You are on page 1of 27

1

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

B U Y
28 Mar, 2011

Indraprastha Gas Limited

Key Data

(`)

CMP

299

Target Price

357

Key Data
Bloomberg Code

IGL IN

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.

Reuters Code

IGAS.BO

BSE Code

532514

NSE Code

IGL

Investment Rationale

Face Value (`)

10

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

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)
Revenues
Operating Profit

FY11E

FY12E

FY13E

17,151.7

22,894.7

28,936.0

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

14.7%

13.3%

11.0%

18.1

21.7

22.7

PAT Margin
EPS (`)

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 IGLs 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 & Outlook


Analyst
Champak Patel
research@acm.co.in
Tel: (022) 2858 3412

We 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 Ltd

ACMIIL

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

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.
IGL

CNG

PNG

Industrial/Commercial

Domestic

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


Net Sales Mix
120.00%
100.00%

11.65%

13.74%

14.06%

14.77%

16.30%

88.35%

86.26%

85.94%

85.23%

83.70%

FY09

FY10

FY11E

FY12E

FY13E

80.00%
60.00%
40.00%
20.00%
0.00%

CNG Sales

PNG Sales

Source: IGL, ACMIIL Research

Selling prices in both the


segments are currently
determined vis-a-vis the relative
prices of alternative fuels

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.

Indraprastha Gas Ltd

ACMIIL

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

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

Relatively secured gas supply to


meet demand

Region

GAIL

NCT of Delhi

GAIL

Noida, Greater Noida

Contracted Supply (MMSCMD)


2
0.2

GAIL

Faridabad

0.25

GAIL

Gurgaon

0.25

RIL

0.15

BPCL

0.24

Source: IGL, ACMIIL Research

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.
IGLs Gas Source Pipeline Structure

Source: IGL

IGLs 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.

Indraprastha Gas Ltd

ACMIIL

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

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

Source: IGL, ACMIIL Research


(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

Initial phase of conversion was


driven by mandatory sources,
current conversions driven by
discretionary users

The ruling of the Honorable Supreme Court in July 1998, which directed conversion
of the citys 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
Cost of Kit (`)

4 Wheeler

3 Wheeler

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)


Yearly travel assuming 300 days of travel (Km)
Yearly Savings (`)
Payback Period (Months)
Breakeven (in Km)

80

50

60

24,000

15,000

18,000

138,667

47,096

29,520

15.1

10.2

10.2

30,288

12,740

15,244

Source: Industry, ACMIIL Research

Indraprastha Gas Ltd

ACMIIL

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

Higher price of Petrol and diesel


to increase CNG conversion- Major
driver for CNG demand is cost
savings

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.

Vehicle growth vis--vis CNG stations


300
241

300000

NO. of Vechicles

250000

181

200000
150000

107

134

120

146

153

250

NO. of CNG stations

350000

200

163
150
100

100000

50

50000

0
FY03

FY04

FY05
FY06
No of Vehicle

FY07
FY08
FY09
No of CNG Station

FY10

Source: IGL, ACMIIL Research

b. PNG

Domestic PNG V/s Industrial PNG consumers


200000

355
296

150000

304

400

317
320

256
240
174

100000

160

118
50000

83
80

FY03

FY04

FY05

Domestic PNG

FY06

FY07

FY08

FY09

FY10

NO. of Industrial Consumer

NO. of Domestic Consumer

PNG penetration of just 3.5% in


Delhi offers huge potential for
growth in the years ahead

The PNG segment contributes a mere 13.74% to IGLs 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.

Industrial/Commercial PNG

Source: IGL, ACMIIL Research

Indraprastha Gas Ltd

ACMIIL

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company
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

Total

241

Source: IGL, ACMIIL Research

SWOT Analysis of IGL


Strengths:

Opportunities:

The Company has been given marketing exclusivity in NCT of Delhi for three years w.e.f. CNG is replacing traditional fuels like petrol & diesel. CNG is about
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

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

IGL has continuously adopted the latest technology as a result of which the quality of Shift towards usage of PNG by industrial and commercial segment.
its products has also improved.
Lower debt in the books along with healthy return ratios gives confidence in the companys
ability to raise debt for future expansion
Weaknesses:

Threats:

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

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.

