, the next growth driver:There are more than 4.5mn domestic LPG connections in the NCT region alone. However, some users may have multiple connections in cities. Assuming on an average there are 1.5 connections per user, the consumer segment would be more than 3 million households. If we assume 50% of these consumers opt for PNG connection (as PNG is priced at 22% lower to LPG), IGL would have a target consumer base of 1.5 mn households compared to 210,000 consumers as on date. As, IGL is targeting these consumers; we expect, total PNG volumes to grow from 87 million metric standard cubic meters (MMSCM) in FY10 to 173.76 MMSCM in FY13E (at a CAGR of 26%). PNG sales are estimated to grow from ` 1,436 Mn in FY10 to ` 3,639 Mn in FY13 (at a CAGR of 36%). Strengthening of Infrastructure to cater growing consumer base:IGL is in midst of a large-scale expansion to augment its PNG infrastructure in existing areas as well as in new areas in Delhi. IGL plans to spend around ` 30,000 Mn over a period of 5 years to augment its infrastructure. The Company plans to provide new PNG connection to over 60,000 domestic households every year in Delhi as well as NCR towns of Noida, Greater Noida and Ghaziabad.Entry barriers to limit competition:IGL operated as a monopoly gas distributor in the city of Delhi for past 8 years. Based on the new regulations by the PNGRB, the Delhi City gas distribution market will open up to competition after December 2011. Although IGL’s marketing exclusivity will end, it will retain exclusivity as ‘city gas carrier’ in Delhi till FY25. IGL would charge a network tariff of 14% for permitting other entrants for using its network. The new players can only develop pipeline infrastructure in areas where IGL does not have any presence.

Valuation & OutlookWe initiate our coverage on IGL with a “BUY” recommendation with a price target of ` 357 based on DCF methodology, which is a 19% upside from the current price level. Our EPS estimate of ` 21.0 and ` 22.7 for FY12E and FY13E respectively, imply earnings CAGR of 14% over FY10-13E. At current level of ` 299, the stock is trading at 14x and 12.97x FY2012E and FY2013E Earnings respectively.

Indraprastha Gas Limited

AnalystChampak [email protected]: (022) 2858 3412

28 Mar, 2011

B U Y

Key Data (`)

CMP 299

Target Price 357

Key Data

Bloomberg Code IGL IN

Reuters Code IGAS.BO

BSE Code 532514

NSE Code IGL

Face Value (`) 10

Market Cap. (` Bn) 41.9

52 Week High (`) 374

52 Week Low (`) 209

Avg. Daily Volume (6m) 336945

Beta (Sensex) 0.7

Shareholding Pattern (%)

Promoters 45

Mutual Funds / UTI / Banks 14.12

Foreign Institutional Investors 17.18

Bodies Corporate 4.47

Individuals 10.12

Other 9.11

Total 100.0

(` mn) FY11E FY12E FY13E

Revenues 17,151.7 22,894.7 28,936.0

Operating Profit 4,968.2 6,345.2 7,116.6

OPM 29.0% 27.7% 24.6%

PAT 2,527.9 3,041.0 3,180.6

PAT Margin 14.7% 13.3% 11.0%

EPS (`) 18.1 21.7 22.7




1

Company Background

IGL is in the retail gas distribution business supplying compressed natural gas (CNG) to the transport sector and piped natural gas (PNG) to domestic and commercial sectors in the National Capital Territory (NCT) region of Delhi. IGL was incorporated in December 1998 as a joint venture (JV) between two oil & gas majors - GAIL and BPCL, each holding 22.5% stake and government of NCT of Delhi (5% stake) to implement the city gas distribution (CGD) project in NCT. IGL has 241 CNG stations in Delhi and NCR as on FY10. IGL is now expanding its network into NCR cities of Noida, Greater Noida, Ghaziabad and Sonipat and plans to cover whole Delhi by end of CY2011.

Business Model

Indraprastha Gas Ltd. (IGL) is a pioneer in commercialising the use of Compressed Natural Gas (CNG) for automotive sector and exists as sole supplier and marketer of CNG to all segments of automotive sector in the National Capital Territory (NCT) of Delhi. It also, supplies Piped Natural Gas (PNG) to domestic and commercial sectors and R-LNG (Re-Gasified Liquefied Natural Gas) to industrial consumers in the NCT of Delhi.

Net Sales Mix

Selling prices in both the segments are currently determined vis-a-vis the relative prices of alternative fuels like Petrol, Diesel and LPG. CNG is priced at a discount to petrol and diesel prices. While in the PNG segment, domestic users are priced at a discount to domestic LPG prices; industrial users are priced at a discount to Naphtha prices.

Selling prices in both the segments are currently

determined vis-a-vis the relative prices of alternative fuels

IGL

PNG

Domestic Industrial/Commercial

CNG

Net Sales Mix

CNG Sales PNG Sales

FY09 FY10 FY11E FY12E FY13E0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

88.35%

11.65%

86.26% 85.94% 85.23%

13.74% 14.06% 14.77%

83.70%

16.30%

Source: IGL, ACMIIL Research




1

Sourcing of Gas: GAIL the sole supplier

On the gas-sourcing front, which is an important aspect of the CGD business, IGL has a supply agreement with GAIL. GAIL is the sole supplier of Administrative Price Mechanism (APM) natural gas to the company. IGL has signed a Gas Purchase Agreement for 2.0 MMSCMD (1.9 MMSCMD for CNG and 0.1 MMSCMD for PNG) with GAIL, which was valid till CY2010 and extendable on mutually agreed terms.

Gas source for IGL

Suppliers Region Contracted Supply (MMSCMD)

GAIL NCT of Delhi 2

GAIL Noida, Greater Noida 0.2

GAIL Faridabad 0.25

GAIL Gurgaon 0.25

RIL - 0.15

BPCL - 0.24


IGL has further been allocated 0.7 MMSCMD of natural gas by the Ministry of Petroleum and Natural Gas (MoPNG) to expand in NCR cities. Gas is received at various points of the Hazira-Bijaipur- Jagdishpur (HBJ) pipeline around Delhi. As the gas cost is denominated in Rupee terms, IGL is insulated from exchange risks. The gas is currently available at subsidized prices, which is called APM prices. However, as per the gas pricing order, APM prices are to be revised upwards by 20% p.a. for four years to align it with market determined prices.

IGL’s Gas Source Pipeline Structure

IGL’s Pricing strategy in CNG and PNG segment

The selling price of CNG /PNG is determined by adding network charges and marketing margin to the cost of natural gas. Government does not interfere in fixing the selling price. The gas regulator Petroleum and Natural Gas Regulatory Board (PNGRB) has capped the return rate on the pipeline network operation at 14% of capital employed on a pre-tax basis.

Relatively secured gas supply to meet demand

Source: IGL




1

CNG Pricing details as on February 2011

Particulars Unit Delhi

Gas Cost (A) `/Kg 12.95

Network charges (B) `/Kg 4.6

Compression Charges (C) `/Kg 6.66

Corporate Tax (D) `/Kg 0.23

Marketing Margin (E=F-A-B-C-D) `/Kg 0.85

Selling Price (F) `/Kg 25.29

Excise 14.42% `/Kg 3.66

Consumer Price (charged to customers) `/Kg 29.00


(Note: Refer Annexure-1 for details on Network charges and Compression charges)

Similarly, in the domestic PNG segment the price is indexed to the administered retail selling price of domestic LPG (14.2 Kg) cylinder in the NCT. In the small commercial users segment, PNG is indexed to commercial LPG (19 Kg) cylinder in the NCT of Delhi, taking into account the respective heating values of natural gas and LPG. Large commercial users are the PNG users replacing Light Diesel Oil (LDO) and commercial LPG. Thus, price in the segment is indexed to weighted average price of LDO and commercial LPG in the NCT taking into account the respective heating values of natural gas, LPG and LDO.

