Analyst Research Report Snapshot

Title:

Spark Capital: IGL: Upgrade to Buy - Receding Uncertainty On Pricing Power And Emerging Volume Growth Drivers

Price:

$115.00

Provider:

Spark Capital Advisors(India) Private Limited

Date:

11 Feb 2013

Pages:

11

Type:

AcrobatPDF

Companies referenced:

IGAS.NS

Available for Immediate Download
Summary:

Upgrade to Buy - Receding Uncertainty On Pricing Power And Emerging Volume Growth Drivers Indraprastha gas (IGL) reported PAT of Rs. 863mn (slightly below expectations), up 25% yoy but down 13% qoq over a high base. Volumes remain flat qoq and gross spread remain high at Rs. 8.6/scm, albeit 6% lower than all time high base of 2Q. Recently announced price hikes in CNG (4%) and PNG (7%) would raise spreads in 4Q. After remaining bearish for ~10 months, we are turning positive on the stock on receding uncertainty related to marketing margins, sustained state govt support, and likely uptick in volume growth. Based on media reports, MoPNG is finalising a directive on regulation of gas marketing margins keeping CGD and LNG outside the purview of any cap. Hence, IGL’s pricing power would remain intact irrespective of the outcome of the Supreme court case of IGL vs PNGRB on tariff fixation. Increased bus addition, new auto rickshaw permits and renewed industrial growth on decontrol of bulk diesel would drive an uptick in volumes. We retain our 15% CAGR FY13-16E volume growth, and increase our mid term EBITDA estimates from ~Rs. 4/scm to Rs. 5/scm leading to ~24% increase in our DCF based TP to Rs. 358. Upgrade to Buy Regulatory positives: MoPNG is likely to regulate margins of bulk marketers and keep CGD and LNG margins uncapped. Hence, IGL’s pricing power would remain intact irrespective of the outcome of the Supreme court case of IGL vs PNGRB on tariff fixation. Delhi govt continue to support IGL in passing on cost to facilitate the on going capex program Pricing power intact: We expect a ~60% increase in gas costs over FY13E-16E due to rising share of costly LNG, hike in KGD6/APM gas prices and shrinkage of APM allocation. In an uncapped marketing margin scenario, IGL is likely to pass on substantial part of these cost pressures through ~40% hike in prices and maintain spreads of Rs.8.5-8.7/scm Compelling economics: Even after assuming ~40% hike in CNG prices by FY16 to pass on higher gas costs, CNG economics for petrol conversions remain attractive. Further, new purchasing decisions would shift from Diesel to CNG as diesel gets decontrolled over next 2-3years Uptick in volume growth: Expect volume growth of 15% CAGR over FY13E-16E against only 11% in FY13E, driven by 1) addition of 1600 new buses in Delhi, 2) Issuance of 45k new auto rickshaw permits over next 2-3 years, 3) continued conversion of petrol cars, 4) shift in customer preference for new CNG cars over Diesel amidst fuel reforms, 4) Uptick in industrial volumes on substitution of bulk diesel and 5) new industrial and PNG connections. Against a target of adding 1000 buses, DTC added only 400 buses in FY13E due to depot capacity (parking) constraints. However, DTC has been adding new depots which will entail larger bus additions in ensuing years

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