Indraprastha Gas Ltd

ACMIIL

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

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

Growth of CNG volume against Vehicle Growth


1000.00

600000
840.40
500000

744.22

800.00

400000
300000

530.53

600.00

461.83

mkG

No. of Vehicles

648.03

400.00
200000
200.00

100000
0

2009

2010

2011E

2012E

0.00

2013E

CNG volume (mkg)

No. of Vehicles

Source: IGL, ACMIIL Research

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.
IGLs Total CNG Requirement
8.0
7.0
6.0
5.0

mmscmd

In the CNG segment, private


cars are expected to be major
growth drivers with regulatory
conversions over

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.

4.0
3.0
2.0
1.0
0.0

2009-10

2010-11

2011-12
Delhi

NCR

2012-13

2013-14

Total

Source: IGL, ACMIIL Research

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.

Indraprastha Gas Ltd

ACMIIL

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

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

CNG offers 68% cost advantage


as compared to petrol-driven
vehicles and 42% as compared to
diesel-driven vehicles

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

68.3%

42.5%

Savings Percentage
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%.
CNG compression capacity
300

4
241

200

181
2
134

146

153

163
100

1
0

Compression capacity to increase


from 3.52 mn kg to 3.9 mn kg by
FY13E

No. of CNG station

Million kg per day

FY05

FY06

Compression Capacity (Mn Kg/day)

FY07

FY08

FY09

CNG Sale (Daily Average) (Mn Kg/day)

FY10
No. of CNG Stations

Source: IGL, ACMIIL Research

IGL has also been continuously increasing its CNG compression capacity to keep
up with the rising demand. As of FY10, IGLs 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 driver


IGL 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.

Indraprastha Gas Ltd

ACMIIL

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

Cost Comparison: PNG V/s LPG

Huge potential in PNG segment


as PNG offers better safety and
convenience vs LPG

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

346

Cost per Kg of LPG (`)

24.4

IGLs 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.

400000
350000
173.76

PNG Connection

300000
144.96

250000
116.16

200000
150000
100000

87.00
54.00

50000
0

2010

2009

2011E

PNG connection

2012E

2013E

200.00
180.00
160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00

MMSCM (Volume)

Growth of PNG volume against PNG connection

PNG Volume

Source: IGL, ACMIIL Research

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.
PNG Requirement in NCR

PNG Requirement in Delhi


1.4

0.5

1.2

0.4

MMSCMD

MMSCMD

0.3
0.2

0.8
0.6
0.4

0.1
0.2

FY10

FY11E
Domestic

FY12E

FY13E

Industrial/Commercial

FY14E

FY10

FY11E

Domestic

FY12E

FY13E

FY14E

Industrial/Commercial

Indraprastha Gas Ltd

ACMIIL

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

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.
Segmental Performance (PNG)
173.76

3500
144.96

` Mn

3000
116.16

2500
2000
1500

87.00
54.00

1000
500
0

2009
2010
2011E
PNG Segment Sales Contribution (` Mn)

2012E
2013E
PNG Volume (MMSCM)

200
180
160
140
120
100
80
60
40
20
0

MMSCM

4000

Source: IGL, ACMIIL Research

Favorable mix should enhance


overall PNG realization

IGLs 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

Source: IGL, ACMIIL Research

Strengthening of Infrastructure base to cater to a growing customer base


Aggressive expansion plans to
sustain growth momentum

IGL 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).

Indraprastha Gas Ltd

ACMIIL

10

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

Planned Capacity addition


8000

35.0%

30.9%

7000

30.0%

26.5%
23.4%

6000
5000

20.0%

25.0%

18.7%
20.0%

` Mn

12.0%

4000
15.0%

3000
10.0%

2000

5.0%

1000
0

FY08

FY09

Capex (` Mn)

FY10

FY11E

FY12E

Operational Cash Flow (` Mn)

0.0%

FY13E

Volume Growth (%)

Source: IGL, ACMIIL Research

Plans to cover all charge areas to


prevent competition in Delhi

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 capex 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

No threat from expiry of


exclusivity in Delhi market as an
exclusive carrier IGL will earn fee
income for carrying volume of its
competitor

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 IGLs 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 IGLs 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, IGLs 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
Cap-ex (` Mn For 1 CNG Station)
EBIT at 20% ROCE (` Mn)

100

180

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)


Required Selling price (`/Kg)

Long Term Tie Ups with major


customers

New Entrants

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
Indraprastha Gas Ltd

ACMIIL

11

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

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

Demonstrated consistent price


hikes

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

Source: IGL, ACMIIL Research

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 will buy gas from LNG market to
meet its expanded capacity

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

360,000

Demand raised to MOP&NG for domestic/CNG/

MOP&NG)

Commercial/Industrial Consumers

Source: IGL, ACMIIL Research

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).

