Beruflich Dokumente
Kultur Dokumente
Analyst contact
Dayanand Mittal
Tel: +91 22 3043 3202 dayanandmittal@ambitcapital.com
IGL
CMP: Target Price (12 month): Previous TP: Upside (%) EPS (FY13): Change from previous (%) Variance from consensus (%)
BUY
`347 `406 NA 17% `23.9 NA -3%
Gujarat Gas
CMP: Target Price (12 month): Previous TP: Downside (%) EPS (CY12): Change from previous (%) Variance from consensus (%)
SELL
`393 `369 NA -6% `25.2 NA -9%
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
Please refer to disclaimer section on the last page for further important disclaimer.
CONTENTS
SECTOR
A brief history of CGD in India ...........................................................3 The CGD supply chain in India ...........................................................4 Regulation of the CGD sector .............................................................6 Sources of competitive advantage .....................................................9 We see IGL as the best CGD play .....................................................22 Marketing margin regulation impact? ............................................28
COMPANIES
Indraprastha Gas31 Gujarat Gas...45
Regulatory & judicial mandates laid the foundation for CGD in India
Thanks to international pressure to cut carbon emissions, India began to seriously look at cleaner fuels, including natural gas, in the 1990s. At the same time, the Government wanted to boost the countrys energy security by tapping Indias domestic natural gas reserves and thereby lower its oil import bill. It is estimated that Indias natural gas reserves is equivalent to 27 years of consumption whereas its crude reserve amounts to less than 5.5 years of consumption. In addition, the cost competitiveness of gas versus liquid fuels adds to its attractiveness, with gas prices (in US$/mmbtu i.e. million British thermal units) in India ranging between 6%-10% of crude prices (in US$/bbl) against 17% on an energy equivalence basis. Thus, in the 1980s, the Government initiated techno-economic feasibility studies for gas distribution in Mumbai and Delhi through Sofragaz and British Gas. Based on the encouraging recommendations of these studies, Mahanagar Gas Ltd (MGL) was incorporated in May 1995 and Indraprastha Gas Ltd (IGL), in December 1998. The Government allocated domestic gas to MGL and IGL for distribution as CNG to cars and as PNG to households in Mumbai and Delhi. Development of the CGD was fast-tracked by the Supreme Courts July 1998 order to contain vehicular pollution. The Court directed all buses, three wheelers and taxis in Delhi to adopt CNG as a fuel by March 31, 2001. After the successful implementation of the CNG programme in Delhi, the Supreme Court identified 14 polluted cities in two court orders (April 5, 2002, and August 14, 2003) for extension of its CNG drive.
Improved gas availability and waning infrastructure bottleneck to provide the next leg of growth
The scarcity of natural gas in India vis--vis the huge gas demand from the core fertiliser and power sectors, and the inadequate pipeline infrastructure has resulted in supply of gas to cities through distribution systems not developing in India as it did in several other countries (such as the UK, USA, Australia, Korea etc). During CY2010, transport (CNG) and the residential segment constituted merely 2.8% of total gas consumed in India, compared to, say, 22% in the US. But as the supply of gas improved (thanks to RILs KG D6 field and due to Indias improved ability to import LNG), and the natural gas pipeline grid expanded, more and more Indian cities were able to get access to natural gas. Hence its application in the residential and transportation sector is expected to grow. According to the PNGRB (Petroleum and Natural Gas Regulatory Board), currently there are one million CNG vehicles in the country and this is expected to increase to six million vehicles over the next 10 years. The PNGRB has laid down a target to spread the CGD network across 200 cities with a potential gas demand of 80mmcmd (million cubic meters per day) compared to the current consumption of 14mmcmd in 25 cities.
Gas sources: Gas for the CGD business is sourced from a mix of gas produced domestically and imported in the form of LNG. Domestic gas production meets ~54% of CGD gas needs and is sourced mainly from ONGCs Bombay High, RILs KG D6 field, PMT (Panna-Mukta-Tapti), Ravva etc. LNG imports help meet the balance gas demand for the CGD sector. PLNG accounts for 70% of LNG imported by India while the balance is imported by Shell, GAIL (Gas Authority of India Ltd) and GSPC (Gujarat State Petroleum Corporation). Gas transmission: About 75% of gas is transmitted by the state-owned transmission company, GAIL, with GSPL and RGTIL being the other players. They help to transmit the gas from the source of production/import to the cities via their trunk pipelines. Connectivity to large consumers (greater than 0.1mmcmd) is provided by laying a spur pipeline from the trunk pipeline to the consumers plant while the small consumers (below 0.05mmcmd) are supplied via the CGD network. CGD companies: The trunk pipeline feeds gas into the city gas distribution network of CGD companies, which in turn supplies gas to small consumers (less than 0.05mmcmd) within cities like the household, commercial segment, automobile and small industrial sector. The key CGD companies are IGL, GGas (Gujarat Gas), GAIL Gas, MGL, GSPC Gas, Sabarmati Gas, Adani Energy etc.
Exhibit 3: Usage of CGD
CGD consumers Automobile in the form of CNG Usage Alternative fuel CNG as a transportation fuel Liquid fuels like petrol and diesel Residential/commercial in the form of PNG PNG is used for cooking, water heating etc Subsidised LPG cylinder and power Small industries Gas is used for heating, cooling, power generation etc Liquid fuel (like fuel oil, naphtha, diesel, etc), coal, power etc
The bulk and Industrial segments comprise high volume customers and hence the margins earned from these customers are lower compared with the margin earned on CNG, the domestic and commercial segments. Although the volume consumed per customer is low in the PNG segment, given the huge potential consumer base, this segment has substantial volume growth potential. Currently, the PNG segment generates low margins due to the high capex requirement for setting up a PNG network. It costs anywhere between `15,000-`18,000 per household to lay a PNG pipeline but the provider can only charge: (a) ` 5,000 as refundable security deposit towards security of equipment and installation used in providing last mile connectivity; and (b) `1,000 as security deposit towards PNG consumption bills. CNG and the commercial segment are high margin businesses though the volume offtake per customer is low. Given the low penetration of CNG in the auto segment (less than 10%), the growth potential is enormous.