Segmental Opportunity

a. CNG

The ruling of the Honorable Supreme Court in July 1998, which directed conversion of the city’s entire bus fleet to CNG, primarily resulted in increase in CNG vehicles in Delhi in the past decade. Apart from buses, all pre-1990 auto-rickshaws were also to be replaced with new auto-rickshaws and all post-1990 auto-rickshaws and taxis were to be converted with CNG kits. The Government of NCT of Delhi in July 2009 has directed all Light Commercial Vehicles (LCVs) operating in Delhi to convert to CNG mode. This would increase the conversion of existing fleet of LCVs to CNG mode. The increase of CNG variant models by car manufacturers would also increase the number of CNG vehicles, going forward.

Analysis of cost recovery of CNG Kit

Bus 4 Wheeler 3 Wheeler

Cost of Kit (`) 175,000 40,000 25,000

CNG Price per kg (`) 29 29 29

Mileage per kg (Km) 4.5 23 35

Cost per Km (`) 6.2 1.2 0.8

Other Fuel price (Bus - Diesel, 4-3 wheeler - Petrol) (`/ litre) 42 61 61

Mileage (Km per litre) 3.5 14 25

Other Fuel Cost per Km (`) 12 4.4 2.4

Saving per Km (`) 5.8 3.1 1.6

Daily Average travel (Km) 80 50 60

Yearly travel assuming 300 days of travel (Km) 24,000 15,000 18,000

Yearly Savings (`) 138,667 47,096 29,520

Payback Period (Months) 15.1 10.2 10.2

Breakeven (in Km) 30,288 12,740 15,244

Source: Industry, ACMIIL Research

Initial phase of conversion was driven by mandatory sources, current conversions driven by

discretionary users




1

There are approximately 3.0mn cars in the NCT and NCR regions combined together. Assuming 50% of these cars are in the NCT regions, the target market would comprise 1.5mn cars. Management has stated that only petrol cars can be expected to convert to CNG. Thus, assuming 70% (Source: Crisil) of the total cars use petrol as the fuel, the target market would be 1.05mn car. Assuming 90% (Source: Crisil) of these cars are small and mid size cars, the effective target market would be at least 0.9mn car, which are the potential consumers of CNG. We believe superior economics of CNG over petrol provides significant growth opportunity in the segment. And hence, there exists huge opportunity for CNG segment.

b. PNG

The PNG segment contributes a mere 13.74% to IGL’s Net Sales Revenue (as of FY10). In the last five years, the number of PNG users has increased at a CAGR of 48% due to the low base effect. However, growth potential in the segment is still immense, as there is a huge target market ready to be exploited in and around Delhi. There are more than 4.5mn domestic LPG connections in the NCT region alone. However, many users usually have multiple cylinders in cities. Assuming on an average there are 1.5 cylinders per user, the consumer segment would be more than 3mn households. If we assume 50% of these consumers opt for PNG connection, IGL has a target consumer base of 1.5 mn households. When compared with the current number of domestic PNG users (approx. 210,000 as on 31st Dec, 2010), the growth potential becomes apparent.

Vehicle growth vis-à-vis CNG stations

No of CNG StationNo of Vehicle

NO

.ofV

echi

cles

NO

.ofC

NG

stat

ions

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY100

50000

100000

150000

200000

250000

300000

350000

0

50

100

150

200

250

300

107120

134146 153

163

181

241


Domestic PNG V/s Industrial PNG consumers

Industrial/Commercial PNGDomestic PNG

NO

.ofD

omes

ticCo

nsum

er

NO

.of I

ndus

tria

l Con

sum

er

FY100

50000

100000

150000

200000

FY03 FY04 FY05 FY06 FY07 FY08 FY090

80

160

240

320

400

317

355

118

83

174

256

296 304


Higher price of Petrol and diesel to increase CNG conversion- Major

driver for CNG demand is cost savings

PNG penetration of just 3.5% in Delhi offers huge potential for

growth in the years ahead




1

c. Industrial/ Commercial Segment:

Unlike peer Gujarat Gas, IGL has negligible share in the Industrial segment. Nonetheless, opportunity in the segment remains substantial as Delhi and its adjoining areas have demand of around 3-4 MMSCMD. However, to tap the same IGL would have to depend on the upcoming gas linkages for which it has already tied up with GAIL and BPCL for meeting the demand of this segment.

CNG Supply Infrastructure

IGL commenced supplying gas from a network of 60 CNG stations, which has increased the total CNG supply stations to 241 stations as on 31st Mar 2010. IGL receives gas through its own network of steel pipelines from GAIL at various points in NCT of Delhi, which is then transported to its own CNG stations (Mother/Online). Other stations (Daughter/Daughter Booster) receive gas form Mother Stations through Mobile Cascades, as they are not connected to the pipeline (Refer Annexure-2 for details on Terminology).

CNG Station as on 31/3/10

Mother Station 145

Online Station 48

Daughter booster 46

Daughter stations 2

Total 241


SWOT Analysis of IGL

Strengths:

● The Company has been given marketing exclusivity in NCT of Delhi for three years w.e.f.

January 1, 2009.

● As per the Petroleum and Natural Gas Regulatory Board (PNGRB) regulations, IGL has

network exclusivity up to December 2025 in the NCT area.

● Supply is secured as the company has been allocated 2.7mmscmd of regular supply

● IGL has continuously adopted the latest technology as a result of which the quality of

its products has also improved.

● Lower debt in the books along with healthy return ratios gives confidence in the company’s

ability to raise debt for future expansion

Opportunities:

● CNG is replacing traditional fuels like petrol & diesel. CNG is about

62% cheaper than Petrol and about 40% cheaper than diesel.

● Introduction of Radio Taxis and high capacity buses running on CNG

in Delhi along with increase in number of CNG variant models by car

manufacturers presents a significant opportunity for the company

● Shift towards usage of PNG by industrial and commercial segment.

Weaknesses:

● Future expansion activities would be dependent on ability to secure additional gas supplies

Threats:

● Competition from other players is possible after December 2011 as

the companies marketing exclusivity is valid till December 2011 only.

● Alternative modes of transport like metro rail posses a threat.




1

Investment Rationale

Robust demand for CNG in Delhi and NCR, a major boost for IGL

There are currently over 4mn-registered vehicles in Delhi. Another 1mn vehicle enter the city from NCR on a daily basis. The population of CNG driven government buses grew at CAGR of ~10% over last 3 years as government of Delhi is adding new buses every year. The demand from private cars, taxis and 3 wheelers is growing at more than ~20% because of the new conversions and registrations of vehicles. Currently, almost 5,000 cars are being converted per month to run on CNG and we expect this car conversion rate to increase as petrol and diesel prices continue to rise further due to rising crude prices.

IGL consistently increased the number of CNG stations from 181 in FY09 to 241stations by the end of FY10 and it plans to further strengthen its CNG stations count to 281 by the end of FY11. To develop the CNG infrastructure, IGL has already incurred a capital expenditure of ` 2,750 million in the current fiscal year and is expected to incur ` 550 million more on developing the CNG infrastructure by the end of this financial year.

With leading car manufactures in the country planning to launch CNG based car variants in the near future, the demand for CNG would increase as well.

Growth of CNG volume against Vehicle Growth

CNG volume (mkg)No. of Vehicles

No.

ofVe

hicl

es

mkG

0

100000

200000

300000

400000

500000

600000

0.00

200.00

400.00

600.00

800.00

1000.00

2009 2010 2011E 2012E 2013E

840.40

744.22

648.03

461.83

530.53


IGL’s Total CNG Requirement

Delhi NCR Total

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2009-10 2010-11 2011-12 2012-13 2013-14

mm

scm

d


In the CNG segment, private cars are expected to be major growth drivers with regulatory

conversions over




1

Passenger car models in CNG

Company Models available in CNG

Maruti Alto, Eeco, SX4, Wagon R, Zen Estilo

Fiat Punto (2011)

Toyota Innova, Corolla, Corolla Altis

Mahindra Logan

Chevrolet Spark, Beat

Tata Indigo GLS, Indica

Hyundai Accent, Santro

Source: SIAM, CRISIL, and ACMIIL Research

CNG as a fuel still remains by far the cheapest compared to petrol and diesel. Though IGL has significantly raised prices of CNG in FY11 on account of the revision in the prices of APM gas, the economics of using CNG still remains favorable.