Indraprastha Gas Ltd

ACMIIL

12

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

Spread performance is healthy


Particulars

FY09

APM gas purchased (MMSCM)


APM gas as % of the total gas (%)

FY11E

FY12E

FY13E

748

813

852

915

93.1%

91.2%

81.1%

74.1%

70.8%

4.8

5.4

8.0

8.8

9.7

Cost of APM gas (`/SCM)


Non-APM Gas purchased (MMSCM)
Non-APM Gas as % of the total gas (%)

Spread would settle at a lower


trajectory on higher gas
procurement costs

FY10

650

48

72

190

298

378

6.9%

8.8%

18.9%

25.9%

29.2%

9.8

11.9

12.1

13.3

14.7

Cost of Non-APM gas (`/SCM)


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

Source: IGL, ACMIIL Research

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.
EBITDA Performance
25.0

38.1%

20.0

`/SCM

50.0%

45.4%
37.2%

40.0%

33.7%
28.2%

15.0

25.0%

29.7%
10.0

23.2%

15.2%

30.0%

28.8%
20.0%

13.5%
5.0
0.0

10.0%

1.4%
FY08

FY09

FY10

Sales Realisation (`/SCM)


EBITDA Growth

FY11E

FY12E

FY13E

0.0%

EBITDA/SCM (`/SCM)
EBITDA Margin

Source: IGL, ACMIIL Research

High Depreciation and Interest cost to hurt Profit margin


During FY2005-10, IGL posted 18.3% CAGR in net profit. Despite increase in CNG
sales volumes in future, over FY2010-13E, we expect IGLs net profit to increase to
` 3,182.7 mn from ` 2,528.9 mn at a CAGR of 14.2%.
Net Profit margin to decline
30.0%

4000.0

PATM to decline due to the


expected increase in gas cost,
higher depreciation and higher
interest cost

25.3%

25.0%

3200.0
19.7%

20.0%

20.0%
2400.0

14.7%
13.3%

15.0%
11.0%

1600.0

10.0%
800.0
0.0

5.0%
FY08

FY09

FY10
PAT (` Mn)

FY11E

FY12E

FY13E

0.0%

PATM (%)

Source: IGL, ACMIIL Research


Indraprastha Gas Ltd

ACMIIL

13

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

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, IGLs 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%.
RoE to be under pressure
16000

35.0%

31.3%

14000
26.4%

24.8%

12000

30.0%

24.7%

25.2%

21.7%

` Mn

10000

25.0%
20.0%

8000
15.0%

6000
4000

10.0%

2000

5.0%

2008

2009

2010

2011E

2012E

Share Holder's Equity (` Mn)

2013E

0.0%

ROE (%)

Source: IGL, ACMIIL Research

Sensitivity Analysis of Effect of Price variation on EPS


Earnings are sensitive to changes
in gas spread and volume

To 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 gas
The 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.
Purchase price variation

FY12EEPS

FY13EEPS

FY12E

FY13E

Change (%)

Change (%)

-5%

24.5

26.4

Base Case

21.0

22.7

12.6

16.1

5%

19.0

19.1

-12.5

-16.1

10%

16.3

15.4

-25.1

-32.2

Source: ACMIIL Research

Scenario-2: If IGL is passing on the increase/decrease in cost of gas


The 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.
Selling Price variation

FY12EEPS

FY13EEPS

FY12E

FY13E

Change (%)

Change (%)

-5%

19.2

19.9

Base Case

21.0

22.7

-13

-14

5%

24.5

10%

27.3

26.0

12.8

14.5

29.3

25.6

29.0

Source: ACMIIL Research

Indraprastha Gas Ltd

ACMIIL

14

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

Key Concerns
High entry barriers outside Delhi
Stiff Competition from GAIL

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 Indias 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--vis Gujarat Gas and Sensex


400
350
300
250
200
150
100
50
0

01/04/2008

01/10/2008
IGL

01/04/2009

01/10/2009

Gujarat Gas

01/04/2010

01/10/2010

SENSEX

Source: IGL, ACMIIL Research

Indraprastha Gas Ltd

ACMIIL

15

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

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
Sales Revenue
EBITDA
Depreciation*t
Cap-ex
Change in WC
FCFF

2011 (E)

2012 (E)