Exhibit 5: Segmentwise volume v/s growth matrix
Note: LMC: Last Mile Connectivity Source: GGas, Ambit Capital research
Comments
Compensation for supply management, contract negotiation, market tie-up, Tariff to guarantee Tariff to guarantee Compression charge market surveys, dispute post-tax RoCE of post-tax RoCE of based on post-tax RoCE resolution, customer facilities, 12% on capital 14% on capital of 14% on capital take or pay risk, bad debt risk, employed employed employed inventory carrying costs and maintaining administrative infrastructure
Key existing cities: Delhi, Mumbai, Ahmedabad, Pune, Surat, Hyderabad, Lucknow etc. Key upcoming cities: Bhavnagar, Ludhiana, Jalandhar, Durgapur, Panipat etc.
20
30
The CGD companies determine the final selling price of CNG/PNG by adding the regulated network and compression charges to the cost of gas purchased. It also adds its marketing margin, which is currently not being regulated. The factors that will determine the development of CGD ahead are:
A clear regulatory framework both for the entity responsible for the promotion of city gas distribution and regulation of existing players, and for the layout of transmission pipelines across the country, Sufficient gas supply via a mix of domestic gas and imported LNG, Fuel price reforms, and Increased thrust on environmental regulation.
Competitive intensity
MEDIUM In the existing cities, the competitive risk is mitigated to a great extent by: (a) the regulated RoCE; and (b) the 5-year marketing and 25-year network exclusivity allowed by the regulator to the winning entity. But in the new cities competition has intensified over last few years with establishment of the PNGRB-awarded competitive bids, instead of the guaranteed returns in the pre-PNGRB era. PNGRB has announced plans to award bids for 200 cities under competitive bidding. This has resulted in emergence of new players Adani, Essar, Lanco, OMCs etc.
Barriers to entry
MEDIUM In existing cities, PNGRB allows 5-year marketing exclusivity and 25-year network exclusivity to the winner of CGD network thereby creating high barriers of entry for a new entrant in an existing city. Shortage of low cost domestic gas, huge capex requirements, delays in land acquisition, environmental clearance, and increasing regulation will dis-incentivise the new players from bidding for new cities. The regulator gives due consideration to past track record and technical expertise of the player before awarding a CGD licence.
Threat of substitution
LOW CNG acts as a substitute to liquid fuels such as petrol/diesel in automobiles. However, CNG is expected to continue to be cost competitive given the: (a) Significant differential between the cost of CNG and the cost of petrol/diesel; and (b) The deregulation of petrol and the proposed deregulation of diesel in a high crude price environment would help in maintaining this differential. PNG used by the household/commercial segment acts as a substitute for subsidised LPG cylinders. Attractiveness of PNG is expected to improve as the Government plans to restrict usage of subsidised LPG cylinders to only 4-6 p.a. per household, i.e. 50% of actual consumption thereby increasing the average cost of LPG cylinders. Gas is used by the industrial segment as an alternative to liquid fuels like naphtha, fuel oil, diesel etc, and given the 11%-25% cost competitiveness of gas, we expect gas to substitute liquid fuel consumption in the industrial segment. Deteriorating
Improving
Source: Ambit Capital research
Unchanged
Gas can be sourced either domestically or via import in the form of LNG. As the cost of domestic gas is one-thirds the cost of LNG, allocation of domestic gas is a big plus for a CGD company. Domestic gas is allocated to various sectors based on the Governments gas allocation policy. The Governments gas allocation policy accords low priority to the CGD sector. The policy gives first priority to the existing customers in the following order: fertiliser producers, LPG and petrochemicals, power plants, CGD, refineries and others. Once demand from existing customers is met, then the gas would be allocated to greenfield projects based on the following priority: fertiliser producers, petrochemicals, power plants, CGD and refineries.
Exhibit 12: RILs KG D6 gas allocation versus actual supply
Sector Power Fertilizers CGD Sponge iron and steel Refineries Petrochemicals LPG Captive power Total Allocation (mmcmd) Firm Fallback 32.7 12.0 15.7 1.2 2.2 4.2 5.0 6.0 1.9 2.6 10.0 63.3 30.2 Total 44.7 15.7 3.4 4.2 11.0 1.9 2.6 10.0 93.5 Actual supply* 20.0 14.9 0.1 0.0 0.0 0.4 2.6 0.0 38.0
Oil & Gas Further, the domestic gas supply scenario has deteriorated over the past year due to a significant decline in KG D6 gas production and due to the slow development of other key gas discoveries (thanks to delays in Government approvals, shortage of deepwater rigs and low domestic gas prices). Please refer to our note Is LNG the answer to Indias energy needs? (December 7, 2011) for more details on the prospects of domestic gas production.
