Indraprastha Gas - Rationale for the Investment Ideas

Rationale for the Investment Ideas

Indraprastha Gas : Margin to remain strong in Q3 but to normalize in FY14

We expect margin to sustain in Q3FY13 due to high CNG prices and lower gas costs on account of INR appreciation. However, we expect margin to come off to Rs 4.7/scm in FY14 given the increasing proportion of costlier R-LNG in gas sourcing mix.

Continuous price hikes likely to impact volumes

Continuous price hikes (CNG prices up 30% YoY) has impacted demand growth. IGL’s volume growth in Q2FY13 at 10% (vs. 23% in FY12) was lowest ever since FY08. Volume growth in CNG and PNG has decelerated to 8% and 19% YoY respectively vs. historic average of 17% and 70% respectively. Management is targeting 18-20% volume growth in the long-term.

Valuation contingent on regulatory environment

Despite strong earnings momentum, case in Supreme Court against PNGRB order (regulating IGL’s tariff structure) remains an overhang on the stock. We expect the case to continue at least for the next 6 months, which would keep valuation subdued. 

However, in the long-run, we expect IGL to earn 16% RoCE including marketing margin and hence value the stock at Rs 310. Maintain BUY. The stock trades at 1.4x FY14E adjusted book value of 170.

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