Fuel Cost Comparison per km

Petrol Diesel CNG

Cost (petrol & diesel - ` per litre, CNG - ` per kg) 61 42 29

Mileage (Km) 12 15 18

Cost per Km (`) 5.1 2.8 1.6

Savings Percentage 68.3% 42.5% -

Source: Industry, ACMIIL Research

Backed by the robust demand for CNG, we expect CNG volumes to increase from 695 MMSCM in FY10 to 1100 MMSCM in FY13 at a CAGR of 18%. Revenue from CNG segment is expected to increase from ̀ 9,345 million in FY10 to ̀ 25,296 million in FY13 at a CAGR of 39%.

IGL has also been continuously increasing its CNG compression capacity to keep up with the rising demand. As of FY10, IGL’s compression capacity stands at over 3.52mn Kg per day. We remain confident that IGL will augment the CNG compression capacity as and when the need arises.

PNG, The next growth driverIGL is expanding aggressively in PNG segment on the back of huge potential opportunity as the PNG penetration level in Delhi stands at 3.5%. Currently, LPG is sold at a subsidized rate by OMCs (Oil Marketing Companies) through bulk cylinders, which has to be booked in advance. We expect the fuel economics to further increase in future as it is expected that the government may increase the price of LPG once the inflation is in check, which would lead to an increase in demand for PNG.

CNG compression capacity

No. of CNG StationsCompression Capacity (Mn Kg/day) CNG Sale (Daily Average) (Mn Kg/day)

Mill

ion

kgpe

rday

No.

ofCN

Gst

atio

n

FY05 FY06 FY07 FY08 FY09 FY10

0

1

2

3

4

0

100

200

300

241

181

163153146

134


CNG offers 68% cost advantage as compared to petrol-driven

vehicles and 42% as compared to diesel-driven vehicles

Compression capacity to increase from 3.52 mn kg to 3.9 mn kg by

FY13E




1

Cost Comparison: PNG V/s LPG

Cost of the domestic LPG Cylinder of 14.2 Kg (`) 346

Cost per Kg of LPG (`) 24.4

IGL’s PNG Selling price per kg (`) 18.9

Price advantage over LPG (`) 5.5

Price advantage over LPG (%) 22.0%

Source: ACMIIL Research

Further the consumer has to pay an interest free refundable deposit of ` 6,000 per connection of PNG, which can be utilized by IGL to fund its cap-ex in expanding its pipeline network. We believe the value propositions for consumer are extremely lucrative to switching to PNG and to IGL it provides a constant stream of revenue thus improving the earning quality of the company. Thus, we expect the PNG volume to grow from 87 MMSCM in FY10 to 173.76 MMSCM by FY13E at a CAGR of 26%.

We expect, contribution of PNG segment towards the volume and revenue mix would increase to ~17% and ~18% respectively by FY13E from ~11% and ~12% in FY10.

Though, PNG forms a relatively small proportion of revenue, we believe sales are ensured in the PNG business for many years. This is because there is no alternate fuel in this case other than LPG (whose price is expected to increase in coming years). Also even if there is competition (which would arise after Jan, 2012), a pipeline for PNG, once connected to a home is quite difficult to replace. IGL has already covered 70 charge areas in Delhi (out of 77 charge areas) and will cover the remaining charge areas by mid of 2011.

Growth of PNG volume against PNG connection

PNG

Conn

ectio

n

MM

SCM

(Vol

ume)

PNG VolumePNG connection

0

50000

100000

150000

200000

250000

300000

350000

400000

0.00

20.00

40.00

60.00

80.00

100.00

120.00

140.00

160.00

180.00

200.00

2009 2010 2011E 2012E 2013E

54.00

87.00

173.76

144.96

116.16


PNG Requirement in Delhi

Domestic Industrial/Commercial

MM

SCM

D

0

0.1

0.2

0.3

0.4

0.5

FY10 FY11E FY12E FY13E FY14E

MM

SCM

D

Industrial/CommercialDomestic

0

0.2

0.4

0.6

0.8

1

1.2

1.4

FY10 FY11E FY12E FY13E FY14E

PNG Requirement in NCR

Huge potential in PNG segment as PNG offers better safety and

convenience vs LPG




1

Although PNG for domestic households is a low margin segment, IGL leveraged on the huge pipeline network laid for expanding the CNG pipeline infrastructure in Delhi, which in a way cross-subsidized the expenditure on PNG infrastructure. We expect, IGL would add ~60,000 domestic household customers each in FY2011, FY2012 and FY2013, which would take the total count of domestic household customers from 182,000 in FY10 to 362,000 in FY13E at a CAGR of 30%.

Increasing PNG Volumes from Industrial Segment to Boost Margins

With the infrastructure in place, IGL expects to add 180-220 commercial/industrial customers by FY13E. We estimate that the demand from commercial/industrial segment will grow from 44.1 MMSCM in FY10 to 87.2 MMSCM in FY13E at a CAGR of 36%. PNG sales are estimated to grow from ̀ 1,436 Mn in FY10 to ̀ 3,639 Mn in FY13 (at a CAGR of 36%) at the same time.

IGL’s realization should get a boost from increasing contribution from the commercial/industrial sector, which contributes 50% of PNG volumes. These consumers are relatively high margin players as compared to domestic household consumers. The current realization for commercial/industrial consumers stands at ̀ 26 compared to ̀ 18.95 charged from domestic household consumers. This would give IGL the leeway to pass on the increasing cost of gas without much difficulty.

PNG Customer Break-up (in nos.)

Category FY10 FY11E FY12E FY13E

Domestic Households 182,286 242,000 302,000 342,000

Commercial/Industrial 355 455 515 575


Strengthening of Infrastructure base to cater to a growing customer baseIGL is in midst of large-scale expansion to augment its PNG infrastructure in existing areas as well as in new areas in Delhi. The expected cap-ex outlay plan of IGL is pegged at around ` 30,000 Mn over a period of 5 years with benefits accruing over a period of time. IGL plans to incur a total capital expenditure of ` 6,500 Mn in FY11, ` 6,000 Mn in FY12 and ` 6,000 Mn in FY13 with approximately 50% to be incurred annually on developing and expanding its CNG business and the rest on PNG infrastructure in Delhi as well as NCR towns of Noida, Greater Noida and Ghaziabad. These ambitious plans would further cement its monopolist position to deter further entrants, post its expiry of exclusive marketing agreement in January 2012. The company plans to add 40 CNG stations each over next two years with 34 stations in Delhi alone and 2 each in the remaining areas. On an average, for IGL the set-up cost for a CNG station is ` 80-100 Mn (Company owned company operated).

Segmental Performance (PNG)

PNG Volume (MMSCM)PNG Segment Sales Contribution ( Mn)`

0

500

1000

1500

2000

2500

3000

3500

4000

2009 2010 2011E 2012E 2013E0

20

40

60

80

100

120

140

160

180

200

` Mn

MM

SCM

116.16

144.96

173.76

87.00

54.00


Favorable mix should enhance overall PNG realization

Aggressive expansion plans to sustain growth momentum




1

Currently, IGL has 400 Km of steel pipeline network and 2,300 Km of MDPE (Medium Density Polyethylene) network. In FY12 and FY13, IGL plans to extend its steel pipeline network by 200 Km and MDPE pipeline network by 1,500 Km.

Historically IGL has been able to fund its capital expenditure through internal accruals. However, going forward, the company would have to raise debt to fund its huge cap-ex requirement. As of December 2010, IGL has a debt of ` 2,500 Mn on its books and we expect IGL to end FY11 with a debt of around ` 3,000 Mn.

Entry barriers to limit competition

IGL operated as a monopoly gas distributor in the city of Delhi for past 8 years. Based on the new regulations by the PNGRB, the Delhi City gas distribution market will open up to competition after December 2011. Although IGL’s marketing exclusivity will end, it will retain exclusivity as ‘city gas carrier’ in Delhi till FY25. IGL would charge a network tariff of 14% of total gas sales for permitting other entrants for using its network, which covers IGL’s expenses for setting up the network, thus, is a potential source of revenue. The new players can only develop pipeline infrastructure in areas where IGL does not have any presence.