Exhibit 13: Domestic gas supply growth will be low and back ended (mmcmd)
FY10 FY11 FY12E FY13E FY14E FY15E Comments Mature fields such as Mumbai High, PMT, Ravva to see a gradual decline. Oil India's gas production in Assam to grow at 4% p.a. due to an increase in demand. ONGC to produce 34mmcmd of gas from its marginal fields in FY13-FY14. ONGC is expected to produce ~25mmcmd of gas from its KG block, but the slowdown in progress due to the exit of its technology partners is likely to push production to FY16-FY17. Sub-surface issues resulted in current production from KG D6 being half of the original expectation. RIL is currently studying the reservoir and expects ramp-up of gas production to be delayed until CY14, as it needs a few years to drill additional wells and connect it to the main reservoir. Slow progress due to delay in approvals for RILs other key gas blocks. This along with shortage of the deepwater rig and low domestic gas price has slowed the progress in its key gas blocks. CBM gas from Essar Oil's CBM blocks (under production) and from RIL's CBM blocks (from FY15 onwards). Due to delay in raising funds, we expect development work at Deen Dayal block to be slow. This could delay commissioning of production to end FY15 or to FY16. As per the FDP, the total capex for Deen Dayal block is `85bn (up to now only `30bn has been raised via term loans).
Existing fields
86.3
80.8
81.7
84.9
85.8
86.6
RILs D6 gas
39.2
55.5
45
50
50
60
0.1
125.5
136.5
127.7
136.9
138.8
154.6
Hence although CGD has a priority over the industrial segment, the huge unmet demand from the core fertilizer, LPG and power sectors and the bleak outlook of domestic gas production would result in no incremental gas allocation for the CGD sector for the next 2-3 years. In fact, the CGD sector runs the risk of a further cut in the supply of gas from the KG D6 field. Although the CGD sector has been allocated 3.4mmcmd of KG D6 gas (1.2mmcmd on a firm basis and 2.2mmcmd on fallback basis), it is currently receiving less than 0.2mmcmd, and that too runs a risk of being cut off completely.
10
Total
Source: Infraline, IGL, GGas, Ambit Capital research, Note: NA refers to Domestic gas Not Allocated by the Government
11
12
Presence in high margin CNG business Total Source: IGL, GGas, Ambit Capital research. Note:
- Very Strong, - Strong, - Weak, - Very Weak
Note: Some local authorities also impose taxes such as octroi on CNG and PNG. Note: UP stands for Uttar Pradesh, MP stands for Madhya Pradesh Source: PPAC, Ambit Capital research
13
Oil & Gas Further CNG/PNG customers are stickier in nature, compared to industrial customers, due to their limited flexibility to switch back to liquid fuels owing to the upfront cost incurred for CNG kit/PNG connectivity. On the other hand, the industrial consumer always has the flexibility to revert to usage of liquid fuels given the dual fired nature of their plants. (1) CNG: Strong pricing power CNG prices in India are 40%-50% lower than the price of petrol due to: (a) High taxes on petrol compared to CNG see table below; and (b) The usage of low-cost domestic gas helps to reduce the price of CNG while the strength of international crude prices is driving the price of deregulated petrol upwards.
Exhibit 18: High taxes on petrol boost CNGs cost competitiveness
`/litre India (Delhi) Pakistan Bangladesh Sri Lanka Nepal
Source: PPAC, Ambit Capital research
Note: Price in India is as of Feb 22, 2012; prices for all other countries are as of July 2011
Taxes constitute a high 41%-43% of the final price of petrol, although this varies across states based on the variation in sales tax/VAT rates of the various states. Though the impact of taxes on diesel price is lower than that on petrol, it is still high with taxes constituting 18%-25% of its final price. But taxes on CNG are lower: from 13% (in Delhi) to 28% (in Gujarat and Madhya Pradesh).
Exhibit 19: High taxes on petrol/diesel boost CNGs cost competitiveness
(%) Delhi Taxes as a % age of final price -Central taxes (excise duty, customs duty) -State taxes/VAT Gujarat Taxes as a % age of final price -Central taxes (excise duty, customs duty) -State taxes/VAT
Source: PPAC, Ambit Capital research
Petrol 41 18 23 43 16 27
Diesel 18 7 11 25 6 19
CNG 13 13 NIL 28 13 15
Hence as petrol prices are twice that of CNG, usage of CNG as a replacement for petrol in 4-wheelers or 3-wheelers would result in ~50% reduction in fuel cost per kilometre. Even though there is an upfront cost of `25,000-`40,000 to be incurred for installing the CNG kit, the cost can be recovered within 12-15 months if the daily usage is 40km-50km. Similarly, CNG would result in ~18% saving in the running cost per kilometre if it is used to replace diesel in a 4-wheeler or a bus see exhibits 20 and 21 on the next page. The saving is lower in diesel compared to petrol due to: (a) Taxes on diesel being lower; and (b) Regulation of the diesel price resulting in its price being `12`13/litre lower than the market price. Note that the Government deregulated petrol prices with effect from June 25, 2010 while it announced its intention to gradually deregulate diesel prices over time. This resulted in the petrol prices rising by 39% since the deregulation decision compared with a mere 7% increase in diesel prices (while crude prices have risen by ~55% during this period).
14
Oil & Gas If the Government opts for diesel deregulation or even a `3-`4/litre hike in diesel prices post the ongoing state elections, it will further strengthen the pricing power of CNG.
