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DOLAT CAPITAL

City Gas Distribution

India Research

C G D
Coming out of the Woods...!!!

Analyst: Priyank Chandra Tel : +9122 4096 9737 E-mail: priyank@dolatcapital.com

January 04, 2013

DOLAT CAPITAL

Index Executive Summary Regulatory Development Gujarat Gas Company Indraprastha Gas CGD Sector 3 5 9 19 29

January 04, 2013

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DOLAT CAPITAL
Executive Summary
City gas distribution (CGD), one of the rising sectors in the India energy pie, had seen an action packed CY12. In particular, the regulatory front played a key overhang on the sector and players’ valuations. Further, in the wake of regulatory issues being taken up at the Supreme Court level, the bidding for new areas took a back seat, and put to rest long term plans of government to promote CGD. We still believe that City gas distribution (CGD) space is an attractive long term investment option in the oil & gas space. The dynamism is fuelled by aspects as: Demand potential: Driven by Gas economics in comparison to alternate fuels Expanding gas grid network Acceptance of high prices by end users Environment friendly nature of gas Rising supplies: Fuelled by RLNG supply (though dearer) Energy majors looking to develop more LNG terminals Any new domestic finds would improve supply situation The two listed players in the CGD space, Indraprastha Gas (IGL) and Gujarat Gas Company (GGCL), are the pioneers of the segment in India. They will reap long term benefits of being the first movers. We are positive on the CGD space and like both IGL and GGCL as a structural play.

Valuation Matrix
Companies IGL Gujarat Gas* Net Sales EBITDA PAT EPS (`) ` FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E 25,151 34,405 42,198 55,901 6,345 23,819 31,459 34,591 39,535 3,952 7,925 4,169 8,979 10,209 3,064 5,258 5,851 2,739 3,765 2,927 4,206 3,281 4,849 21.9 3,607 21.4 26.9 22.8 30.0 25.6 34.6 28.1

* December Year Ending FY13 = CY12 Companies IGL Gujarat Gas* FY13 = CY12 Mkt Cap CMP Target Upside Rating P/E(x) (` bn) (`) (`) (%) FY12 FY13E FY14E FY15E ` ` ` 36 256 379 48 Buy 11.7 9.5 8.5 7.4 39 306 363 20 Buy 14.3 13.4 12.0 10.9 RoE(%) FY12 FY13E FY14E FY15E 27.4 27.4 25.2 24.5 33.9 36.0 35.7 33.3 RoCE(%) FY12 FY13E FY14E FY15E 29.5 29.9 28.6 28.9 35.0 35.7 37.0 35.3

* December Year Ending

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after the High Court struck down the order issued by the PNGRB. that PNGRB does not have the rights to fix Network Tariff and Compression Charges to be charged to an end user by a CGD company. implying players will be free to fix the same as per their P&L dynamics. the outcome of the PNGRB – IGL case would not have any impact on financials of CGD companies. Should not be regulated as it can be determined by competition and alternative fuel prices If there is no cap on marketing margins and PNGRB does not want to control the final selling price. based on the understanding of the PNGRB Act. Marketing Margin fixation is unlikely because : If it comes. no fresh investments will come in the CGD space. We still maintain this view.DOLAT CAPITAL Key events which impacted the sector were: MoPNG asking PNGRB to look into fixing marketing margins charged by gas distribution companies PNGRB issuing order fixing the Network Tariff and Compression Charges for IGL and the same to be applicable to its customers The latter. We expect this marketing margin matter to ultimately turn irrelevant in the scheme of things. 2013 4 . In the interim. we learn from our interactions with the industry that the relevance of marketing margins at the regulatory front has taken a back seat. is pending with the Supreme Court. January 04. Government still has ambitious plans for CGD space and if this has to move ahead there could be no capping of marketing margins. Our View: We maintain our earlier view.

2012 December 19. Retrospective liability is not justified as IGL has not charged that amounts. 2013 5 . Will discourage entities from entering CGD space. PNGRB is authorized to fix Network tariff for a third party – selling gas in an existing CGD network. 2011 Event Ministry of Petroleum asks PNGRB to initiate process for determining marketing margin charged by gas companies Dolat View This got initiated due to fertilizer ministry asking to look in the marketing margins charged by gas selling companies. 2012 PNGRB issues 21 days notice seeking preliminary data from all entities PNGRB issues order for IGL fixing its Network tariff and compression charges & Imposes retrospective liability April 9. Matter of time and IGL very likely to win the case Indicates that PNGRB would like to avoid the marketing margin issue. 2012. CGD does not deal with fertilizer or power sector but got covered as they distribute gas Stakeholders become apprehensive as it could impact profitability. Fresh investments – bidding for new areas are frozen. 2012 IGL takes a stay on PNGRB order PNGRB refuses to entertain the marketing margin matter. 2012 May 7. February 14. Hearing date gets postponed to March 18. On expected lines but this may take long time for a verdict We were told that PNGRB asked for an extension and wanted to submit some additional data. 2012 November 21. IGL and Gujarat Gas (listed companies) stock prices are down by more than 40%. This was done to ascertain type of data that entities will provide for calculating marketing margins PNGRB is not authorized to fix network tariff and compression charges for IGL’s own consumers.DOLAT CAPITAL Regulatory Development: Since December 2011. Bidders for CGD license in Round 1 and Round 2 were relying heavily on marketing margin to make profits. Industry participants feel that with the current stance of PNGRB. 2012 July 27. there has been lot of Regulatory (PNGRB) developments that had weighed down the CGD sector and made investors weary. Chronology of Events: Time Line December 26. Data submitted by companies was too less for any meaningful calculation. the industry is very likely to stagnate at current levels. 2012 January 04. 2012 June 1. 2012 April 10. Lack of clarity between MoPNG and PNGRB.Reason given – Gas as a product is not formally notified by Government Delhi Court says that PNGRB is not authorized to fix tariffs for IGL consumers PNGRB approaches Supreme Court Supreme Court gives next date of hearing – January 4. Hangover would continue as PNGRB can approach Supreme Court.

Gas Cost: Denominated in US dollars and there is a constant increase in LNG proportion in sourcing mix. January 04.DOLAT CAPITAL Build up of the Selling Price There are four major components that define the final selling price for the end consumer. PNGRB says it has the power to fix network tariff and compression charges that are charged by CGD entity to its consumers. 2013 6 . We feel that PNGRB is not authorized to do so. Compression Charge:Compression charge is levied on compression of natural gas and is applicable only on CNG segment. The authorized entities are expected to recover the huge investments made in the infrastructural development primarily through levying of network tariff and compression charges. Compression Charge and Gas cost. Marketing Margin: Not defined but is considered to be the difference between the final selling price and summation of Network Tariff. The network tariff and compression charge is applicable to the new entities entering the CGD business in a city after the completion of marketing exclusivity period. Network Tariff:Network Tariff is the charge for utilizing the existing infrastructure of the authorized CGD operator. Pass through component Marketing Margin is built as the CGD entity takes the risk of marketing the gas to retail consumers.

likelihood of this scenario is low. Scenario – 3 PNGRB does not control .DOLAT CAPITAL Marketing Margin – It’s the key to returns in CGD business Source: Industry. Compression Charge does not control . 2013 7 . Compression Charge Marketing Margin. Listed companies (IGL and GGCL) stock prices would further fall.Financials of CGD companies are not impacted.Likelihood of this scenario is high. January 04. Compression Charge. Dolat View .Financials of CGD companies are not impacted. Marketing Margin Inference .Likelihood of this scenario is negligible.Marketing Margin. CGD space would see lot of investment activities. Final selling price Inference . Dolat View . Dolat view . Final selling price Inference . Scenario – 2 PNGRB control . Strong case for re-rating of listed companies (IGL and GGCL).Network tariff. Investor sentiment would improve and new geographical areas will come up for CGD. Dolat Research Based on the above there could be 3 possible outcomes for a CGD entity: Scenario – 1 PNGRB control .Sector become stagnant and no fresh investments.Network tariff.Network tariff.