We believe the competition will look to enter the CNG market because it is relatively easier to set up fueling stations and snatch some of the incremental CNG demand from IGL. However, IGL’s PNG customers will be difficult to switch and a growing share of PNG business will provide a cushion to IGL compared to some potential loss in CNG segment if any.

Economics for CNG Station for company owned company operated model

IGL New Entrants

Cap-ex (` Mn For 1 CNG Station) 100 180

EBIT at 20% ROCE (` Mn) 20 36

(+) Depreciation (` Mn) 8.8 18

(+) Cost of Gas (` Mn) 36.5 41.9

(+) Operating Costs (` Mn) 15 20

Sales (` Mn) 87 120

Sales (Mn Kg/yr) 3 3

Required Selling price (`/Kg) 29 40

Source: Company, ACMIIL Research

Long term contracts with major customers remains a big positive for IGL. In CNG business, DTC (Delhi Transport Corporation) is the major customer of IGL contributing about 20% to its total sales. IGL has entered into a long-term contract

Planned Capacity addition

0

1000

2000

3000

4000

5000

6000

7000

8000

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

FY08 FY09 FY10 FY11E FY12E FY13E

Volume Growth (%)Capex ( Mn)` Operational Cash Flow ( Mn)`

` Mn

12.0%20.0%

18.7%

23.4%

26.5%

30.9%


Plans to cover all charge areas to prevent competition in Delhi

No threat from expiry of exclusivity in Delhi market as an

exclusive carrier IGL will earn fee income for carrying volume of its

competitor

Long Term Tie Ups with major customers




1

with DTC, whereby for next 10 years IGL would be the exclusive supplier of CNG for the entire fleet of DTC buses. IGL is also in the final stages of negotiation with various oil-marketing companies (OMCs) to strike long-term exclusive agreements as 16% of sales accrue from supply to the outlets of OMCs.

Ability to pass on cost

IGL has demonstrated its ability to pass on the escalation in cost to its customer. Recently Government has raised the APM gas prices from $1.8 to $4.2/mmbtu. IGL has implemented the following prices hikes in the recent past. We expect IGL to increase the CNG prices further by ` 4-5 in FY12E.

CNG Price Hikes in Delhi (`/ Kg)

Month Old price New price Reason

Mar-10 21.20 21.90 Due to rise in input costs

Jun-10 21.90 27.50 Increase in APM prices from $1.79 to $4.2 per MMBTU

Oct-10 27.50 27.75 In light of Exchange Volatility

Jan-11 27.75 29.00 To pass on the incremental price of high cost R-LNG


IGL also raised price of PNG in Delhi by ` 2.10 per SCM for domestic households, which is a very price sensitive segment with a view to protect its margin. The new consumer price of PNG to households in Delhi has been raised to ` 18.95 per SCM from ` 16.85 per SCM for consumption up to 90 SCM in four months. Beyond 90 SCM of consumption in four months, the applicable rate in Delhi would be ` 26 per SCM. We expect the PNG prices to increase supported by pending deregulation of LPG prices. However we have not factored the same in our projections.

Gas Supply – Secured but needs more through R-LNG

IGL buys gas from 2 state owned companies- GAIL, and BPCL on long-term contracts (up to 2.7 MMSCMD) and 0.15 MMSCMD gas from RIL (KG-D6). To cater to the incremental demand, IGL has to increasingly depend on R-LNG to meet its gas requirements going forward. IGL would get first preference over any new player if the government increases the allocation of APM or KG-D6 gas in Delhi. However, cost of R-LNG is expensive compared to APM gas (by over 50%), which would put pressure on the blended cost of gas for IGL.

Gas source for Commercial/Industrial consumers

Type Producer/Supplier Quantity (SCMD) Remarks

R-LNG BPCL 25,000 Supply ongoing

R-LNG Siti Energy 10,000 Supply ongoing

R-LNG GAIL (India) Ltd. 300,000 Letter of Intent signed

KG Basin D-6 Reliance (Through

MOP&NG)

360,000 Demand raised to MOP&NG for domestic/CNG/

Commercial/Industrial Consumers


It has consistently raised the prices to maintain its spread. However, the scenario would change as the dependence on R-LNG increases in future. Though the spread would fall, we expect it to remain healthier at ` 5 per Standard Cubic Meter (` 6.6 per Kg).

Demonstrated consistent price hikes

IGL will buy gas from LNG market to meet its expanded capacity




1

Spread performance is healthy

Particulars FY09 FY10 FY11E FY12E FY13E

APM gas purchased (MMSCM) 650 748 813 852 915

APM gas as % of the total gas (%) 93.1% 91.2% 81.1% 74.1% 70.8%

Cost of APM gas (`/SCM) 4.8 5.4 8.0 8.8 9.7

Non-APM Gas purchased (MMSCM) 48 72 190 298 378

Non-APM Gas as % of the total gas (%) 6.9% 8.8% 18.9% 25.9% 29.2%

Cost of Non-APM gas (`/SCM) 9.8 11.9 12.1 13.3 14.7

Weighted average cost of gas (`/SCM) 5.1 6.0 8.8 10.5 12.7

Price per Kg (1 SCM = 1.31 kg) (`/Kg) 6.7 7.8 11.5 13.8 16.6

Average Sales Price (`/SCM) 11.1 11.8 14.4 16.0 17.7

Average Sales Price (`/Kg) 14.6 15.4 18.9 20.9 23.2

Average Spread (`/SCM) 6.0 5.8 5.7 5.5 5.0

Average Spread (`/Kg) 7.8 7.6 7.4 7.1 6.6


Financial Analysis

EBIDTA/SCM (Standard cubic meter) to sustain though, EBIDTA Margins to fall

To sustain the higher growth in volume, IGL would have to source more of R-LNG, which will put pressure on its EBIDTA margins. As per our estimates, EBIDTA margins would decline from 37.2% in FY10 to 25.0% in FY13E. However, IGL is expected to continue to maintain its EBIDTA/SCM.

High Depreciation and Interest cost to hurt Profit marginDuring FY2005-10, IGL posted 18.3% CAGR in net profit. Despite increase in CNG sales volumes in future, over FY2010-13E, we expect IGL’s net profit to increase to ` 3,182.7 mn from ` 2,528.9 mn at a CAGR of 14.2%.

EBITDA Performance

`/SC

M

EBITDA Growth EBITDA Margin

Sales Realisation ( /SCM)` EBITDA/SCM ( /SCM)`

FY08 FY09 FY10 FY11E FY12E FY13E0.0

5.0

10.0

15.0

20.0

25.0

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

33.7%

45.4%

38.1%37.2%

28.2%

25.0%

23.2%

1.4%

28.8%

13.5%15.2%

29.7%


Net Profit margin to decline

PATM (%)PAT ( Mn)`

0.0

800.0

1600.0

2400.0

3200.0

4000.0

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

FY08 FY09 FY10 FY11E FY12E FY13E

11.0%

13.3%14.7%

20.0%19.7%

25.3%


Spread would settle at a lower trajectory on higher gas

procurement costs

PATM to decline due to the expected increase in gas cost,

higher depreciation and higher interest cost




1

This is mainly on account of increase in gas cost, marginal increase in realizations and higher depreciation due to estimated cap-ex of ` 30,000 Mn in coming 5 years. On account of higher depreciation and interest cost, PAT margins would fall from 20% in FY10 to 11.0% in FY13E.

RoE to decline over long term but would manage to stay above 20%Historically, IGL’s RoE has been around 30.0% levels. In future, due to the expected increase in gas costs, high depreciation, we expect RoE to contract to 21.7% in FY13E. Though, we expect, increase in realizations would help RoE to stay above healthy 20%.

Sensitivity Analysis of Effect of Price variation on EPSTo protect its margins IGL has to pass on the incremental cost of gas to its consumers. Being a monopoly player in Delhi and NCR region IGL has always been passing on the incremental input cost price hike to its customer and we believe IGL will continue to do so in the coming years as well. We have carried out a sensitivity analysis on EPS to show the impact of change in price.Scenario-1: If IGL is not passing on the increase/decrease in cost of gasThe following table shows EPS sensitivity to change in purchase price without any accompanying increase/decrease in the selling price. In the given set of assumptions, with every 1% change in price, EPS changes by ~2.2% in FY12E and ~2.4% in FY13E.