Exhibit 20: CNG cost competitiveness analysis (for Delhi)
Bus (CNG) Cost of CNG kit (`) CNG price per kg (`) Mileage per kg (km) CNG cost per km (`) (A) (B) (C) (D=B/C) 175,000 33.75 3.5 9.6 Bus (diesel) Cost of other fuel: (diesel for bus and 4 wheeler and petrol for 4 and 3 wheeler) (`/litre) (E) Mileage (km per litre) (F) Other fuel cost per km (`) Saving per km from CNG (`) CNG cost competitiveness (%) Daily average travel (km) Yearly savings (`) Payback period (months) Breakeven (in km)
Source: IGL, GGas, Ambit Capital research
4 wheeler (CNG) 40,000 33.75 12 2.8 4 wheeler (diesel) 40.91 12 3.4 0.6 18 40 12,000 7,160 67.0 67,039
4 wheeler (CNG) 40,000 33.75 12 2.8 4 wheeler (petrol) 65.64 12 5.5 2.7 49 40 12,000 31,890 15.1 15,052
3 wheeler (CNG) 25,000 33.75 20 1.7 3 wheeler (petrol) 65.64 20 3.3 1.6 49 50 15,000 23,918 12.5 15,679
4 wheeler (CNG) 40,000 43.4 12 3.6 4 wheeler (diesel) 46.3 12 3.9 0.2 6 40 12,000 2,850 168.4 168,421
4 wheeler (CNG) 40,000 43.4 12 3.6 4 wheeler (petrol) 70.0 12 5.8 2.2 38 40 12,000 26,600 18.0 18,045
3 wheeler (CNG) 25,000 43.4 20 2.2 3 wheeler (petrol) 70.0 20 3.5 1.3 38 50 15,000 19,950 15.0 18,797
Although a part of CNGs cost competitiveness is attributable to the allocation of low-cost domestic gas, CNG will still sustain its competitiveness even if the proportion of LNG rises to 100% see exhibit 22 on the next page. Even if we assume 100% of the gas requirement is met via import of LNG, the price of CNG would still be 19% lower than petrol.
15
Case 3 100% LNG 16.0 34.91 11.79 46.70 6.73 0.00 53.43 65.64 19% 40.91 -31%
6.5 14.26 11.79 26.05 4.25 0.00 33.75 65.64 49% 40.91 18%
10.0 21.82 11.79 33.61 4.85 0.00 38.45 65.64 41% 40.91 6%
13.0 28.37 11.79 40.16 5.79 0.00 45.96 65.64 30% 40.91 -12%
(2) Industrial segment: Medium pricing power Given the shortage of domestic gas and the fact that the industrial segment does not feature in the Governments priority list for allocation of domestic gas, incremental demand from the industrial segment will be met via LNG imports. However, even if we assume that 100% of the gas requirement for industrial consumers is sourced from LNG imports, then too LNG would be competitive for industrial consumers. We estimate that even at a high 14.5% linkage to US$100/bbl of crude price, the delivered cost of LNG would be US$17.8/mmbtu compared to US$20US$22/mmbtu range for alternative liquid fuels. Thus the cost of gas will be 11%25% lower than the prices of alternative liquid fuels see exhibit 23 below.
Exhibit 23: Gas cost competitiveness v/s liquid fuels for the industrial segment
LNG Brent crude price (US$/bbl) Liquid fuel's average discount/premium to Brent (%) Implied f.o.b. fuel price (US$/mmbtu for LNG and US$/bbl for liquid fuels) Add: Transportation, taxes and duties, processing, marketing and other costs (US$/mmbtu for LNG and US$/bbl for liquid fuels) Implied delivered price to the end-consumer post adjustment for subsidy on diesel (US$/mmbtu for LNG and US$/bbl for liquid fuels) Implied f.o.b. fuel price adjusting for diesel subsidy (US$/mmbtu) LNG's discount to liquid fuels (%)
Source: Bloomberg, Ambit Capital research
100
14.5 3.2
85.0 17.0
17.7 17.7
102.0 19.6 11
118.8 20.7 17
120.2 22.1 25
Exhibit 24 shows the historical comparison of gas costs (based on LNG imports) with the prices of fuel oil, naphtha and diesel in US$/mmbtu terms. Clearly, LNG prices have been 10%-20% lower than prices of alternative liquid fuel.
16
(3) PNG: Pricing power subject to capping of LPG subsidy Even though PNG is slightly more expensive than subsidized LPG, it is still attractive given that PNG is easily accessible and helps to meet the huge demand for reliable and continuous supply of cooking gas. Currently the Government provides LPG to all families at ~`400/cylinder (of 14.2kg) against a market price of `750/cylinder. Hence the cost of PNG is marginally higher (1%-15%) versus the cost of LPG.
Exhibit 25: Cost competitiveness: PNG v/s LPG
IGL Cost of the domestic LPG cylinder of 14.2kg (`) Cost per kg of LPG (`) PNG selling price per kg (`) Price advantage over LPG (`/kg) Price advantage over LPG (%)
Source: Ambit Capital research
However, it is worth noting that LPG prices in India are very low (~50%) compared to prices prevailing in other countries see exhibit 26 below. Hence the Government is considering capping the number of subsidized LPG cylinders at 5-6 cylinders p.a. per household against the average annual consumption per family of 11-12 cylinders. This would drive up the average cost of LPG to ~`-`500550/cylinder thereby improving the competitiveness of PNG. Considering the huge LPG user base and the Governments intention to phase out the subsidy on LPG, there is a huge growth potential for gas consumption in the PNG segment.
Exhibit 26: LPG price comparison
Country India (Delhi) Pakistan Bangladesh Sri Lanka Nepal
Source: PPAC, Price in India is as of 10th Feb 2012, all other countries prices are as of July 2011
17
Presence in high growth potential CNG and PNG business Sub-total Source: IGL, GGas, Ambit Capital research. Note:
- Very Strong, - Strong, - Weak, - Very Weak
18
Although the PNGRB was constituted in 2006, it was not able to issue even a single CGD licence as the Delhi High Court (via its January 21, 2010 order) questioned the PNGRBs power to issue authorisation for CGD projects since the Government had not notified Section 16 of the PNGRB Act, (Section 16 gives PNGRB the powers to grant CGD licences). Section 16 was finally notified by the Government in July 2010 and the Supreme Court gave its decision in May 2011 in favour of the PNGRB thereby allowing it to process all pending applications for the grant of CGD licences.