2013 Int en tio na lly Le ft B lan k 8 .DOLAT CAPITAL January 04.

These Shareholding Pattern as on Sept’12(%) Promoter MF/Banks/FIs FIIs Public / Others 65. With increased availability of RLNG gas.9 PER (x) 14.607 NPM % 11. will provide long term demand sustainability.784 6. To its credit.3 35. Pioneer in City Gas Distribution GGCL has been the pioneer in the city gas distribution space for 21 years and is at the forefront of promoting gas culture in Gujarat. being a government company.3 9.169 5.927 3.4 9. considering the economic advantage over alternate fuels.1 15. Availability of RLNG in the spot market will support volume growth.016 DOLAT CAPITAL Target Price: ` 363 Buy Gujarat Gas Company (GGCL) will exploit its incumbency advantage by riding the volume growth potential of key Gujarat industrial belts.1 9.0 33.7 35. GSPC.9 6.1 10. This segment reduces the gas price risk as the hike is passed on to end users. GSPC buying the stake of British Gas in Gujarat Gas would bring strategic long term advantages for Gujarat Gas growth prospects.7 PAT 2. It has to its credit development of over 3. Pricing power will ensure long term sustainability of margins.000 SCMD comes under the CGD purview of providing exclusivity).281 3.700km of gas pipelines involved in retail delivery. Volume (no) BSE Code NSE Symbol Bloomberg Code Reuters Code ` 257mn ` 2/` 39bn USD 721mn ` 437 / 270 85283 523477 GUJRATGAS GGAS IN GGAS. GGCL has developed a franchise that sells energy saving solutions to industrial retail segment (81% of GGCL’s volumes).47 11.258 5.739 2.1 EPS (`) ` 21.9 35.0 35. thereby protecting profitability. India’s highest gas consuming state.535 Figure in `.4 22.9 12. Investment Rationale GSPC buying stake of British Gas GSPC buying stake of British Gas (BG) in GGCL would ensure long term sustainable growth.Initiating Coverage Gujarat Gas Company India Research CMP: ` 306 BSE Sensex NSE Nifty Scrip Details Equity Face Value Market Cap 52 week High / Low Avg. We recommend a Buy with a DCF-based target price of ` 363. Other segments are CNG and PNG.BO 19.0 36.47 GGAS relative to Sensex 120 110 100 90 80 70 60 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 GGAS Sensex Financials Year Net Sales CY11 23. Bharuch and Ankleshwar. which are seeing decent growth.7 37. Fuel economics of gas as a fuel across all segments.819 CY12E 31. mn % Growth 31. GGCL will ride the CGD evolvement (CNG for automobile and PNG for households & commercial) with its extensive coverage of Surat.3 32.4 13. GGCL is well-set to capitalise on growth opportunities driven by usage of gas.3 13.2 9. GGCL will also benefit from the natural exclusivity (industrial retail requiring less than 50.8 25.459 CY13E 34.0 14. Business Model: Maximising risk-adjusted growth GGCL’s business model is based on a cost plus basis.9 ROANW(%) ROACE (%) 33.3 January 04.1 14. 2013 Gujarat Gas Company 9 .4 12.591 CY14E 39.25 17.6 28.12 6.3 EBIDTA 3. RLNG sourcing would change and the gas price would be marginally lower as compared to prices of RLNG which was supplied by BG trading arm.851 OPM % 16.1 % Growth 5. would bring in faster approvals required for infrastructure expansion of GGCL.0 10.952 4.

It is keen on exploring its existing territory in Gujarat better. GGCL has got the CGD license in its existing areas of operation. volume growth has stagnated. wider/ deeper pipeline coverage. GGCL has identified the bulk segment as a bad apple and withdrawn. At CMP of ` 306. These regions offer significant demand and optimum utilisation of the existing pipeline network. the stock trades at 12x CY13E and 10.India Research DOLAT CAPITAL segments have also absorbed the regular price hikes by GGCL to negate rising input cost. GGCL stock price has been impacted due to BG selling stake to GSPC and regulatory developments. GGCL is not keen on unrelated geographic expansion.Bardoli in Surat and Jambusar in Bharuch. 2013 Gujarat Gas Company 10 . The risk to our call remains the slow execution in infrastructure growth – that can restrict the volume growth. with a DCF-based target price of ` 363. However.000 SCMD). We recommend Buy rating. and increased exposure to the commercial segment will result in better profitability. The exclusivity in its existing areas of operation will enable GGCL to become the sole supplier of industrial segment (for less than 50. GGCL has started expansion in areas . CNG and PNG segment growth rates are considerably higher than the industrial segment. On the business front. This enabled it to cater the demand from other segments with higher margins. The change in revenue mix. Changing revenue mix to improve profitability With impending competition from large scale GAS utilities like GAIL. These two areas offer significant industrial potential. Promising triggers of concurrent geographical expansion As a strategy. The capex will be through internal accruals only.9x CY14E earnings. Interaction with industry participants reinforces our opinion that regulatory concerns will improve in favour of CGD space. we believe that GSPC coming in would bring faster expansion – required for volume growth. 1 year forward PE Band January 04. Valuation GGCL will ride on its existing coverage of key industrial regions as well as growth from the CNG and PNG segments.

2013 Gujarat Gas Company 11 . It has promoted the gas culture in Gujarat. Availability of gas has been the key driver of consumption as an industrial fuel along with CGD developments. It has been the primary origination and entry point for both domestic natural gas and imported LNG. The three cities offer huge potential for gas consumption as they are industrial centres. The first CNG station in India was set up in Surat by GGCL. India’s highest gas consuming state. DMIC will be passing through GGCL areas of operation and increased industrial activities will result in higher gas volumes for GGCL. They also have significant potential for CGD development (CNG and PNG). GGCL presence in DMIC (in Gujarat) Source : Company. Dolat Research January 04.India Research DOLAT CAPITAL Pioneer in City Gas Distribution GGCL has pioneered the city gas distribution (CGD) space for 21 years. GGCL has developed over 3. Going forward.700-km of pipeline network to provide retail access in Ankleshwar. India’s diamond and textile hub. Bharuch and Surat — located in southern Gujarat. we feel the upcoming Delhi Mumbai Industrial Corridor (DMIC) project will augur well for GGCL. Gujarat accounts for nearly 40% of India gas consumption. It has now started operations in the heavily-industrialised Ankleshwar and Bharuch and expanded to Surat. Gujarat is the second-most industrialised state of India with nearly 270 industrial clusters.

Increased availability of RLNG ensures smoother supply of gas. On the demand side. Dolat Research GGCL operates in the highly industrialised belts of Ankleshwar. Business Model: Maximising risk-adjusted growth GGCL’s business model has evolved over a period of time and caters to industrial. Under PNGRB guidelines. Bharuch and Surat. GGCL supplies nearly 19% of the total gas consumption to CNG and PNG (along with the commercial) segment.000 SCMD will be under the purview of CGD licence. Source : Company. 2013 Gujarat Gas Company 12 . This segment has been growing due to infrastructure expansion and enviable economics of gas usage. It has taken adequate steps to promote a gas culture by pushing development of combine heat & power solution and making consumers aware of the savings from gas usage. This makes GGCL the sole supplier of gas to these industries. though at higher price. the industrial. commercial.India Research DOLAT CAPITAL GGCL has evolved a CGD model which is considered a benchmark by gas regulator PNGRB.000 SCMD of gas. supplies of less than 50. These have a large number of industries that require gas less than 50. January 04. We feel GGCL is ideally placed to capitalise on the potential with assured profitability. CNG and PNG segment. CNG and PNG are gas hungry segments. The Porter 5 Forces model signifies the inherent strength of GGCL’s business model. driven by economic benefits of using gas as a fuel.