FY12EEPS FY13EEPS FY12E FY13E

Purchase price variation ` ` Change (%) Change (%)

-5% 24.5 26.4 12.6 16.1

Base Case 21.0 22.7

5% 19.0 19.1 -12.5 -16.1

10% 16.3 15.4 -25.1 -32.2


Scenario-2: If IGL is passing on the increase/decrease in cost of gasThe following table shows EPS sensitivity to change in selling price with accompanying increase/decrease in purchase price. In the given set of assumptions, with every 1% change in selling price, EPS changes by ~2.4% in FY12E and ~2.6% in FY13E.

FY12EEPS FY13EEPS FY12E FY13E

Selling Price variation ` ` Change (%) Change (%)

-5% 19.2 19.9 -13 -14

Base Case 21.0 22.7

5% 24.5 26.0 12.8 14.5

10% 27.3 29.3 25.6 29.0


RoE to be under pressure

` Mn

0

2000

4000

6000

8000

10000

12000

14000

16000

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2008 2009 2010 2011E 2012E 2013E

31.3%

21.7%

24.7%25.2%

26.4%24.8%

ROE (%)Share Holder's Equity ( Mn)`


Earnings are sensitive to changes in gas spread and volume




1

Key Concerns

High entry barriers outside Delhi

GAIL has set up six more JVCs (Joint Venture Companies) for CGD projects in various cities. GAIL Gas has submitted EoI (Expression of interest) for 7 cities (Kota, Jhansi, Matura, Sonipat, Dewas, Gwalior and Ghaziabad). GAIL Gas won 4 cities viz Dewas, Kota, Meerut and Sonepat in the first round of bidding of PNGRB. These initiatives by GAIL could increase entry barriers for IGL for expanding city gas distribution business to other cities.

Spurt in LNG prices

Since only 2.7 MMSCMD of APM gas has been allocated to IGL in its area of operation, IGL has to depend more on R-LNG sourced from Petronet LNG, as the expected demand is expected at ~4.35 MMSCMD by FY13E. Any adverse impact on sourcing of R-LNG can derail the volume growth plans of IGL. If the global LNG prices firm up further, it could lead to very significant increase in input costs, which it has to pass on to the end consumers.

Regulatory hurdles

IGL has a mandate for operating in Delhi, Greater Noida and Ghaziabad. Despite the initial mandate, final approval is pending for Noida and Ghaziabad. Though 50% of the FY11-15E cap-ex is still in Delhi region, IGL is aggressively rolling out in other NCR areas as well (excluding Faridabad & Gurgaon) which could expose IGL to risks it future plan.

Peer Group Comparison

Being a pure city gas distribution company, IGL is comparable only to Gujarat Gas Corporation Ltd. (GGCL), which is operating in Gujarat State. GGCL is India’s largest private sector player in the City Gas distribution business in India and supplies gas to more than 230,000 domestic, commercial, industrial customers and serve over 80,000 compressed natural gas users.

At current market price (CMP) of ` 299, IGL is trading at 14.0x its FY12E EPS as compared to 19.6x for GGCL. On P/BV basis also, IGL (3.5x) is cheaper than as compared to its closest peer, GGCL (4.7x).

Company Sales (` Mn) Net Profit (` Mn) EBITDAM% PATM% ROCE% ROE%

Indraprastha Gas 17,089.7 2,421.7 29.5 15.9 36.1 26.4

Gujarat Gas 18,421.7 2,590.1 24.1 14.3 28.8 23.4

Source: Capital Line, ACMIIL Research

Price movement of IGL vis-à-vis Gujarat Gas and Sensex

0

50

100

150

200

250

300

350

400

01/04/2008 01/10/2008 01/04/2009 01/10/2009 01/04/2010 01/10/2010

IGL Gujarat Gas SENSEX


Stiff Competition from GAIL




1

Outlook and Valuation

Given its monopoly in NCR region, strong volume growth in CNG and PNG segment, and the aggressive expansion plans for establishing the CNG and PNG infrastructure in the operational areas, we believe IGL is in a favorable position to exploit the growing opportunity in the CGD segment. We expect the revenues to register a CAGR of 30% during FY10-13E and bottom line to register a 13% CAGR during the same period. We have valued the company based on DCF methodology. The rationale behind opting for DCF method over other valuation methodology is because of the predictability of the cash flows. Our EPS estimate of ` 21.0 and ` 22.7 for FY12E and FY13E respectively, imply earnings CAGR of 14% over FY10-13E. At current level of ̀ 299, the stock is trading at 14.0x and 12.97x FY2012E and FY2013E earnings. IGL has historically traded in the range of 13-16x of its one year Forward Earnings. Hence, we initiate our coverage on IGL with a “BUY” recommendation with a price target of ` 357, which is a 19% upside from the current price level.

DCF Valuation Summary

` Mn 2011 (E) 2012 (E) 2013 (E) 2014 (E) 2015 (E) 2016 (E) 2017 (E) 2018 (E) 2019 (E) 2020 (E)

Sales Revenue 17,151.7 22,894.7 28,936.0 30,961.6 33,128.9 35,447.9 37,929.2 40,584.3 43,425.2 46,464.9

EBITDA 5,088.2 6,465.2 7,236.6 8669.23 9276.08 9925.41 10620.18 11363.60 12159.05 13010.18

Depreciation*t 393.93 532.53 671.13 918.05 977.08 1040.25 1107.84 1180.16 1257.55 1340.35

Cap-ex 6100.00 6100.00 6100.00 1857.69 1987.73 2126.87 2275.75 2435.06 2605.51 2787.90

Change in WC 253.55 -517.55 222.56 50.70 55.77 61.35 67.48 74.23 81.65 89.82

FCFF -2630.94 -798.64 -883.31 4818.04 5148.56 5502.05 5880.13 6284.49 6716.95 7179.46

Note: Free Cash Flow to Firm = EBITDA*(1-t)+(Depreciation*t)-(Cap-ex)-(Net change in Working Capital)

Terminal Value (` Mn) 96,399.5.6 WACC Assumptions

Present Value (` Mn) 51620.82 Beta 0.76

Less: Net Debt (` Mn) 1607.00 Market Risk Premium 4.0%

Equity Value (` Mn) 50013.82 Risk Free Rate 8.5%

No of Shares (Mn) 140.0 WACC 10.7%

Per Share Value (`) 357 Terminal Growth Rate 3.0%

Terminal Growth (%)

WACC (%) 1 2 3 4 5

9.7 353 386 430 488 572

10.2 326 354 391 439 505

10.7 302 326 357 397 452

11.2 280 301 327 360 405

11.7 260 278 301 329 366

IGL’s forward P/E Band

50

100

150

200

250

300

350

400

01/04/2008 01/10/2008 01/04/2009 01/10/2009 01/04/2010 01/10/2010

IGL Price 22X 19X 16X 13X 10X 7X

Source: Capital Line, ACMIIL Research




1

Industry Overview

According to the Integrated Energy Policy, 2009, India’s commercial energy supply would need to grow from 5.2% to 6.1% per annum while its total primary energy supply would need to grow at 4.3% to 5.1% annually from the base period (2003-04) to sustain the GDP growth rate of 8+%. In terms of per capita energy consumption India is likely to use only around 1.5 Tonnes of Oil Equivalent (toe) in 2030 as against a consumption of around 0.6 (toe) in 2009.On the supply side, India’s oil import dependence was around 72% of its total oil consumption in 2009. The same is further slated to grow to 84% by 2030. Therefore, it becomes imperative for India to prioritize exploration of natural gas and enhance the usage of such competitive fuel source in its portfolio of primary energy consumption.