Maharashtra Natural Gas Pune Hyderabad, Vijaywada, Rajahmundry and Bhagyanagar Gas Ltd. Kakinada GAIL Gas Ltd. Dewas, Kota, Sonepat and Meerut
Source: Infraline, Ambit Capital research *Ambit Capital research estimate
To accelerate deployment of the CGD network, PNGRB had invited bids in 2009 for 13 cities in two rounds. The bidding process for the third round got delayed due to inability of the PNGRB to issue the CGD licences see callout on the left. However, thanks to the Supreme Courts May 2011 decision, PNGRB can now process all pending CGD licence allocations and the winners are expected to be announced by March 2012. The fourth round of bidding has been cancelled by the PNGRB owing to aggressive bidding by the companies (which has resulted in companies quoting low bids making the project appear unviable and raising doubts about its actual execution).
Madhya Pradesh GAIL Andhra Pradesh Rajasthan Uttar Pradesh Haryana Uttar Pradesh Andhra Pradesh Haryana Uttar Pradesh Uttar Pradesh Uttar Pradesh West Bengal Gujarat Gujarat Gujarat Gujarat Punjab Andhra Pradesh
4th bidding Kerala round: these bids Bidding was initiated in Oct 2010 but has been has been cancelled Guna Madhya Pradesh by PNGRB. have been cancelled Alibag, Lonavla/Khopoli Maharashtra Shahjahanpur
Source: PNGRB, Ambit Capital research
Uttar Pradesh
19
Industrial, 29.0%
Industrial, 29.8%
Source: EIA, Ambit Capital research
Power, 43.0%
Source: Infraline, Ambit Capital research
As at end-FY11, there were 1.1mn CNG vehicles and the PNGRB expects this number to increase to 6mn vehicles over the next 10 years. As is evident from the exhibit 32 below, more than 40% of the CNG vehicles are from the NCR region. This is driven by a mix of regulatory push (Supreme Court order) and favourable tax breaks for CNG in Delhi. As IGL holds the licence for the CGD business in Delhi and NCR, it is well placed to capture this huge market.
Exhibit 32: Breakdown of statewise CNG vehicles (in 000)
State NCR Gujarat Maharashtra Uttar Pradesh Haryana Andhra Pradesh Madhya Pradesh Tripura Total
Source: Infraline, Ambit Capital research
Buses 17 4 4 2 0 0 0 0 28
Others 11 4 3 9 1 0 0 0 27
To support volume growth, IGL plans to invest `28bn over FY12E-FY16E to increase the number of CNG stations and to provide a PNG network to all its geographical areas, so as to capture the full potential of its existing cities. IGL has consistently increased the number of CNG stations from 181 in FY09 to 278 stations by the end of FY11; with 40 of these stations to start operations by June 2012 (they are awaiting statutory clearance). Further IGL is constructing another 20-30 CNG stations, of which ~20 stations are expected to be commissioned in FY13.
20
Company GAIL Gas/Adani Energy/Gujarat Gas IGL MGL (Mumbai), MNGL(Pune) Bhagyanagar Gas Ltd (Hyderabad) Green Gas (Lucknow), CUGL(Kanpur) Tripura Natural Gas (Agartala) Haryana City Gas
FY11 CNG sales (000 tonnes)* 323.1 596.0 353.7 11.9 93.3 2.0 6.2 34.7 1,420.9
Sub-total Pricing power State wise tax structure for gas Lower sales taxes/VAT on CGD in Delhi compared with the other states improves the relative attractiveness of the CGD business in the NCR and gives IGL a competitive advantage versus other CGD companies. High sales taxes/VAT on CGD in Gujarat, impacts the relative pricing power of GGas and GSPC gas. The CNG segment is the most profitable given the 40%-50% differential with the cost of petrol. Further, deregulation of petrol price, and proposed deregulation of diesel price, would add to the cost competitiveness of CNG. As ~80% of IGL and MGLs sales volumes are to CNG segment, they have better pricing power.
Presence in high margin CNG business Sub-total Volume growth potential Presence in high growth cities
Exclusive CGD licence for high-growth cities (like NCR/Mumbai) gives companies (like IGL/MGL) a first mover advantage to capture the huge opportunity before the exclusivity period ends. A presence in high growth NCR market along with the Supreme Court order to convert all public vehicles to CNG in NCR, puts IGL in a sweet spot. CNG and PNG segments have the highest growth potential versus the industrial segment, as penetration of CNG/PNG is less than10%. As ~90% of IGL and MGLs sales volume is to CNG/PNG segment, they are better placed to tap this growth opportunity. IGL is the best placed firm to take advantage of the huge CGD opportunity
- Strong, - Weak, - Very Weak
Presence in high growth potential CNG and PNG business Sub-total Grant total Source: IGL, GGas, Ambit Capital research. Note:
- Very Strong,
21
Actual supply* 2.00 0.20 0.25 0.25 2.70 0.05 2.75 0.74 3.49
2.00 0.20 0.25 0.25 (A) (C=A+B) (D) (E=C+D) 2.70 0.61 3.31
RIL KG D6 gas (0.31 on firm basis and 0.30 on fallback basis) (B)
But for GGas, the decline in supply from the matured PMT field and lack of additional domestic gas allocation would result in its entire volume growth being met via import of LNG. The share of LNG in its gas mix during CY11 stood at a high 38%. Though GGas has been allocated 0.6mmcmd from the KG D6 block on a fallback basis, gas supply is not expected to commence unless KG D6 gas production exceeds ~75mmcmd (against current production of ~39mmcmd), the likelihood of which appears limited over the next 3-4 years given the reservoir challenge being faced by the operator.