Demand was there but with decline in domestic supplies. developed over years. this will result in better utilisation of pipelines for gas transportation.CY11. Things changed and with improved availability of RLNG. Market of spot RLNG was not conducive for CGD sector. GGCL has started expanding infrastructure in uncovered areas to achieve volume growth.000 SCMD. 2013 Gujarat Gas Company 13 . Besides offering significant demand potential. Bharuch and Surat. Dolat Research Promising triggers of concurrent geographical expansion As a strategy. GGCL could not supply the gas to full potential. This is being witnessed in the current year CY12. Increase in global RLNG prices and INR depreciation. GGCL volumes started moving up during CY10. This is resulting in a volume loss again in CY12. GGCL will be the sole supplier of gas to the industrial segment that consumes gas less than 50. GGCL prefers focusing on its existing geographic territory in Gujarat rather than exploring new ones. GGCL has an extensive coverage in Ankleshwar.India Research Porter 5 Forces Model DOLAT CAPITAL Source : Company. GGCL has got the formal licence in its existing areas of operation and has bid for Bhavnagar. resulted in a sharp hike in RLNG prices. volumes declined due to non availability of gas. January 04. GGCL has decided not to pursue customer segments which are not ready to pay the higher prices. During CY09. which is in close proximity to GGCL’s existing areas of operation.

coupled with low profitability. At the current level of prices. 2013 Gujarat Gas Company 14 . January 04. GGCL’s decision to exit the bulk segment was due to the focus on profitability. makes it a bad apple for GGCL. It will divert volumes to more profitable segments of industrial retail. CNG segment has been growing double digits for GGCL and considering the usage economics we expect this segment to continue to grow strongly.India Research DOLAT CAPITAL Source : Dolat Research Changing revenue mix to improve profitability Impending competition in the bulk segment. industrial retail is far better than the bulk segment. CNG and PNG (domestic & commercial). Source : Dolat Research In terms of profitability. CNG supplied by GGCL is cheaper by 45% in comparison to Petrol and 11% cheaper as compared to diesel. leaving it to focus on more profitable segments with considerable volume potentials. This change would boost profitability.

Source : Dolat Research Revenue growth driven by volume. Revenue growth will be driven by volumes as well as realisations. Going forward.6% CAGR in CY11-CY14E. blended cost of GGCL is on a rise. GGCL would be able to expand its absolute spreads on a per unit basis due to changing revenue mix.1% during CY12-CY14E driven by all the segments. January 04. We expect GGCL’s operating profitability to grow 14% CAGR in CY11-CY14E and net profit to grow 9. we expect GGCL not to compromise on margins.India Research Financial Analysis DOLAT CAPITAL Profitability margins would remain stable and absolute profitability remains strong With disruptions in domestic supplies and volume growth on rise. RLNG proportion will increase. Source : Dolat Research GGCL’s ability to hike prices will result in operating and net profitability growing in absolute terms. Profitability margins would take a beating in CY12E due to delay in increasing the selling price to protect spreads. 2013 Gujarat Gas Company 15 . realisation GGCL will see volume CAGR of 7. We expect margins to remain stable. As the incremental volume is catered by high cost RLNG.

535 91% 1.402 62% 2.397 1.. GGCL stock price has been impacted due to BG selling stake to GSPC and regulatory developments.219 6. GGCL will ride on its existing coverage of key industrial regions as well as growth from the CNG and PNG segments.256 136% 6.411 2.154 1. Interaction with industry participants reinforces our opinion that regulatory concerns will improve in favour of CGD space.604 1.337 2.478 3.889 1.9% 65.080 418 2.955 984 136% 4. with a DCF-based target price of ` 363. We believe that GSPC coming in would bring faster expansion – required for volume growth.596 5. volume growth has stagnated.473 2. Earlier the issues were of gas supply.647 83% 2.038 3.281 751 136% 4.009 4.India Research DOLAT CAPITAL Source : Dolat Research Valuation GGCL has undergone a structural change in the past couple of years.377 4.607 865 136% 4.524 128 363 16 .115 136% 5. The capex will be through internal accruals only.741 9.361 40.620 (142) 2.587 3. On the business front.9x CY14E earnings.498 1.649 3. Now the concern is for the volume growth.397 3.701 9. which are sorted due to availability of RLNG.034 2.939 2.514 46.826 2.0% 9.534 3. We recommend Buy rating.190 3.720 2.242 68% 2.640 (631) 2.140 (314) 1. 2013 Gujarat Gas Company CY13E CY14E CY15E CY16E CY17E 3.017 4.050 75% 790 4.337 50. DCF Profit After Tax (PAT) Depreciation Interest (1-T) Gross Cash Inflow Capex Increase in Non Cash Working Capital Gross Cash Outflow Free Cash Flow Discount Factor PV of Free Cash Flow PV of Cumulative Free Cash Flow Assumed Terminal Year (n) Cash Flow at N+1 Growth Rate (in %) WACC (in %) Terminal Value Discounted Terminal Value Present Value of Firm till Terminal Year Total Discounted Value of Firm Current Debt of Firm & Pref Equity Present Value of Equity No of Equity Shares Fair Value of Equity Share (in `) January 04. At CMP of ` 306. which would go away as GGCL expands its infrastructure in the uncovered areas of its licensed territories. the stock trades at 12x CY13E and 10.240 1.

