Indraprastha Gas: ‘Robust growth, attractive valuations’

CMP Rs347, Target Rs401, Upside 15.6%

Over the past five months, Indraprastha Gas Ltd (IGL) has corrected 20% due to 1) increasing contribution of LNG to its supply basket, 2) rising prices of LNG and 3) sharp rupee depreciation in rupee against the US Dollar. While LNG contribution to the supply basket will continue to rise given our expectations of a 19% volume CAGR during FY11-14E, LNG prices are expected to soften and rupee has also been appreciating against the US Dollar. With CNG per KM running cost still at a substantial discount to petrol or diesel, we believe IGL has a very strong pricing power enabling it to maintain per unit gross margins. Expansion into newer territories of Noida, Greater Noida and Ghaziabad will add to volume growth. We expect the company to register a revenue CAGR of 29% and PAT CAGR of 16% during FY11-14E. Considering this, we find the valuations attractive at P/E of 13.8x FY13E EPS of Rs25.1.

CNG and PNG volumes in Delhi to witness robust growth

During FY11-14E, we expect IGL to witness volume CAGR of 13% for CNG and 40% for PNG, taking the overall volume CAGR to 19%. CNG volumes will be propelled by 1) addition of CNG buses, 2) increased private car conversions and 3) higher usage of CNG vehicles for intra city movement in the NCR region. PNG volumes will get a thrust from continued surge in industrial applications.

Strong pricing power in CNG to help sustain gross margins

Over the past 12 quarters, CNG realizations for IGL have jumped by 70%. This has been on the back of a series of price hikes following rising gas prices (hike in APM prices + surge in LNG prices). During the same period, gross margins/unit have been in the range of Rs9.4-10.5/scm. We believe, IGL would be able to maintain this given that per km cost advantage for CNG over petrol is still at 67%. Furthermore, CNG price in Delhi (Rs32/kg) is much lower than prevailing prices in Gujarat (Rs50/kg).

Valuations attractive at 13.8x FY13E P/E

We believe IGL has strong earnings visibility considering rapid conversions of private vehicles to CNG and increasing usage of gas in industries. Superior pricing power will enable them to sustain gross margins and keep return ratios over 25%. Maintain BUY with a 9-month price target of Rs401.