Exhibit 36: GGas gas sourcing mix (mmcmd)
Allocation Domestic gas: PMT, APM, Niko and Cairn Lakshmi field RIL KG D6 (0.61on fallback basis) Total domestic gas LNG Total
Source: GGas, Ambit Capital research ... *for CY11
22
Oil & Gas Though the share of LNG in IGL will also grow to ~48% of its gas mix in FY15, similar to GGas, it is due to the higher volume CAGR of 15% expected in IGL over the next 3-4 years compared to the 4%-5% volume CAGR expectation for GGas.
Exhibit 37: IGL: Domestic gas dominates the gas mix
100% 80% 60% 40% 20% 0% FY09 LNG
Source: IGL, Ambit Capital research
3% 8% FY10
14% FY11
21% FY12e
33% FY13e
43%
47%
26% CY10
37%
41%
45%
48%
CY11e
CY12e
CY13e
CY14e
Domestic gas
FY14e
LNG
Source: GGas, Ambit Capital research
Domestic Gas
4%
6%
9%
11%
12%
14%
15%
72%
81%
83%
82%
80%
79%
77%
92%
89%
82%
78%
75%
72%
70%
40% 20% 0% 8% CY08 10% CY09 10% CY10 11% CY11e 12% CY12e 13% CY13e 14% CY14e
FY10
FY11 PNG
FY12e
FY13e
Industrial
FY14e
FY15e
CNG
PNG
Industrial
23
Favourable taxation for CNG in the NCR strengthening its competitive positioning Higher proportion of domestic gas High exposure to the competitive CNG business.
In contrast, GGas will continue to face pressure on its margins due to the growing proportion of high-cost LNG in its gas mix. Moreover, the cost of LNG is higher for GGas due to its high dependence on LNG imports via spot contracts.
To support volume growth, IGL is putting in place measures to significantly enhance and expand infrastructure. IGL has consistently increased the number of CNG stations from 181 in FY09 to 278 stations by the end of FY11, with 40 of these stations to start operations by June 2012, as they are awaiting clearance from the fire and explosives department. Further, IGL is constructing 20-30 CNG stations, of which ~ 20 stations are expected to be commissioned in FY13. IGL plans to invest `28bn over FY12E-FY16E to increase the number of CNG stations, provide a PNG network to all its geographical areas and connect to as many industrial consumers so as to capture the full potential of its existing cities.
24
FY11
FY12e
FY13e
FY14e
FY15e
In contrast, for GGas the volume CAGR would be capped at 4%-5% as its growth is primarily dependent on the saturated Industrial segment demand. It is to be noted that industries in Gujarat have been well served with gas for the last couple of decades due to its proximity to the source of gas supply and pipeline connectivity, thus the demand growth from this segment would be only 3%-4% p.a. GGas plans to incur capex of approximately `1.5bn p.a. over the next three years for expansion within its existing operational area. Further the company has bid for Bhavnagar (potential demand of ~1mmcmd) to support its future growth prospects. If it were to win the bid for Bhavnagar, then it would require incremental capex of `1.0bn to 1.2bn annually for the first five years.
Exhibit 43: IGL: Volume growth to continue to be robust
6.0 5.0 4.0 3.0 2.0 1.0 0.0 FY09 FY10 FY11 FY12e FY13e FY14e FY15e 30% 25% 20% 15% 10% 5% 0%
Growth (Y-o-Y)
Growth (Y-o-Y)
Relative valuation
At the current market price:
IGL is trading at: (a) 1-year forward EV/EBITDA of 8.1x, 25% higher than its own 5-year average multiple of 6.5x; (b) 1-year forward PE of 14.5x, 24% higher than its 5-year average multiple of 11.7x; and (c) 1-year forward PB of 3.5x, 17% higher than its 5-year average multiple of 3.0x. GGas is trading at: (a) 1-year forward EV/EBITDA of 10.3x, 24% higher than its own 5-year average multiple of 8.3x; (b) 1-year forward PE of 15.6x, 28% higher than its 5-year average multiple of 12.2x; and (c) 1-year forward PB of 4.8x, 41% higher than its 5-year average multiple of 3.4x.
25
Oil & Gas The comparison to the 5-year average multiple makes IGL look expensive. However, IGL was trading at low valuations before June 25, 2010 due to concerns on its pricing power as petrol prices were regulated impacting the competitiveness of CNG. But since the deregulation of petrol prices on June 25, 2010, the stock has traded at a 1-year forward PE of 15.8, 1-year forward PB of 4.1x and 1-year forward EV/EBITDA of 8.9x. Hence post June 25, 2010 we note the following improvements in IGLs fundamentals: (i) Cost competitiveness of CNG improved due to deregulation of petrol price amid high crude prices; (ii) Allocation of additional APM gas to IGL for expansion into NCR lowered its gas cost; and (iii) There was increasing evidence of IGLs pricing power, as it managed to pass on the increase in gas cost by raising CNG prices by over 20% in the last one year. GGas is trading at a PE multiple in line with IGL. But GGas trades at 15% premium to IGL on the PB and EV/EBITDA multiples despite its volume growth stagnating at ~5% and resulting in muted earnings growth of 4.4% over CY11-CY14E. This is despite its pricing power being under risk due to its higher dependence on LNG.
26
Oil & Gas IGL is trading at 15.4x FY13 consensus EPS, a 10% discount versus global peers and at the lower end of 15x-20x, at which most Asian peers are trading. This is despite its: (a) superior RoCE of +20%; and (b) strong earnings growth of 12% CAGR over FY11-FY14E. GGas also trades at a similar multiple as IGL despite its volume growth stagnating at ~5% resulting in muted earnings growth of 4.4% during CY11-14E.