India’s natural gas marketAccounting for about 2.4% of the global energy production, India ranks eleventh among the world’s greatest energy producers and has become the sixth largest energy consumer in the world, accounting for about 3.9% of the global energy consumption. Despite the large energy production, India is a net energy importer, because of the imbalance between the demand and supply of energy. In spite of huge energy consumption, India’s per capita energy consumption is one of the lowest in the world, which is an indicator of a potential high growth in the demand.

India’s GDP has grown at more than 8-8.5% during the last few years, and it is expected that India will grow at 8.6% in the near future. This growth has taken place despite the huge deficit in energy infrastructure like ports, railways, pipeline and power transmission and other infrastructure. Even today, half of the country’s population does not have access to electricity or any other form of commercial energy, and still use non-commercial fuels such as firewood, crop residues as a primary source of energy for cooking in over two thirds of households. The future growth of the country demands a move towards large-scale commercial energy forms. In particular, natural gas as a clean energy source holds the highest promise for the country. Natural gas has emerged as the most preferred fuel due to its inherent environmentally benign nature, greater efficiency and cost effectiveness.

Domestic supply is still in a nascent stageNatural Gas as a source of energy has been gaining importance over the last few years. The contribution of natural gas to India’s primary energy consumption has increased to ~10% in 2009-10 from over 3% a decade ago. With new discoveries of natural gas in the country, we expect this scenario is changing in the coming future to satisfy India’s energy requirement.

Energy Mix in 2009-10

Oil

14%

Nuclear Energy

2%Hydro Electric

7%Natural Gas

12%Coal

65%

Energy Mix in 2014-15E

Oil

13%

Nuclear Energy

4%Hydro Electric

8%Natural Gas

14%

Coal

61%

Source: EIA, ACMIIL Research Source: EIA, ACMIIL Research

India is a net importer of oil & gas

GDP growth of 8-8.5% would require huge energy need




1

Supply to increase at 14% CAGR from 162.7 MMSCMD to 275.9 MMSCMD in FY14E

In FY10, India’s overall gas supply was ~145.8 MMSCMD, of which domestic gas constituted around 78 % and 36 MMSCMD was contributed by LNG. The major source of gas was ONGC ~61.4 MMSCMD followed by RIL’s KG D6 block. The supply mix was purely dominated by ONGC till FY10. RIL’s KG D6 field has significantly eased the pressure on the gas deficit Indian market. With new discoveries of natural gas, the supply scenario is expected to change drastically over the next 4-5 years. Supply mix is likely to shift from PSU to private players, majorly RIL KG D6, which will contribute ~32% of India’s natural production by FY12E.

Supply Side Break-up

Supply break-up (MMSCMD) FY10 FY11E FY12E FY13E FY14E

ONGC 61.4 61.3 70.0 70.0 70.0

OIL 6.4 6.4 7.8 8.0 9.0

Private/JV/PMT/GSPC 23.0 21.9 21.9 23.9 27.9

Reliance Industries (KG D6 Basin) 36.0 60.0 72.0 80.0 87.0

Total (A) 126.8 149.6 171.7 181.9 193. 9

LNG

Dahej 28.0 29.0 33.0 38.0 43.0

Kochi 0.0 0.0 0.0 5.0 10.0

Shell Hazira 8.0 12.0 12.0 12.0 12.0

Dabhol 0.0 0.0 5.0 8.0 11.0

Total (B) 36.0 41.0 50.0 63.0 76.0

Coal Based Methane (C) 0.0 3.0 3.0 5.0 7.0

Total Production (A+B+C) 162.8 193.6 224.7 249.9 276.9

Flared + Internal consumption (D) 17.0 17.0 17.0 17.0 17.0

Total Supply (A+B+C-D) 145.8 176.6 207.7 232.9 259.9

Source: PNGRB, ACMIIL Research

We expect the supply from domestic gas sources to increase at 11.2% CAGR from ~126.8 MMSCMD in FY10 to ~194 MMSCMD in FY14E. The KG D6 is likely to play a major role in increasing domestic supply with a total production of ~87 MMSCMD in FY14E. Supply from ONGC and OIL, is expected from its marginal/small fields, eventually increasing up to ~70 MMSCMD by FY14E. GSPC, another new domestic gas will start its production by FY13E and ~6-7 MMSCMD of gas output is expected by FY14E. We expect firm LNG supplies will help augment the domestic supply, taking the supply from 36 MMSCMD in FY10 to 76 MMSCMD by FY14E. Coal Based Methane (CBM) is also likely to contribute ~7 MMSCMD of gas by FY14E. Despite this sharp increase in domestic gas supply, it is unlikely to meet the growing demand for natural gas. We expect this deficit to be met by imported LNG.

Demand Supply Balance

MM

SCM

DFY09 FY10 FY11E FY12E FY13E FY14E

0

50

100

150

200

250

300

350

238.5

202.7222.9

255.8

287

312.1

259.9232.9

207.7

176.6

145.8124.9

Demand Supply

Source: Petroleum Planning and Analysis Cell, ACMIIL Research

Supply mix likely to shift from PSU to private players




1

Gas from new discoveries to dominate domestic supply

Production from the new gas fields is estimated to be around 110.4 MMSCMD for FY14E. As the development plans for these new discoveries have been put in place, they will become fully operational by 2011-12. Hence, over the next 5 years, supply will be largely dominated by these new domestic discoveries. A significant portion of the new supply is expected to come from the fields to be operated by the private players.

LNG imports is to be significant at 76 MMSCMD by FY14E

Currently, LNG contributes ~22% (~36 MMSCMD) of the natural gas requirement of the Indian gas market and it is expected to touch 28% (~76 MMSCMD) by FY14E. At present, Petronet LNG is the major supplier of imported LNG at ~28 MMSCMD in the market and is expected to supply ~76 MMSCMD of the re-gasified LNG by FY14E, backed by its expansion in Dahej and Kochi terminals. Shell Hazira and Dabhol will contribute ~12 MMSCMD and ~11 MMSCMD by FY14E. Importing spot LNG on ongoing basis will also fulfill some of the unmet demand.

Natural Gas Demand remains significant: Expected to increase at 8.8% CAGR

Natural gas is used both as a fuel and a feedstock in various industries. It is used as a fuel in the power, industrial, tea plantation, Cement, Ceramics, Glass sectors, as city gas for cooking and heating and as CNG for transportation. It is also used as a feedstock in Fertilizer, Petrochemicals, and LPG industries.

There has been an increase in natural gas off-take for energy purposes by nearly 20% from the period 1990-91 to 2009-10. Likewise, natural gas consumption for the non-energy purposes has increased by 9% over the same period. The figure below shows the natural gas off-takers in various sectors.

Natural Gas Supply Balance

MM

SCM

D

0.0

50.0

100.0

150.0

200.0

250.0

300.0

FY09 FY10 FY11E FY12E FY13E FY14E

Existing Fields New Discoveries Coal Based Methane LNG Supply


Sector-wise Consumption of Natural Gas

Others

13%Steel

3%

Power

40%

Fertiliser

30%

City Gas/CNG

9%

Petroleun/Refinary

5%

Source: PNGRB, Planning Commission and ACMIIL Research

Going forward, RLNG to contribute significant share (28%) to the

total supply

Demand to increase at 8.8% CAGR by FY14E backed by huge demand

from Power, Fertilizer and CGD sector




1

Natural Gas Demand Break-up

Sectors (MMSCMD) FY10 FY11E FY12E FY13E FY14E

Power 102.7 110.9 119.2 128.8 138.4

Fertilizer 59.9 61.1 64.3 77.8 84.2

City gas 13.8 15.3 16.8 18.7 19.9

Petrochemicals/Refineries/Industrial 29.5 31.4 33.3 35.4 37.7

Industrial 10.1 12.5 15.4 19.1 23.2

Sponge iron/Steel 6.9 7.3 7.8 8.2 8.7

Total 222.9 238.5 256.8 288 312.1

Source: PNGRB, Planning Commission, Ministry of Petroleum & Natural Gas, ACMIIL Research

In future, natural gas demand is expected to grow at 8.8% CAGR from 222.9 MMSCMD in FY10 to 312.1 MMSCMD in FY14E. Demand is likely to increase due to the expected commissioning of certain power plants, re-opening of some closed fertilizer units and continued investments in City Gas Distribution (CGD). The new discovery of RIL’s D6 block of KG basin is expected to play a significant role in meeting India’s energy requirement.