245 1.413) (D) Measures of Investment EPS (`) CEPS (`) DPS (`) Dividend Payout (%) Profit Ploughback (%) Book Value (`) RoANW (%) RoACE (%) RoAIC (%) (Excl Cash & Invest.2 40.495 593 3.018 Average Cost Of Debt (%) 0. (` Mn.335) (2.153 1.698 3.039 Loans and Advances 148 354 Other Current Assets 34 132 sub total 2.I.8 4.3) Non Cash Working Capital (` Mn) (2.153 4.851 6.9 35.0 35.0 42. Other Income) EBIDTA (Incl.831 29.0 3.263) (1.226 2.3 3.0 22.425 16.4 0.7 (C) Measures of Financial Status Debt / Equity (x) 0.4 2.4 26.4 (30.516 4.7 34.963.3 Interest Coverage (x) 3.206 5.797 2 4.607 12.0 65. Net Interest Exp Direct taxes paid Chg.0 (3.169 865 5.0 40.2 7.387 6.7 13.941 16.546 (1.556 Current Assets.349 sub total 4.7 15.407 Less: Accumulated Depreciation 3.2 81.6) (3.292.6 41.507 6.346 Net Worth 7. O.5 32.156 270.3 41.4 78.) 18.4 12.576 751 4.4 2.1 79.934 2.027 Provisions 1.245 1.810 2.810 2.4 39./(Dec.286 8.535 720 Investments 5.010 8.159 20.9 3.0 103.7 37.6 10.486 647 1.964 3.9 3.245 1.5 428.2 306 14.2 2.123 Dec13E 257 144 49 9.5 (15.320) (2.839 2.084. Loans & Advances Inventories 158 215 Sundry Debtors 1.9 12.516 1.084.671) 25.4 2.0) 60.720.426 628 4.372 486 (688) 11 490 (1) (3.281 DOLAT CAPITAL ` mn Dec14E 39.8 33.169 4.309 697 1.5 306 12.459 3.698) 1.163 2.7 39.245 1.729 27.189.9 11.125.207 545 3.365) (1.739 Dec12E 31.4 EBIDTA Margin (incl.2 Working Capital Turnover (x) (10.658 5. in Working Capital (Non Cash) Other (A) CF from Operating Activities Capex {Inc.5 1.380) (2.856 237 2.544 3.378 795 1.607 CASH FLOW Particulars Profit before tax Depreciation & w.692 Dec14E 257 144 49 11.269 1.9 39.377 Net Current Assets (2.) 16.7 160.952 4.497 1 4.819 340 24./ (Dec.3) (4.7 57.0 2.305 5.867 4.478 9.4 33.6 5.146 800 5.801.1 16.8 10.093.0 4.813) (1.825 4.163) 177 36 3.1 40.814) 44 49 93 Dec12E Dec13E Dec14E 4.) MCap/ Sales (x) EV (` Mn.0 4.578 2 5.567 320 5.559 25.8 Net Profit Margin 11.573 27.2 7.591 240 34.153 4.459 270 31.) in Debt Interest exp net Dividend Paid (Incl.688 (985) (2.904.564 Deferred Tax Liability 801 Total Capital Employed 11.2 January 04.810 390 146 5.440) 0 0 0 500 450 450 (2) (2) (2) (2.064 600 12.927 Dec13E 34.6) (3.271.825 1.3 9.9 2.716 1. Other Income) Interest Gross Profit Depreciation Profit Before Tax & EO Items Profit Before Tax Tax Net Profit BALANCE SHEET Particulars Dec11 Sources of Funds Equity Capital 257 Non Convertible Preference Shares 144 Stock Options 49 Other Reserves 7.592 7.1 15.6 Tax/PBT 29.946 (229) 883 93 2.159.) in Investments (B) CF from Investing Activities Issue of Equity/ Preference Inc.India Research INCOME STATEMENT Particulars Net Sales Other Operational income Total Income Total Expenditure Raw Material Employee Expenses Other Expenses Other Income EBIDTA (Excl.6 12.0 16. O.941 Dec11 23.226) (1. 2013 Gujarat Gas Company 17 .6 5.4 (18.510 Net Block 6.535 240 39.) (E) Valuation Ratios CMP (`) P/E (x) Market Cap.397 604 1.327 Less : Current Liabilities & Provisions Current Liabilities 2.0 32.5 9.0 39.046 3.1 29.0 9.923 31.897 Capital Work in Progress 1.) in FA n WIP} Free Cash Flow Inc.407 5.314) (2.8 27.080) (2.902 593 1 (1.9 53.o.796 643 4.0 43.902 1.174) 2.4 2.861) (1.9 Applications of Funds Gross Block 10.1 30 3 146.061 1.1 34.064 3.586 Cash and Bank Balance 93 2.5 5.3 3.089) 22.6 4.171 2 6.3 840 6.261 9.0 7.514 3.305 1.) EV/Sales (x) EV/EBDITA (x) P/BV (x) Dividend Yield (%) E-estimates 21.825 5.899 1.676 (418) 314 (201) (100) (100) 5.813) (1.822 0.0 36.8 3.1 30 3 146.544) (1.3 (B) As Percentage of Net Sales Raw Material Employee Expenses Other Expenses 77.548 (350) (300) (300) (1.1 15.272 5.927 3.0 2.8 15.0 6.6 31.514 500 13.365) 1.7 4.564 Loan Funds 2.843 1.436 2.249.795 Unsecured Loans 2.9 400 16.692.765) (1.3 35.2 Fixed Assets Turnover (x) 2./ (Dec.039 1. Tax) (C) Cash Flow from Financing Net Change in Cash Opening Cash balances Closing Cash balances E-estimates IMPORTANT RATIOS Particulars Dec11 (A) Measures of Performance (%) Contribution Margin EBIDTA Margin (excl.9 14.0 46.050) Total Assets E-estimates 11.3 66.1 30 3 146.5 15.775 33.0 2.6 Gross Profit Margin 18.160 Dec12E 257 144 49 8.2 6.789 0.902 3.1 77.086 0.6 306 10.I.3 39.123 14.750 320 5.3 306 13.140) 4.740 7.3 91.208 18.0 35.381.0 2.1 Debtors Period (days) 28 Closing stock (days) 2 Inventory Turnover Ratio (x) 151.258 5.5 0.4 35.305 643 751 865 2 2 2 (1.1) 13.5 0.985) 28.039 1.1 Dec12E Dec13E Dec14E Dec11 3.949 1.7 (1.0 9.1 4.9 15.

2013 Int en tio na lly Le ft B lan k Gujarat Gas Company 18 .India Research DOLAT CAPITAL January 04.

9 11. and it continues to sustain volume and operating performance. we believe IGL is on a strong footing.6 % Growth 18.0 21. 2013 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 IGL Sensex Indraprastha Gas 19 . Based on our industry interactions. Notably.345 7.3 PER (x) 11. NCR monopoly to continue: IGL is the exclusive supplier of CNG (for transport) and PNG (for household. And clearing of these over the next few months shall trigger an instant re rating for the sector and IGL in particular. commercial and industrial) in Dehil and the NCR. however the size of the opportunity continues to be big enough for it to sustain growth in high teens next few years.6 32.6 24. The company’s marketing exclusivity for Delhi region expired in December 2011.643 532514 IGL IGL IN IGAS.0 22.7 9.0 8.5 8.405 FY14E 42. Further. The matter under contest relates to the fixation of Network Tariff and Compression Charges. The other issue that has been an overhang on the stock is the fear of cap on marketing margins.Initiating Coverage Indraprastha Gas India Research CMP: ` 256 BSE Sensex NSE Nifty Scrip Details Equity Face Value Market Cap 52 week High / Low Avg. PNGRB does not intend to control final selling prices. Its role as a facilitator of green fuel culture and an exclusive supplier in the high-growth National Capital Region (NCR) has been proven over the last decade.7 EPS (`) ` 21.43 21.8 22.4 29. Shareholding Pattern as on Sept’12(%) Promoter MF/Banks/FIs FIIs Public / Others IGL relative to Sensex 110 100 90 80 70 60 50 40 45.2 23. the regulatory issues have not impacted financial performance of IGL.849 NPM % 12.BO 19.9 Financials Year Net Sales FY12 25.00 17.206 4.3 PAT 3.5 27.979 10.016 DOLAT CAPITAL Target Price: ` 379 Buy Indraprastha Gas’s (IGL) business model of playing the role of an enabler in the energy economy with adequate pricing power positions as one of the secular plays in the sector. The regulator. We recently upgraded the stock to Dolat preferred picks.4 29. Of late however.7 15. The aggressive geographical expansion has enhanced the network coverage and this shall be a key driver of its volume growth.3 18.5 7.925 8. IGL’s ability to protect spreads despite an increase in gas costs ensures profit growth.151 FY13E 34. on the back of its promoter’s strength (GAIL).9 25.901 Figure in `.765 4.0 34. We observe in our channel checks that the CGD sector would be kept out of the purview of marketing margin. there would be no impact of profitability of IGL. Volume (no) BSE Code NSE Symbol Bloomberg Code Reuters Code ` 1400mn ` 10/` 36bn USD 658mn ` 394 / 170 194.50 16.2 10.209 January 04.198 FY15E 55.784 6. given the challenges to OPM % 25.4 ROANW(%) ROACE (%) 27.9 26.04 Investment Rationale Regulatory Concerns: A case of overdone pessimism The Supreme Court is due to take up the hearing of the PNGRB – IGL case in Mar 2013.2 36. and therefore has fair probability of winning the case.064 3.5 EBIDTA 6. The key strength for IGL comes from its ability to source gas. We believe that these concerns may have been overdone.2 28. However. mn % Growth 44.9 30. we believe that entry barriers for new players to establish presence in the region are very high. regulatory concerns have weighed down on the stock.5 28. Hence.9 10.

The remaining is RLNG. However. With no improvement in domestic supplies.5x FY14E earnings. At CMP the stock trades at 9. This is inspite of the regular price hikes (20% ytd) taken by IGL while for Petrol and Diesel. the price hikes have been 2. We feel that risk reward is highly in favour of IGL.India Research DOLAT CAPITAL ensure gas supply. gas continues to be the best option. will drive revenue and profit growth. The aggressive expansion is expected to continue and IGL will reap long-term benefits. In the industrial segment. The latest cap on the number of cylinders (if six cylinders per household is retained) has made PNG more attractive. PNG is cheaper as compared to liquid fuels. PNG is cheaper by 6% at current heavily-subsidised LPG price levels.6% over FY12 to FY15E. Any further increase in LPG price will further tilt the scale in favour of IGL. Visible growth with pricing power: IGL has doubled its gross block in two years (FY10-12). 1 year forward PE Band January 04. despite hikes in gas cost. The infrastructure expansion is across CNG stations and pipeline networks for the PNG segment. it is marginally costlier as compared to solid fuel. This shows the IGL business model’s resilience. Enviable user economics: The economics for CNG as transport fuel continues to offers unprecedented savings (around 56% against petrol and around 24% versus diesel).5x FY13E and 8. we feel IGL’s monopoly will continue. by consistently raising selling price. We recommend Buy with a DCF based price target of ` 379. 2013 Indraprastha Gas 20 . coupled with decent volume growth. Valuation IGL’s ability to maintain gross spreads in absolute terms. IGL has shown the ability to maintain gross spreads. We believe that current market price is factoring extreme negatives of regulatory hurdles. In the household segment.4% and 14% respectively. For the commercial segment. We expect IGL to clock a volume CAGR of 14.