2013 (E)

2014 (E)

2015 (E)

2016 (E)

2017 (E)

2018 (E)

2019 (E)

2020 (E)

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

5,088.2

6,465.2

7,236.6

8669.23

9276.08

9925.41

10620.18

11363.60

12159.05

13010.18

393.93

532.53

671.13

918.05

977.08

1040.25

1107.84

1180.16

1257.55

1340.35

6100.00

6100.00

6100.00

1857.69

1987.73

2126.87

2275.75

2435.06

2605.51

2787.90

253.55

-517.55

222.56

50.70

55.77

61.35

67.48

74.23

81.65

89.82

-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)

96,399.56

Present Value (` Mn)

51,620.82

Less: Net Debt (` Mn)

WACC Assumptions

1,607.00

Equity Value (` Mn)

50,013.82

No of Shares (Mn)

140.0

Per Share Value (`)

Beta

0.76

Market Risk Premium

4.0%

Risk Free Rate

8.5%

WACC

357

10.7%

Terminal Growth Rate

3.0%

Terminal Growth (%)


WACC (%)

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

IGLs forward P/E Band


400
350
300
250
200
150
100
50

01/04/2008
IGL Price

01/10/2008
22X

01/04/2009
19X

01/10/2009
16X

13X

01/04/2010
10X

01/10/2010
7X

Source: Capital Line, ACMIIL Research

Indraprastha Gas Ltd

ACMIIL

16

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

Industry Overview

India is a net importer of oil & gas

According to the Integrated Energy Policy, 2009, Indias 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, Indias 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.

Indias natural gas market


Accounting for about 2.4% of the global energy production, India ranks eleventh
among the worlds 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, Indias per capita energy consumption is one of the lowest in the world,
which is an indicator of a potential high growth in the demand.
Energy Mix in 2009-10

Natural Gas
12%

Hydro Electric Nuclear Energy


2%
7%

Oil
14%

Source: EIA, ACMIIL Research

GDP growth of 8-8.5% would


require huge energy need

Energy Mix in 2014-15E

Coal
65%

Natural Gas
14%

Hydro Electric
8%

Nuclear Energy
4%

Coal
61%

Oil
13%

Source: EIA, ACMIIL Research

Indias 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 countrys 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 stage


Natural Gas as a source of energy has been gaining importance over the last few
years. The contribution of natural gas to Indias 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 Indias energy requirement.
Indraprastha Gas Ltd

ACMIIL

17

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

Demand Supply Balance


350

312.1
287

300

255.8

250

222.9

238.5
259.9

MMSCMD

202.7

232.9

200

207.7
176.6

150
145.8
100

124.9

50
0

FY09

FY10

FY11E

FY12E

Demand

FY13E

FY14E

Supply

Source: Petroleum Planning and Analysis Cell, ACMIIL Research

Supply to increase at 14% CAGR from 162.7 MMSCMD to 275.9 MMSCMD in FY14E
In FY10, Indias 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 RILs KG D6 block. The
supply mix was purely dominated by ONGC till FY10. RILs 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 Indias natural production by FY12E.
Supply Side Break-up
Supply break-up (MMSCMD)
ONGC
OIL

FY10

FY11E

FY12E

FY13E

FY14E

61.4

61.3

70.0

70.0

70.0

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

126.8

149.6

171.7

181.9

193. 9

Total (A)
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

0.0

3.0

3.0

5.0

7.0

162.8

193.6

224.7

249.9

276.9

17.0

17.0

17.0

17.0

17.0

145.8

176.6

207.7

232.9

259.9

Coal Based Methane (C)


Total Production (A+B+C)
Flared + Internal consumption (D)
Total Supply (A+B+C-D)
Source: PNGRB, ACMIIL Research

Supply mix likely to shift from PSU


to private players

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.
Indraprastha Gas Ltd

ACMIIL

18

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

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.
Natural Gas Supply Balance
300.0
250.0

MMSCMD

200.0
150.0
100.0
50.0
0.0
FY09

FY10
Existing Fields

FY11E

FY12E

New Discoveries

FY13E

Coal Based Methane

FY14E

LNG Supply

Source: PNGRB, ACMIIL Research

LNG imports is to be significant at 76 MMSCMD by FY14E


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

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.
Sector-wise Consumption of Natural Gas