City gas distribution (CGD) to be the main driver for demand growthIn India, city-based piped gas distribution, which includes the compressed natural gas (CNG) stations, piped natural gas (PNG) to industries for heating, and domestic and commercial PNG, is at a nascent stage, accounting for just 9% of total natural gas demand. This can be attributed to lack of city gas pipeline infrastructure and the government’s policy of allocating the available supply of gas to the priority sectors viz. power and fertilizer. However, with huge discoveries of natural gas by Reliance Industries in the KG basin and other major discoveries along western India, the city gas distribution holds immense potential in India. Further, the Government of India is keen on developing city gas distribution due to the benefits natural gas brings to the country economy and environment.CGD demand is estimated based on forecasts for:CNG: Vehicle population, mix and average kilometers traveled per day.PNG: Population size, demand, and expected industrial and commercial developments in the area.City Gas Distribution is expected to boost the demand for natural gas. We expect it to record a CAGR of over 33% as many companies (GAIL, Reliance, Adani and Essar) have been aggressively announcing plans for city gas distribution. CGD plans getting higher priority than green field power plants prove the fact that government is in favour of cleaner auto fuel. Also usage of PNG would reduce the subsidy burden for the government as LPG and Superior Kerosene Oil (SKO) consumption would reduce.

Consumption pattern of volume

MM

SCM

D

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

FY09 FY10 FY11E FY12E FY13E FY14E

CNG PNG (Domestic+Industrial)

Source: PNGRB, Planning Commission, Ministry of Petroleum & Natural Gas, ACMIIL Research

City gas demand to treble in 5 years




1

CNG is expected to grow at a rate lower that the overall CGD growth rate. Currently demand of CNG is around 9.7 MMSCMD and accounts for over 71 % of the total CGD demand. PNG is still in a nascent pace and hence going forward PNG and industrial usage are expected to grow faster as compared to the CNG.

Availability of CGD in Various Cities

With the expected growth in the gas supply and the simultaneous creation of gas inter-state transmission infrastructure in India, this sector is very likely to grow fast in the next 3-5 years. With the emphasis on clean environment, this sector would get the necessary thrust in the coming years. In line with this, various players have drawn up ambitious plans to roll out city gas infrastructure across a number of cities in the country.

In India, city gas supply exists in New Delhi (Indraprastha Gas), Mumbai (Mahanagar Gas), Surat, Bharuch and Ankleshwar (Gujarat Gas). However, city gas supply is predominantly used by the industrial sector and owing to the Supreme Court ruling transportation is emerging as the next major consuming sector. In 2009-10 domestic and commercial segments constituted 14% of the demand in Mumbai, 5% in New Delhi and 8.8% in Surat, Bharuch, and Ankleshwar. Hence, more initiatives have to be taken to improve the demand from the commercial and residential segments to develop a full-fledged city gas distribution infrastructure.

State and City wise CGD structure

States with CGD Providers

Maharashtra Mahanagar Gas Limited- (Mumbai, Thane, Mira-Bhayendar, Navi-Mumbai)

Delhi Indraprastha Gas Limited- (Delhi & Noida)

Andhra Pradesh Bhagyanagar Gas Limited- (Hyderabad, Vijayawada)

Madhya Pradesh Aavantika Gas Limited- (Indore, Ujjain and Gwalior)

Uttar Pradesh 1. Central UP Gas Limited- (Kanpur & Bareilly)

2. Green Gas Limited- (Agra, Lucknow)

Gujarat 1. GAIL-HPCL JV- (Vadodara, Ahmedabad)

2. Gujarat Gas Company Ltd.- (Surat, Bharuch, Ankleshwar)

3. Adani Energy- (Ahmedabad, Vadodara)

4. GSPC Gas- (Rajkot, Morbi)

5. Sabarmati Gas- (Mehsana, Sabarkantha, Gandhinagar)

Tripura Tripura Natural Gas Company Limited- (Agartala)


The city gas distribution sector has simultaneously grown with the gas sector growth. From coverage of just 2 cities at the beginning of the Xth Plan, the city coverage has grown to 24 at the end of December 2010 across the western, northern and southern regions of the country and the coverage is expected to grow to 200 cities in the next 5-7 years. Currently, there is a total city gas distribution network of ~6,000 Km. As far as Compressed Natural Gas (CNG) supplies are concerned, there are 278 stations dispensing CNG in the country and the number is expected to grow in the coming years. Assuming an annual growth of 8%, the demand would go up to about 13.83 MMSCMD, in 2009-10 to 18.2 MMSCMD in 2013-14E.

Industrial PNG segmentGiven the cost benefits of using natural gas in power generation, as feedstock and in the PNG segment, we believe industrial, petrochemical and other industries are likely to increase their consumption of natural gas in the future. We expect volumes from this industry to grow at 10.6% CAGR from 46.4 MMSCMD in FY10 to 69.4 MMSCMD in FY14E.




1

Porter Five Force Model for City Gas Distribution Industry

Competitive rivalry in the industry: Medium

Existing players in this industry have spread their

business in their respective cities. Network exclusivity for 25

years is provided to them. However, with an expected

increase in gas availability, new players are likely to

enter into the business, resulting in higher competition

for laying the network in untapped cities.

Threat of new entrants: Low

CGD business is highly capital intensive in nature. It involves long gestation

periods as well as higher level of government regulations. Existence of the

established players like IGL, GGCL and GAIL, which have already expanded

their pipeline network in the area will limit entrant of new players.

Bargaining power ofsupplier:Medium

We believe bargaining power of suppliers

is medium as supply to Delhi and Mumbai

at government-determined price.

However, for other cities gas is sold at

market price for CGD.

Bargaining power of Customer: Low

Generally customers are fully

dependant on the transporter for the

natural gas supply.

Threat of Substitute: Medium

PNG is the cheapest fuel as compared to Naphtha and Fuel Oil for

industrial consumers and cheaper compared to LPG for commercial and

domestic consumers. CNG is also the cleanest and cheapest mode of

transportation, except in areas where metro rail is assessable. Hence,

we believe the threat of substitute is medium.