Reason given – Gas is not a notified product IGL wins the case in Delhi High Court. Our view is further corroborated from the following aspects of the sector: January 04. PNGRB moves to Supreme Court IGL has submitted the data for tariff (Network and Compression) approval to PNGRB. IGL takes a stay on PNGRB order from Delhi High Court PNGRB refers the marketing margin issue back to Oil Ministry.04 Actual by IGL* 4. These were not accepted by PNGRB and were reduced significantly by PNGRB.51 8. Proposed by IGL Compression Charges ` / Kg ` / SCM Network Tariff `/ MMBTU ` / SCM Total (` / SCM) * Dolat Estimates 6. 2011 Government asks PNGRB to look in the marketing margin charged by Gas distribution companies PNGRB issues an order to IGL fixing the Network Tariff and Compression Charges. 2012 July 27.05 3.25 5.58 Network Tariff and Compression Charge: As per the PNGRB Act.33 April 9.58 1.50 3.30 3. the regulator is authorized to fix network tariff payable to IGL by any gas distribution company which enters the Delhi region.India Research Regulatory Concerns Overdone DOLAT CAPITAL Regulatory hurdles for IGL have emerged on 2 fronts – Network Tariff & Compression Charges and Marketing Margin. 2012 104. IGL stance has been that since it procures and sells gas directly to its customers. This is based on the use of IGL’s infrastructure to move gas. Delhi High court says that PNGRB does not have any power to fix tatriffs for IGL’s own consumers. that city gas distribution (CGD) companies shall be excluded from the purview of marketing margins.75 2. 2012 June 1. therefore there is no applicability of third party here as it owns the client. Chronology of Events: December 26. However.34 66. 2013 Indraprastha Gas 21 .44 38.75 2. Marketing Margin: We believe. The important aspect of this is that network tariffs can be fixed by the regulator for third party.93 PNGRB 2. 2012 April 10. 2012 May 8.66 4. based on our interaction with the industry participants. We expect this clarification to emerge over the next few months.

January 04. secure gas tie ups and strong parentage will ensure steady growth for IGL. Porter’s 5 Forces Model IGL has maintained profitability. entry barriers. Incremental volume is catered by high cost imported RLNG. aided by volume growth and access to gas at APM rates. 2013 Indraprastha Gas 22 . industrial and household purposes. Due to availability of alternate fuels. CGD companies cannot be assured of a confirmed off-take (like Power) with a fixed margin and hence they carry the risk of marketing the gas to retail consumers.India Research DOLAT CAPITAL Gas input costs are not fixed. Its business model in NCR has been a benchmark for the rest of the country to promote green fuel culture. NCR monopoly to continue IGL supplies natural gas in the national capital region (NCR) for transport. We feel that IGL’s monopoly in NCR will remain though the marketing exclusivity period for Delhi has ended in December 2011. market forces should determine the marketing margin that can be charged by IGL. ‘Porter 5 Forces’ model signifies the inherent strength of IGL’s business model. favourable business prospects. It has been instrumental in shifting public transport to CNG from conventional fuels. The dominant market position.

thereby presenting a big revenue opportunity. which runs buses in NCR.2 6. Considering the under recovery in LPG cylinders. 2013 Indraprastha Gas 23 . which is heavily subsidised. PNG is cheaper as compared to LPG. /SCM) Comparable factor of PNG with LPG on energy equivalence (1 SCM / Kg) Comparable Cost (in Rs / Kg) % Savings on every unit Source : Dolat Research 410. the government may revise prices upwards.India Research DOLAT CAPITAL Enviable user economics Apart from controlling pollution.0 January 04.2 28. High prices of conventional fuels and easy availability of CNG with new CNG stations coming up would drive the shift. The tie up with DTC has been at an institutional level and IGL has created CNG filling stations at DTC depots to facilitate easy filling of CNG for DTC buses. NCR has the highest population of four wheelers in India.) Weight of LPG( in Kg) Cost per unit (Rs / Kg) PNG for Household Cost (in Rs. Source : Dolat Research Rationalisation of LPG subsidies : Opportunity for PNG In the PNG segment for households.9 22 0. The capping of the number of cylinders has increased the demand for PNG. The Delhi Transport Corporation (DTC). is IGL’s biggest customer.81 27. LPG Cylinder Cost (in `.5 14. The regulatory compulsion of public transport being on CNG envisages long-term demand sustainability. The fuel cost of four wheelers is a major cost component of running them. the use of CNG offers unprecedented savings on fuel consumption. The economics and negligible maintenance of shifting to CNG act as a strong trigger for conversion of private vehicles to CNG.

India Research DOLAT CAPITAL In the commercial and industrial segment. PNG is preferred due to cost economics and ease of usage. This is aimed at capturing upcoming residential areas and covering untapped domestic segment. PNG is cheaper as compared to liquid fuels. Source : Dolat Research The expansion will come in the form of: Capacity augmentation at existing CNG stations: This will reduce filling time and waiting time. 2013 Indraprastha Gas 24 . it is marginally costlier when compared to solid fuels. CNG station: IGL is aggressively adding CNG stations to cater to burgeoning CNG demand. It has doubled its gross block in two years FY10-12. This would propel the volume growth in the industrial segment. 2012 is as below: Station Category Online Daughter Daughter Booster Total IGL 110 0 3 113 DTC / UPSRTC 50 0 0 50 OMC 67 1 77 145 Total 227 1 80 308 January 04. Visible Growth with Pricing Power IGL is extensively upgrading its infrastructure. Increase in pipeline network: IGL is expanding its pipeline network across NCR to reach new residential areas for the PNG segment. We expect capex intensity for another 3 years and IGL will reap the benefits in the long term. The CNG station break up for IGL as on March 31. We expect RLNG prices to go down from the current levels by March. However. At current prices. It is also spreading out to new sites for CNG stations. This segment is catered by high cost RLNG. IGL has a flexible pricing for industrial segment we expect that benefit of decline in RLNG prices would be passed on to the industrial consumers.

It has nearly 2. blended cost of gas will increase constantly.India Research Category Steel Pipeline MDPE Pipeline Total FY08 195 1272 1467 FY09 231 1700 1931 DOLAT CAPITAL FY10 299 2330 2629 FY11 421 4420 4841 FY12 CAGR (in %) 574 6479 7053 31.6% CAGR over FY12 to FY15E. In the absence of any increase in domestic gas supplies.6 MMSCMD of APM gas and the remaining volume is catered to by high-cost RLNG.1 The PNG network growth for IGL is as below: The company has consumed its allocated quota of APM gas and is going strong in terms of volume growth. Its strategy has been to maintain or increase gross spreads consistently. IGL will be resorting to RLNG to support volume growth. Acceptance of the regular price hikes shows the economic advantage of even expensive gas. Source : Dolat Research January 04. 2013 Indraprastha Gas 25 . IGL has been raising selling prices across segments to maintain absolute gross spreads.0 50. To counter the constant increase in blended gas cost. IGL will have to hike prices regularly. Increasing proportion of RLNG in gas mix Source : Dolat Research As the incremental volume growth is catered to by high-cost RLNG.2 48. We expect IGL’s volumes to grow at 14. To maintain absolute profitability on a per unit basis.

Source : Dolat Research IGL’s ability to hike prices will result in operating and net profitability growing in absolute terms. which comprises households and commercial & industrial.2% CAGR in FY12-FY15E and net profit to grow 16. Source : Dolat Research Revenue growth driven by volume. margins would remain on a decline trajectory.6% during FY12-15E driven by the industrial segment. Revenue growth will be driven by volumes as well as realisations. 2013 Indraprastha Gas 26 .India Research Financial Analysis DOLAT CAPITAL Profitability margins to decline but absolute profitability remains strong Rising input cost has put pressure on operating and net margins. will be the high growth segment. The CNG segment is expected to grow 11.2% CAGR during FY12-15E. blended cost of IGL is on a rise.5% CAGR in FY12-15E. As the incremental volume is catered by high cost RLNG. realisation IGL will see volume CAGR of 14. Though IGL would be able to protect its absolute spreads on a per unit basis. January 04.5% CAGR during FY12-15E. We expect IGL’s operating profitability to grow 17. It is expected to grow at 24. PNG.