Exhibit 49: Global gas utilities valuation table
Company US Peers Energy Transfer Partners LP El Paso Corp Nustar Energy Oneok Partners Boardwalk Pipeline LP Enbridge Energy Kinder Morgan Energy EQT Corp Nisource National Fuel Gas Energen Corp Southern Union Piedmont Natural Gas Vectren Corporation Spectra Energy Partners APA group Enterprise Products Partners LP Magellan Midstream Partners LP US peers average European Peers EV/EBITDA (x) FY12/ FY13/ CY11 CY12 10.0 12.8 12.4 13.1 12.5 12.4 10.9 8.5 9.0 7.2 5.9 11.4 10.2 7.0 10.4 3.6 15.0 15.0 10.4 8.7 10.8 11.0 11.7 11.6 11.5 9.7 6.8 8.5 6.0 5.0 10.6 9.6 6.5 9.9 3.3 14.0 13.8 9.4 6.8 5.9 6.3 22.5 8.6 15.7 7.9 8.6 11.6 10.7 6.9 5.3 7.9 7.3 9.3 10.2 9.5 9.0 P/E (x) FY12/ FY13/ CY11 CY12 24.1 26.4 19.8 20.2 20.1 23.8 37.8 23.1 16.6 18.4 15.3 23.1 20.4 15.9 16.2 9.0 22.4 18.9 20.6 9.3 17.4 13.3 25.0 17.5 19.1 18.6 17.5 19.5 21.3 11.8 9.0 12.2 16.3 15.8 17.0 18.8 18.7 19.2 22.4 17.0 20.7 18.3 21.9 33.9 16.9 15.9 16.4 11.9 21.6 19.0 15.0 15.4 7.8 20.7 17.3 18.4 8.7 11.0 9.9 23.0 14.4 15.3 15.2 15.1 16.6 19.4 11.1 8.8 12.0 14.6 14.3 15.0 16.6 16.1 P/B (x) EBITDA margin (%) FY12/ FY13/ FY12/ FY13/ CY11 CY12 CY11 CY12 1.8 4.2 1.5 2.9 1.6 2.3 3.9 2.1 1.3 2.0 1.4 2.0 2.5 1.6 2.3 1.3 4.0 5.1 2.4 1.7 0.8 1.3 3.7 3.1 1.2 2.9 1.7 1.5 3.5 2.0 1.9 3.7 3.9 4.9 2.8 2.5 2.1 1.9 3.5 1.6 2.8 1.6 2.3 3.9 1.9 1.3 1.9 1.3 1.9 2.3 1.6 2.1 1.1 4.1 4.9 2.3 1.6 0.8 1.2 3.4 2.6 1.1 2.5 1.5 1.4 3.3 1.8 1.6 3.0 3.3 4.1 2.5 2.3 1.9 25.3 56.7 8.4 10.4 58.2 12.5 40.3 71.0 26.3 39.4 53.3 30.7 22.3 24.3 53.9 72.8 8.9 35.4 36.1 78.6 18.8 48.7 31.5 20.4 18.3 20.2 14.9 16.1 72.3 17.3 91.9 8.9 24.8 20.1 29.7 34.5 25.0 26.7 63.7 8.8 13.7 59.0 13.2 40.9 72.3 27.6 40.9 55.4 34.1 22.8 24.6 53.4 71.9 8.9 36.5 37.5 79.0 19.1 49.1 31.0 19.1 17.2 18.7 13.7 15.8 72.6 17.4 92.0 7.8 21.6 18.8 28.8 34.9 25.7 RoE (%) FY12/ FY13/ CY11 CY12 7.8 10.8 8.8 17.9 8.3 11.4 10.3 9.8 8.2 11.2 10.8 9.0 12.0 10.3 14.5 15.4 17.8 27.5 12.3 18.3 5.5 11.9 14.9 18.8 6.5 16.9 10.3 8.1 17.4 18.2 33.3 33.3 26.5 32.0 19.7 15.1 11.7 7.2 17.8 9.4 17.4 9.7 11.6 12.5 13.5 8.4 12.5 12.8 9.8 11.8 10.6 14.6 15.0 19.0 28.6 13.5 17.9 7.1 12.5 14.4 19.5 7.6 16.9 11.0 9.0 17.2 17.3 27.1 27.1 24.4 30.6 18.5 15.3 14.0
Enagas 7.4 Snam Rete Gas 5.7 European peers average 6.5 Asian peers Hong Kong & China Gas 25.2 ENN Energy 9.8 Towngas China 18.7 China Resources Gas 9.8 China Gas 9.7 Beijing Enterprises 13.4 Petronas Gas BHD 11.5 GAIL 7.7 GSPL 5.4 PETRONET 8.7 IGL 8.6 GUJARAT GAS CO 10.4 Asian peers average 11.6 Global peers average 10.6 Global peers median 10.1 Source: Bloomberg, Ambit Capital research.