1

Financial Statements

Profit & Loss Statement ` Mn

Particulars FY2008 FY 2009 FY 2010 FY 2011E FY 2012E FY 2013E

Net sales 7,129.3 8,604.2 10,876.3 17,151.7 22,894.7 28,936.0

Total Expenditure 4,059.8 5,585.7 7,045.5 12,183.5 16,549.5 21,819.4

Operating profit 3,069.5 3,018.5 3,830.8 4,968.2 6,345.2 7,116.6

Other income 164.8 262.2 211.1 120.0 120.0 120.0

EBIDTA 3,234.3 3,280.7 4,041.9 5,088.2 6,465.2 7,236.6

Depreciation 625.7 674.3 774.5 1,193.7 1,613.7 2,033.7

EBIT 2,608.6 2,606.4 3,267.4 3,894.5 4,851.5 5,202.9

Interest - 22.8 30.0 121.4 310.7 452.3

PBT 2,608.6 2,583.6 3,237.4 3,773.1 4,540.8 4,750.6

Tax 803.5 887.3 1,060.2 1,245.6 1,498.5 1,567.6

PAT 1,805.1 1,696.3 2,177.2 2,527.5 3,042.3 3,182.0

Sales Growth 20.7% 26.4% 57.7% 33.5% 26.4%

Operating Profit Growth -1.7% 26.9% 29.7% 27.7% 12.2%

Net Profit Growth -6.0% 28.4% 16.2% 20.3% 4.6%

Operating Margin 43.1% 35.1% 35.2% 29.0% 27.7% 24.6%

Net Profit Margin 25.3% 19.7% 20.0% 14.7% 13.3% 11.0%

Balance Sheet ` Mn

Particular FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E

Source of Fund

Share Capital 1,400.0 1,400.0 1,400.0 1,400.0 1,400.0 1,400.0

Total Equity 1,400.0 1,400.0 1,400.0 1,400.0 1,400.0 1,400.0

Reserves and Surplus 4,363.4 5,434.1 6,854.5 8,643.7 10,903.0 13,266.5

Total Share holders Fund 5,763.4 6,834.1 8,254.5 10,043.7 12,303.0 14,666.5

Total Loans - - - 3,000.0 4,500.0 6,200.0

Deferred Tax Liability 238.4 208.9 238.1 438.5 438.5 438.5

Deposits from customer 68.3 265.3 552.2 726.0 906.0 1,086.0

Total 6,070.1 7,308.3 9,044.8 14,208.2 18,147.5 22,391.0

Application Of Fund

Fixed Assets

Gross Block 6,680.1 8,172.1 11,053.1 17,053.1 23,053.1 29,053.1

Less: Depreciation 3,104.2 3,778.5 4,553.0 5,746.7 7,360.4 9,394.2

Net block 3,575.9 4,393.6 6,500.1 11,306.4 15,692.7 19,658.9

Capital Work in Progress 587.9 818.3 1,826.1 1,926.1 2,026.1 2,126.1

Total 4,163.8 5,211.9 8,326.2 13,232.5 17,718.8 21,785.0

Investments 1,088.3 1,041.8 170.2 183.2 183.9 184.6

Net Current Assets 818.0 1,054.6 548.4 792.5 244.9 421.3

Total 6,070.1 7,308.3 9,044.8 14,208.2 18,147.5 22,391.0




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Cash Flow Statement ` Mn

Particulars FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E

PBT 2,608.6 2,583.6 3,237.4 3,773.1 4,540.8 4,750.6

Add:

Depreciation 625.7 674.3 774.5 1,193.7 1,613.7 2,033.7

Interest Paid - - - 121.4 310.7 452.3

Profit Before Working Capital Change 3,071.6 3,054.8 3,861.5 5,088.2 6,465.2 7,236.6

Less:

Working Capital Changes (79.4) 96.5 537.6 (187.2) 213.2 17.9

Cash generated from Operations 2,992.2 3,151.3 4,399.1 4,901.0 6,678.4 7,254.5

Tax Paid 954.1 958.2 1,125.7 1,245.6 1,498.5 1,567.6

Net Cash flow from Operating Activities 2,038.1 2,193.1 3,273.4 3,655.4 5,179.9 5,686.9

Net Cash Flow Investing Activities (746.4) (1,514.8) (3,722.0) (6,100.0) (6,100.0) (6,100.0)

Net Cash Flow From Financing Activities (491.3) (655.2) (655.2) 2,140.3 406.4 428.2

Net Inc/Dec in Cash and Cash Equivalents 800.4 23.1 (1,103.8) (304.3) (513.7) 15.1

Cash and Cash Equivalents at the beginning of the year 1,680.9 2,481.3 2,504.4 1,400.6 1,096.3 582.6

Cash and Cash Equivalents at the End Of the year 2,481.3 2,504.4 1,400.6 1,096.3 582.6 597.7

Ratio Analysis

Particulars FY2008 FY2009 FY2010 FY2011E FY2012E FY2013E

Profitability Ratios

EBDITAM 45.4% 38.1% 37.2% 29.7% 28.2% 25.0%

PATM 25.3% 19.7% 20.0% 14.7% 13.3% 11.0%

ROCE 43.0% 35.7% 36.1% 27.4% 26.7% 23.2%

ROE 31.3% 24.8% 26.4% 25.2% 24.7% 21.7%

Capital Structure Ratios

Debt-Equity Ratio 0.00 0.00 0.00 0.30 0.36 0.42

Solvency Ratios

Current Ratio 1.56 1.69 1.27 1.33 1.08 1.11

Interest Coverage ratio - 114.32 108.91 32.45 15.62 11.50

Valuation ratios

EPS (`) 12.89 12.12 15.55 18.06 21.03 22.73

CEPS (`) 17.36 16.93 21.08 26.59 33.26 37.26

BV/share 41.17 48.82 58.96 71.74 87.88 104.76

Price/BV 5.26 4.18 3.40 2.85

P/E 19.93 16.74 14.0 12.9




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“B-Network Tariff”: Network tariff means the weighted average unit rate of tariff (excluding statutory taxes and levies) in `/million metric British thermal unit for all categories of consumers of natural gas in a CGD network.

“C-Compression Charges”: Compression charges means a charge (excluding taxes and levies) in `/kg for online compression of natural gas into compressed natural gas (CNG) for subsequent dispensing to consumers in a CNG station.

The network tariff and compression charge for CNG in a CGD network shall be determined by considering a reasonable rate of return (14% on a post tax basis) on normative level of capital employed plus a normative level of operating expenses in the CGD network.

The return on Capital Employed (for Network Tariff) shall be determined for the capital employed in the common infrastructure in the CGD network (i.e. consisting of the pipeline from the tap-off point in the natural gas pipeline up to the city gate station, city gate distribution network consisting of pipelines, distribution related equipments and facilities).

For determination of compression charge for CNG, capital employed in the related facilities for compression of natural gas into CNG, land for online compression and all equipments and facilities beyond the discharge valve of the online compression for CNG are to be included.

ANNEXURE-1




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ANNEXURE-2

Type of CNG Stations:

Mother Station: A Mother Station is connected to a natural gas pipeline, which ensures supply at the station at a pressure of around 19-22 Kg/cm2g. Stations are equipped with compressor(s) of varying capacities (1,150/1,200 SCM per hour), dispensers, stationary cascades, etc. A compressor compresses gas to a pressure of 250 Kg/cm2g and it is dispensed to various kinds of vehicles at maximum pressure of 200 Kg/cm2g. These compressors are either gas engine or electric motor driven. The Mother station also feeds the daughter/ daughter booster station by supplying CNG through mobile cascades of 2,200 water litre capacities each. Usually, a mother station has one/two filling points to fill mobile cascades.

Online Station: This station functions on similar lines to a Mother Station except that it does not have the mobile cascade filling facility, which helps feed daughter/ daughter booster stations.

Daughter Station: This station receives gas through LCV mounted cascades (a bank of cylinders) of 2,200 water liter capacity from the Mother stations as they are not connected to the pipeline. At daughter stations, CNG is dispensed to vehicles on the pressure equilibrium principle.

Daughter Booster Station: The only difference between daughter booster station and daughter station is that a variable suction pressure booster is installed in between the mobile cascade and the dispenser. Function of the booster is to draw the natural gas from the cascade right from 180 Kg/cm2g pressure till the pressure reduces to as low as 30 Kg/cm2g and supply be at a pressure of 200 Kg/cm2g.

Source: IGL




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Disclaimer:

This report is based on information that we consider reliable, but we do not represent that it is accurate or complete and it should not be relied upon such. ACMIIL or

any of its affiliates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information

contained in the report. ACMIIL and/or Promoters of ACMIIL and/or the relatives of promoters and/or employees of ACMIIL may have interest/position, financial or

otherwise in the securities mentioned in this report. To enhance transparency we have incorporated a Disclosure of Interest Statement in this document. This should

however not be treated as endorsement of the views expressed in the report

Disclosure of Interest Indraprastha Gas Limited

1. Analyst ownership of the stock NO

2. Broking Relationship with the company covered NO

3. Investment Banking relationship with the company covered NO

4. Discretionary Portfolio Management Services NO

This document has been prepared by the Research Desk of Asit C Mehta Investment Interrmediates Ltd. and is meant for use of the recipient only and is not for

circulation. This document is not to be reported or copied or made available to others. It should not be considered as an offer to sell or a solicitation to buy any security.

The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We

may from time to time have positions in and buy and sell securities referred to herein.

SEBI Regn No: BSE INB 010607233 (Cash); INF 010607233 (F&O), NSE INB 230607239 (Cash); INF 230607239 (F&O)

Notes:

Institutional Sales:

Ravindra Nath, Tel: +91 22 2858 3400

Kirti Bagri, Tel: +91 22 2858 3731

K.Subramanyam, Tel: +91 22 2858 3739

Email: [email protected]

Institutional Dealing:

Email: [email protected]

Indraprastha Gas Limited- SWOT Analysis

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