489 377 7.048 58.849 2.5x FY14E earnings. Case is with Supreme Court and regulatory overhang would remain till the decision of Supreme Court comes.288 1.India Research DOLAT CAPITAL Source : Dolat Research Valuation IGL has undergone a structural change in the past couple of years. With PNGRB not interested to control the final selling price.787 3.022 140 379 27 .198 309 10. We believe that current market price is factoring extreme negatives of regulatory hurdles. DCF Profit After Tax (PAT) Depreciation Interest (1-T) Gross Cash Inflow Capex Increase in Non Cash Working Capital Gross Cash Outflow Free Cash Flow Discount Factor PV of Free Cash Flow PV of Cumulative Free Cash Flow Assumed Terminal Year (n) Cash Flow at N+1 Growth Rate (in %) WACC (in %) Terminal Value Discounted Terminal Value Present Value of Firm till Terminal Year Total Discounted Value of Firm Current Debt of Firm & Pref Equity Present Value of Equity No of Equity Shares Fair Value of Equity Share (in `) January 04.841 5.155 3. Pricing power resilience. We recommend Buy with a DCF based price target of ` 379.939 6.793 13.5x FY13E and 8.980 68% 2. we believe that it would not be implemented on CGD sector.206 2.163 5.251 4.477 83% 1.293 5.616 567 6.048 2017 5.765 1.715 5.221 5.999 1.400 (112) 5.725 45.431 7. Regarding marketing margin issue.0% 73.397 (75) 1.288 5.109 13.843 343 9.818 53.765 5. 2013 Indraprastha Gas FY13E FY14E FY15E FY16E FY17E 3.235 75% 2.148 411 6.978 2.184 (704) 4. we feel that spreads of IGL are not under threat.323 4.903 5.251 4. At CMP the stock trades at 9. Regulatory hurdles during FY13 have beaten down the stock significantly.480 3. The strength of the business model was never tested till rising input cost forced it to revise prices regularly.847 387 5. aggressive pursuit of growth.0% 10.676 91% 4. We feel that risk reward is highly in favour of IGL.036 9.400 (112) 5.472 4.005 62% 3.183 2. promotion of new usages of gas and strong demand and supply sides will culminate in cash generation for the foreseeable future.

206 ` mn Mar15E 55.5 28.400 16.501 5.661 7.605 Capex (6.847 2.9 32.064 Mar13E 34.0 January 04.0 23.737 Less : Current Liabilities & Provisions Current Liabilities 3.4 1.296) (1.9 71.397) (5.0 17.433 Closing Cash & Cash Equivalents 1.433 4.1 5.6 81.832) 2.687 8.485 506 3.497) (5.925 8.5 35.226) 26.1 (2.568 692 22./ (Dec.143 6.1 5. (` Mn.1 (3.4 Average Cost Of Debt (%) 9.923 45.392 437 929 67 6.847 5.9 9.663 38.369 4.375 2.1 1.425 2.726 2.493 5.237 7.9 Net Profit Margin 12.597 5.0 22.152) (D) Measures of Investment EPS (`) CEPS (`) DPS (`) Dividend Payout (%) Profit Ploughback (%) Book Value (`) RoANW (%) RoACE (%) RoAIC (%) (Excl Cash & Invest.501 23. Other Income) EBIDTA (Incl.095 25.237 Depreciation & w.) in Debt 1.6 37.4 67.084 Current Assets.4 108.735 Mar13E 1.327 6.943 6.4 129.400 13.302 6. Tax) (814) (814) (1.3 15.6 24.1 152.I.7) Non Cash Working Capital (` Mn) (2.790) Net Change in Cash 715 3.4 8.184) Free Cash Flow (756) 4.361 24.4 2.9 40.8 27.1 1.745 18.421 Inc.) in Investments 760 (100) (100) (100) Other 61 (B) CF from Investing Activities (5.0 21.388 4.7 35.673 27.901 22 55.425 3.872 21.0 28.0 45.072 3.6 6.922 28.5 0.148 6.0 26.299 4.3 18.964 875 140 10.748 Capital Work in Progress 3.284 1.9 256 9.405 21 34.2 0.443 5.663 Mar15E 1.4 14.) EV/Sales (x) EV/EBDITA (x) P/BV (x) Dividend Yield (%) E-estimates 21.501 4.289 563 9.933 1.885 Cash and Bank Balance 320 4.877 8.9 33.675 3.0 256 7.6 52.735 22.3 8.7 21.367 2. 1.388) Chg.4 10.1 22 7 52.6 35.0 10.638 Provisions 870 814 sub total 4.1 256 8.4 10.7 1.7 10.9 22 7 52.796 18.057 13.9 27.724 Net Block 15.220 60 8.3 21.2 1.0 8.285 Mar12 25.241 28.0 33.586 2.338) 30.501 1. 2013 Indraprastha Gas 28 .947 750 650 (600) Interest exp net (484) (575) (614) (563) Dividend Paid (Incl.714 40.2 87.9 Gross Profit Margin 23.787 384 Investments 984 1.) (E) Valuation Ratios CMP (`) P/E (x) Market Cap.511 4.964 E-estimates IMPORTANT RATIOS Particulars Mar12 (A) Measures of Performance (%) Contribution Margin EBIDTA Margin (excl.5 29.4 41.501 Mar14E 1.277 2.2 28.618 300 28.1 18.184 809 2.2 (B) As Percentage of Net Sales Excise Duty % of Gross Sales Raw Material Employee Expenses Other Expenses 9.430 591 4.0 37.543 7.5 2.489 7.695 384 1.5 Interest / Sales 1.889 12.426 26.979 9.072) (2.6 73.3 Fixed Assets Turnover (x) 1.345 6.3 20 6 60.3 18.148 2. in Working Capital (54) 75 112 704 Other (14) 65 (392) 0 (A) CF from Operating Activities 5.4 29.3 2.6 25.9 61.510 94 7.432 1.2 Debtors Period (days) 19 Closing stock (days) 5 Inventory Turnover Ratio (x) 67.511 4.929 1.145 3.302) (1.0 9.473 Less: Accumulated Depreciation 6.0 0.7 8.0 9.840 1.1 (2.498 1.298 1.840 1.489 Net Interest Exp 479 575 614 563 Direct taxes paid (984) (1.7 65.) MCap/ Sales (x) EV (` Mn.9 32./(Dec.849 CASH FLOW DOLAT CAPITAL Particulars Mar12 Mar13E Mar14E Mar15E Profit before tax 4.289 3.840 0.218 300 25.285 Total Assets E-estimates 18.277 6.543 4.) 25.3 20.452 Net Current Assets (1. O.1 4.284) Inc.India Research INCOME STATEMENT Particulars Net Sales Other Operational income Total Income Total Expenditure Raw Material Employee Expenses Other Expenses Other Income EBIDTA (Excl.151 36 25.752 80 10.4 14.6 32.117) (1.597 6.042) 34.361 6.818 627 18.072 4.857 10.627 8.209 10.420 6.400 19.198 22 42.437 3.4 35.292 671 4.8 77.9 4.9 35.832 3. O.501 22.2 EBIDTA Margin (incl.7 3.4 29.7 Mar13E Mar14E Mar15E Applications of Funds Gross Block 22.8 38. Other Income) Interest Gross Profit Depreciation Profit Before Tax & EO Items Profit Before Tax Tax Net Profit BALANCE SHEET Particulars Sources of Funds Equity Capital Other Reserves Net Worth Secured Loans Unsecured Loans Loan Funds Deferred Tax Liability Total Capital Employed Mar12 1.967 21.7 3.187 18.019 575 7.842 15.8 2.7 9.287 3.277 7.627) Other (979) (C) Cash Flow from Financing 650 (1.o.9 2.1 72.597 1.8 1.832) (2.1 1.5 10.840 0.237 2.680 5.0 18.285 (C) Measures of Financial Status Debt / Equity (x) 0.494 0.220 33.9 256 11.I.433 775 120 8.400) (5.7 3.4 1.445 1.039 614 8.338 1.241 3.5 35.4 1. Loans & Advances Inventories 374 566 Sundry Debtors 1.0 3.400 10.5 29.511 Loans and Advances 575 675 Other Current Assets 95 100 sub total 2.5 Interest Coverage (x) 13.625 0.618) (1.412 479 5.2 8.432 4.4 33.6 Tax/PBT 31.212 (78) 531 Opening Cash & Cash Equivalents 585 1.841 15.3 1.284 1.1 Working Capital Turnover (x) (13.765 Mar14E 42.500) (5.897 1.4 1.265) (2.299 4.5 20.675 3.) 25.871 1.623 4.984 400 1.