Demand to increase at 8.8% CAGR


by FY14E backed by huge demand
from Power, Fertilizer and CGD
sector

Steel
3%

Others
13%

Power
40%

Petroleun/Refinary
5%
City Gas/CNG
9%

Fertiliser
30%

Source: PNGRB, Planning Commission and ACMIIL Research

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 nonenergy purposes has increased by 9% over the same period. The figure below shows
the natural gas off-takers in various sectors.
Indraprastha Gas Ltd

ACMIIL

19

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

Natural Gas Demand Break-up


Sectors (MMSCMD)

FY10

Power

FY11E

FY12E

FY13E

FY14E

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

6.9

7.3

7.8

8.2

8.7

222.9

238.5

256.8

288

312.1

Sponge iron/Steel
Total

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 RILs D6 block of KG basin is expected to play a significant role in
meeting Indias energy requirement.

City gas distribution (CGD) to be the main driver for demand growth

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
14.0
12.0
10.0

MMSCMD

City gas demand to treble in 5


years

In 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
governments 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.

8.0
6.0
4.0
2.0
0.0

FY09

FY10
CNG

FY11E
FY12E
FY13E
PNG (Domestic+Industrial)

FY14E

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

Indraprastha Gas Ltd

ACMIIL

20

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

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 interstate 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)

Source: PNGRB, ACMIIL Research

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 segment


Given 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.

Indraprastha Gas Ltd

ACMIIL

21

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

Porter Five Force Model for City Gas Distribution Industry


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.

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.

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.

Indraprastha Gas Ltd

ACMIIL

22

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

Financial Statements
Profit & Loss Statement
Particulars

` Mn
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

164.8

262.2

211.1

120.0

120.0

120.0

3,234.3

3,280.7

4,041.9

5,088.2

6,465.2

7,236.6

625.7

674.3

774.5

1,193.7

1,613.7

2,033.7

2,608.6

2,606.4

3,267.4

3,894.5

4,851.5

5,202.9

22.8

30.0

121.4

310.7

452.3

Other income
EBIDTA
Depreciation
EBIT
Interest
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
Particular

` Mn
FY2008

FY2009

FY2010

FY2011E

FY2012E

FY2013E

Source of Fund
Share Capital

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

3,000.0

4,500.0

6,200.0

238.4

208.9

238.1

438.5

438.5

438.5

68.3

265.3

552.2

726.0

906.0

1,086.0

6,070.1

7,308.3

9,044.8

14,208.2

18,147.5

22,391.0

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

Total Loans
Deferred Tax Liability
Deposits from customer
Total

1,400.0

1,400.0

Application Of Fund
Fixed Assets

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

818.0

1,054.6

548.4

792.5

244.9

421.3

6,070.1

7,308.3

9,044.8

14,208.2

18,147.5

22,391.0

Net Current Assets


Total

Indraprastha Gas Ltd

ACMIIL

23

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

Cash Flow Statement


Particulars
PBT

` Mn
FY2008

FY2009

FY2010

FY2011E

FY2012E

FY2013E

2,608.6

2,583.6

3,237.4

3,773.1

4,540.8

4,750.6

Depreciation

625.7

674.3

774.5

1,193.7

1,613.7

2,033.7

Interest Paid

121.4

310.7

452.3

3,071.6

3,054.8

3,861.5

5,088.2

6,465.2

7,236.6

Add:

Profit Before Working Capital Change


Less:
Working Capital Changes
Cash generated from Operations
Tax Paid

(79.4)

96.5

537.6

(187.2)

213.2

17.9

2,992.2

3,151.3

4,399.1

4,901.0

6,678.4

7,254.5

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%

0.00

0.00

0.00

0.30

0.36

0.42

1.56

1.69

1.27

1.33

1.08

1.11

114.32

108.91

32.45

15.62

11.50

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

5.26

4.18

3.40

2.85

19.93

16.74

14.0

12.9

Capital Structure Ratios


Debt-Equity Ratio
Solvency Ratios
Current Ratio
Interest Coverage ratio
Valuation ratios

Price/BV
P/E

Indraprastha Gas Ltd

ACMIIL

24

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

ANNEXURE-1
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.

Indraprastha Gas Ltd

ACMIIL

25

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

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

Indraprastha Gas Ltd

ACMIIL

26

COMPANY REPORT

INVESTMENT INTERRMEDIATES LTD.


An ISO 9001:2008 Certified Company

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: instsales@acm.co.in
Institutional Dealing:
Email: instdealing@acm.co.in

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)

Indraprastha Gas Ltd

ACMIIL

27