Distribution The acceptance of the high priced Re-gasified Liquefied Natural Gas (RLNG) has brought a new dynamism to the CGD space. The expanding pipeline infrastructure. Source: Industry. Dolat Research January 04. commercial consumers and small industrial consumers (Piped Natural gas [PNG]) Transportation segment as vehicle fuels (Compressed Natural gas [GNG]) CGD network involves movement of small volumes of gas through small diameter medium to low pressure distribution pipelines by a local distribution company to a large number of retail consumers. Network Basics CGD represents the last mile in the gas value chain and gas is supplied at low / medium pressure to Residential. especially in the absence of any increase in domestic gas supplies.DOLAT CAPITAL City Gas Distribution (CGD) – last Part in the Gas value chain . poly ethylene (PE) and medium density polyethylene (MDPE) pipelines along with CNG dispensing stations. 2013 29 . favourable economics of gas and a growing concern over pollution makes a sound investment case in CGD space provided the strategy to deal with supply side issues and regulatory risks is in place. It is an integrated network of steel.

P. Mira Bhayandar and Navi Mumbai Pune Kanpur. Haryana City Gas GAIL gas Ltd. which began operations in the late 1980 to mid 1990. Mehsana. Sabarkantha Vadodara Duliajan and nearby areas Asansol. Siti Energy Indraprastha gas Ltd. Central U. Mahanagar Gas Ltd. Bareilly Agra. largely dormant phase Source: Industry. Sonepat and Meerut Mathura Anand/Kheda 30 January 04. GAIL HPCL* Bhagyanagar Gas Ltd. Lucknow and Taj Trapezium zone Vadodara Ahmedabad Hyderabad.DOLAT CAPITAL CGD Evolution in India The gas retail business in India started as early as 1880 when Calcutta Gas Company and Bombay Gas Company commenced operations in Kolkata and Mumbai respectively. Avantika Gas Ltd. Sabarmati Gas Ltd. Tripura Gas Ltd. Dolat Research Year of Incorporation 1980 2005 2004 2006 1972 1965 1996 2006 1998 1995 2006 2005 2005 2006 2003 1990 2006 2000 2008 1999 Operating Areas Surat. gave thrust to the CGD sector. Faridabad. Sanwariya Gas Charotar Gas Source: Industry. north and south Ahmedabad. Kota. Mumbai and Vadodara Supreme Court directive to expand CNG network Supreme Court directs to introduce clean fuels in 11 cities other than Delhi and Mumbai CGD network operational in multiple locations Formation of PNGRB CGD becomes a reality and platform being made for massive growth Gains Momentum Structured Development CGD Development Phase Few initiatives. Dolat Research Existing CGD Network in India as on October 2012 CGD Entity Gujarat Gas Company Ltd. The sector remained dormant for a very long time. Vadodara Mahanagar Seva Sadan Assam Gas Company Ltd. Maharashtra Natural Gas Ltd. Ltd. Kulti and Durgapur Moradabad Delhi. 2013 . Greater NOIDA and Ghaziabad Mumbai. Mahanagar Gas (MGL) and Indraprastha Gas (IGL). NOIDA. The formation of Gujarat Gas Company (GGCL). commences supply of coal gas Systems tested by ONGC and AGCL in Assam and Tripura GGCL launches PNG supply for industrial consumers GAIL did a pilot study in Delhi. Great Eastern Energy Corp. Ujjain and Gwalior Gurgaon Dewas. Bharuch and Ankleshwar Across all regions of Gujarat. Gas Ltd. central. Year 1880 – 1900 1962 1972 1982 -86 1989 -91 1992 1998 2003 2006 2007 City / State Company & Areas Coal gas supplied in Kolkata and Mumbai Assam Gas Company (AGCL) established Vadodara Municipal Corp. Rajahmundry and Kakinada Agartala Indore. covering Saurashtra. GSPC Gas Adani Gas Ltd. Green Gas Ltd. Thane. Vijaywada. Vadodara Gandhinagar.

The regulations provided exclusivity of infrastructure over its economic life of 25 years (economic life has been taken as 25 years for determining network exclusivity. the bidders are evaluated on certain predefined parameters. which is nearly 60% of the total cost and the land cost required for City Gate stations and CNG stations within the city. Over and above the qualifying technical and certain financial criteria. the actual economic life of the infrastructure could be more than 25 years). The revised parameters are as below: Source: Industry. These parameters have also undergone some change due to some malpractices witnessed in the earlier rounds of bidding. Marketing Exclusivity The regulations provide for marketing exclusivity of 5 years and 3 years for new and existing players respectively. the pipeline January 04. a CGD project for a mid tier city could be developed with an investment of around Rs 4 bn.DOLAT CAPITAL CGD Project Cost: On an average. The main costs for a CGD project are the pipeline network. Dolat Research Network Exclusivity PNGRB has provided Network Exclusivity on the infrastructure for the winning bidder. Competitive Bidding for New Licenses The regulations put a process for selection of a CGD entity for a new city on the basis of competitive bidding. The network tariff charged by the owner for the use of infrastructure by other players is a biddable parameter. 2013 31 . Beyond this period.

No. Any increase in the domestic supplies in the coming years would be an added advantage for CGD companies to fuel growth as well as profitability. The price of the gas produced from the fields operated by private companies or joint ventures of public and private companies is approved by the government. the formula or basis for that price has to be approved by the government. This was done with a clear objective that consumers up to a certain level of gas consumption would be catered by CGD licensee of that area irrespective of the price differential. However. RLNG is readily available and all the above mentioned CGD companies are catering to their incremental volume growth through RLNG. Gas Supply: CGD has been accorded a high priority status for allocating gas from domestic supplies. IGL. but less than 100. The only risk to this is the prices of RLNG moving upwards sharply from the current levels.000 SCM. GGCL and MGL. Dolat Research Guidelines To be under CGD network Either through CGD network or separate pipeline To be through a separate pipeline not covered under network Service Obligations The regulator has specified certain minimum levels of service obligations and service standards on matters relating to safety. However. quality of natural gas supplied. the CGD users have shown willingness to accept high cost gas in form of imported RLNG. However. Gas Consumption Levels 1 Gas consumption less than 50.DOLAT CAPITAL infrastructure will become a common carrier and open access has to be given to third parties on payment of network tariff. January 04. billing and emergency response. Gas Consumption Parameters PNGRB has defined the gas consumption levels of consumers to ensure that a CGD player does not have to face any competition from bulk suppliers. The decline in the KG D6 gas production has been a dampener for the country.000 SCM per day 3 Consumption over 100. 2013 32 . the upcoming global capacity for RLNG and decline in US imports would keep RLNG prices under check.000 SCM per day CGD Source: Industry. S. viz. The gas priced under Administered Price Mechanism (APM) is for the gas produced from blocks that were awarded by the government on a nomination basis to ONGC and OIL. For the gas produced from the NELP blocks.000 SCM per day 2 Consumption over 50. issue of new connections. the contractor who develops and produces from the field can propose a selling price of gas. addressing consumer complaints. Gas Pricing There are several gas prices prevailing in the country. considering the case of 3 major CGD players of India.

This is the only segment in the gas market that can reflect the short term demand and supply scenario of India.79 per MMBTU to USD 4. the government increased the APM price of gas by 135% from USD 1. January 04. It also eliminated the subsidy and brings in a level playing field for various consumers of gas. In May 2010. The price hikes has become a normal business phenomenon and we feel that all the CGD companies are working with a strategy to maintain their gross spreads on absolute terms. the biggest concern was the ability of CGD companies to maintain their profitability and would any prices hikes be accepted by the end users. Impact on CGD: When the APM prices were increased and CGD companies had to resort to higher cost RLNG in absence of domestic gas supplies.2 per MMBTU bringing it par with KG D6 prices. the price is not regulated. which is the other source of gas apart from domestic supplies. The enviable economics of gas usage as compared to alternate fuels and ease of usage enabled CGD companies to pass on the hike in the gas input cost. The acceptance of the price hikes showcases the resilience in the business model of CGD companies. 2013 33 . This substantial increase in the APM price in one go is an indication of the government’s intent to make the gas market viable for investors.DOLAT CAPITAL For the imported RLNG.

US and UK are the benchmarks for the CGD business. Dolat Research January 04. 2013 34 . Regulation Low Moderate Envisaged Positin High All the major countries are clustered around the same position in Global CGD Matrix and are trying to benchmark to US and UK for maturation US UK High High Malaysia D e m a Moterate n d Pakistan India Japan S u p Moterate p l India should concentrate on y regulatory/infrastructural development first. China South Koriea Turkey Low Low Low Moderate Infrastructure High Source: Industry.DOLAT CAPITAL India Position on Global CGD Scenario India needs to compare the CGD developments in the country with the progress made by other countries and take lessons on what has driven the progress of CGD business in the world.

Dolat Research Moderate January 04.DOLAT CAPITAL Gap Areas and Issues pertaining to the CGD business in India Gap Areas Areas of Concern Impact Regulatory Loopholes • Role Ambiguity • Delay in granting authorising powers • Slowness in conducting the CGD bidding rounds • Increasing number of NOC clashes • Lack of clarity on policy and guidelines among players Project financing Concerns • Financial risks owing to bidding in the scenario of uncertainty of gas sourcing and trunk pipeline connectivity • Problems in equity pooling for project execution • Issues in getting finance for small and new player in the business • Promotes unfair business practices • Undue pressure on recovery of costs • De-incentivises the new entrants in the market • Acts as a deterrent to new entrants in the market • Promotes unethical business practices • Promotes unachievable business proposals in the sector Strong Moderate Zero Tariff Bids Meager Overbidding Meager Marketing Exclusivity • Highly Capital intensive projects with low monopoly gas marketing period of only five years • Insufficient return on investment • Against the idea of promoting small players for long-term in the CGD business Gas Allocation Principles • Low priority allocation • Less domestic gas availability • Increase reliance on R-LNG to meet energy requirements • High Input costs ultimately increases the gas price for the end consumers • Negative effect on the growth of exploration activities is speculated to result in less domestic gas availability Moderate Strong Gas Price Pooling Meager CGD Bidding Rounds • Targets underachieved • Slow coverage of cities under CGD leads to slow spread of clean fuel to end users across the country Source: Industry. 2013 35 .

Regulator and Government to reduce the impact and frequency of the risks Low Source: Industry. pricing of fuels.DOLAT CAPITAL Major Risk Factors of CGD business in India Risk factors Gas Availability and Allocation Risk Major Areas of concern • Diminishing domestic natural gas availability • Low priority accorded to CGD sector in Gas Allocation Policy • Core sector allocation not available for anchor consumer segments of CGD sector . profitability and re-investments • Build-up of gas volumes sales is not easy in the high margin customers of industrial and commercial • A lot of inertia from customers is expected in the segment of PNG and CNG • Attaining the optimal customer portfolio is a challenge • Pre-mature competition may act as a barrier to reach the desired penetration level • Legal disputes and delays threatening the authority of PNGRB • Amendments in the regulations may impact the CGD landscape • Any changes in the CGD bidding parameters also reflect a major risk • Pricing is highly subject to regulatory risk as regulatory changes may impact the CGD pricing Risk impact Moderate to high Financial Risk Moderate Marketing Risk High Regulatory Risk High Risk Matrix of CGD business Impact Gas Sourcing High Operational Marketing Regulatory Gas Availability/Allocation Pricing/Taxation Moderate Financial Project Management Legal/Statutory Business Model Low Synchronised efforts required from CGD operators.Industrial and Commercial • Huge investments required in the initial years when CGD is typically a low volume and low margin business • Underlying uncertainty of gas sourcing will make the funding difficult • Unrealistic bidding will affect the investment recovery model • Investing in high-interest rates time period will affect the working capital. Dolat Research Moderate High Frequency 36 January 04. 2013 .

DOLAT CAPITAL January 04. 2013 Int en tio na lly Le ft B lan k 37 .

com chandrakant@dolatcapital.com nehals@dolatcapital.com pranavj@dolatcapital. Sethna P.com prachi@dolatcapital. Sridhar Chandrakant Ware Jitendra Tolani Designation Principal Director .com chiragm@dolatcapital.Research Consumer Pharma & Agro Chem Auto & Auto Ancillary Midcaps Oil & Gas IT Services Metals & Mining Derivative Analyst Upside above 20% Upside above 5% and up to 20% Upside of upto 5% or downside of upto 15% Downside of more than 15% E-mail amit@dolatcapital. CFA Amit Purohit Bhavin Shah Mayur Milak Nehal Shah Priyank Chandra Rahul Jain Ram Modi Prachi Save Sector/Industry/Coverage Director .com kapil@dolatcapital. internally developed data and other sources believed to be reliable.+91-22-4096 9700 91-22-40969745 91-22-40969724 91-22-40969731 91-22-40969749 91-22-40969753 91-22-40969737 91-22-40969754 91-22-40969756 91-22-40969733 Associates Dhaval S.com ram@dolatcapital. we do not take any responsibility for inaccuracy or omission of any information and will not be liable for any loss or damage of any kind suffered by use of or reliance placed upon this information.com bhavin@dolatcapital.+91-22-4096 9797 91-22-40969747 91-22-40969746 91-22-40969712 91-22-40969735 91-22-40969705 91-22-40969748 91-22-40969702 91-22-40969708 91-22-40969728 91-22-40969707 91-22-40969734 purvag@dolatcapital. Our Research reports are also available on Reuters. Thomson Publishers and Bloomberg (DCML <GO>) . 20. Shah Pranav Joshi Sector/Industry/Coverage Engineering & Capital Goods Financials E-mail dhaval@dolatcapital.Institutional Sales Institutional Sales .com mayur@dolatcapital. 1st Floor. For Pvt. Fort. While all reasonable care has been taken to ensure that the facts stated are accurate and the opinion given are fair and reasonable.com Tel.com jatin@dolatcapital.Equities Sales Trader Sales Trader E-mail Tel. Ambalal Doshi Marg.DOLAT CAPITAL BUY ACCUMULATE REDUCE SELL Analyst Amit Khurana.com Tel.Institutional Sales AVP .Institutional Sales AVP .com amitp@dolatcapital.com sridhar@dolatcapital. Ltd.com aadil@dolatcapital.FII AVP .com priyank@dolatcapital.com janakiram@dolatcapital.+91-22-4096 9700 91-22-40969726 91-22-40969706 Equity Sales/Dealing Purvag Shah Vikram Babulkar Janakiram Karra Kapil Yadav Parthiv Dalal Jatin Padharia Chirag Makati Aadil R.400 001 This report contains a compilation of publicly available information.com rahul@dolatcapital. Circulation & Research Purpose only.com jitendrat@dolatcapital. Rajabahadur Mansion.com Dolat Dolat Capital Market Pvt.Sales Trading Head of Derivatives Head Dealing . Mumbai .com vikram@dolatcapital.Institutional Sales Director .com parthiv@dolatcapital.