27
PNG (`/scm)
16.92 2.13 14.79 11.15 3.50 0.00 0.14 2.6 5.2%
*Levelised network tariff and compression charge submitted by IGL management to PNGRB so as to ensure the regulated post tax RoCE of 14% on capital employed. It is yet to be approved by the regulator. Source: IGL, Ambit Capital research
Hence the marketing margin constitutes ~17.5% of the CNG segments profitability and ~5.2% of the PNG segments profitability. But IGL spends ~15%20% of its overall capex on the marketing business, incurs an operating expense of ~`0.50/scm for sale through its own CNG station or pays ~`0.90/scm to OMCs for using their outlets. Hence the marketing margin doesnt seem to be on the higher side. But even in the worst case if we assume that the marketing margin is reduced by 50%, then also the impact on the earnings would be less than 10% for IGL. Given that its stock price has corrected by 10% since the news of potential regulation of marketing margin came in, we believe the market is factoring in the worst case and it provides a good opportunity to buy the stock. To provide a cushion against the risk of marketing margin regulation, we have conservatively assumed EBITDA margins to stabilise at ~`4.8/scm from ~`5.23/scm earned during FY12. But for GGas, marketing margin constitutes ~25% of its profitability, given the low capex required for connecting the industrial segment. Hence GGas runs a higher risk from the potential capping of marketing margin.
28
Further, IGLs RoCE is expected to moderate going forward and stabilise at ~25% on account of significant capex being incurred by the company to ramp-up its infrastructure across the NCR region. As its returns are not significantly higher than the regulated return of 21% (pre-tax) allowed by PNGRB, we do not expect any significant scope for a cut in IGLs marketing margin. But RoCE of GGas continues to be high at ~30% due to the low capex required to set up connectivity for Industrial consumers. As its return is significantly higher than the regulated return of 21% (pre-tax), it runs the higher risk of a cut in its marketing margin.
Exhibit 53: IGL: Return ratios stabilizing at ~25%, implying lower risk from marketing margin
40% 35% 30% 25% 20% 15% 10% 5% 0% FY11 FY12e ROCE
Source: IGL, Ambit Capital research
Exhibit 54: GGas: High return of ~30% poses significant risk from marketing margin regulation
FY13e
FY14e
FY15e ROE
FY16e
ROE
29
30
Indraprastha Gas
Bloomberg: IGL IN EQUITY Reuters: IGAS.BO
BUY
A Capital play
We prefer IGL due to its: (i) High allocation of domestic gas and efficient sourcing of LNG, (ii) Pricing power underpinned by its presence in the cost competitive CNG segment and favourable tax treatment of CGD in the NCR, and (iii) Strong volume growth potential due to its exclusive licence for setting up a CGD network in the huge NCR market. Allocation of additional domestic gas, progress on diesel deregulation and capping of the LPG subsidy are potential positive triggers. We Initiate with a BUY. Competitive position: STRONG Changes to this position: STABLE
Recommendation
CMP: Target Price (12 month): Previous TP: Upside (%) EPS (FY13): Change from previous (%) Variance from consensus (%) `347 `406 NA 17% `23.9 NA -3%
IGL has been allocated higher domestic gas as 91% of its sales are to the Government preferred CNG/PNG business. IGL is also likely preferred for any incremental allocation of domestic gas. Furthermore, its strong parentage (GAIL owns 22.5%) gives it an edge in the efficient sourcing of LNG. IGL has pricing power due to its significant presence in the cost competitive CNG segment, low cost of gas due to the higher usage of domestic gas (1/3rds the cost of LNG) and favourable tax treatment for CGD in the NCR. IGL has strong volume growth potential due to its exclusive licence for setting up a CGD network in the extensive NCR market and its presence in the under penetrated and Government-preferred CNG/PNG business. We expect 16% volume CAGR over FY12E-FY16E. Allocation of low cost domestic gas and IGLs early mover advantage in Delhi should reduce the competitive threat post end of the marketing exclusivity for Delhi. IGL has also bid for Ludhiana and Jalandhar CGD (in the state of Punjab) in the third round of auction held by PNGRB in July 2010. The stock has corrected by 10% over the last 40 days due to concerns that IGLs marketing margin is likely to be regulated. This provides a good entry point as the market is factoring in a 50% reduction in its marketing margin, which looks unjustified given the capex, opex and risks involved in gas marketing. Valuation: Using a DCF-based model we value IGL at `406 (assuming cost of equity of 14.0% and perpetuity growth of 4.5% from FY23) which implies an FY13 P/E of 17.0x, FY13 EV/EBITDA of 9.3x and P/B of 4.1x. This valuation appears reasonable given the 16% volume CAGR expectation and 12% earnings CAGR over FY12-FY14. Although IGLs planned capex of `28bn over FY12E-FY16E would moderate its RoCE (FY11: 33%, FY16e:25%), RoCE is still expected to be strong at ~25%. Allocation of additional domestic gas, gradual deregulation of diesel, proposed capping of LPG subsidy and the continued deregulation of petrol are the key positive catalysts for the stock.
Exhibit 1: Key financials
Year to March Sales volume (mmcmd) Gross margin (`/scm) EBITDA (` mn) EBITDA (%) EPS (`) RoCE (%) P/E (x)
Source: Company, Ambit Capital research
Stock Information
Mkt cap: 52-wk H/L: 3M ADV: Beta: BSE Sensex: Nifty: `49bn/US$986mn `454/285 `152mn/US$3.1mn 0.6x 18,145 5,505
14.7 -25.0
Performance (%)
25,000 20,000 15,000 10,000
Sensex
Feb-12
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Indraprastha Gas
Company Background Indraprastha Gas (IGL) was incorporated in December 1998, as a JV between GAIL, BPCL and the Government of Delhi with an objective to supply CNG to the transport sector and PNG to the domestic and commercial sectors in the NCR region. IGL was incorporated post the Supreme Courts July 1998 order seeking that all buses, three wheelers and taxis in Delhi adopt CNG as fuel. IGL has not only emerged as the sole supplier of CNG and PNG in the National Capital Territory (NCT) of Delhi but is also expanding its footprint in the National Capital Region (NCR) cities of Noida, Greater Noida, Ghaziabad and Faridabad.
Return ratios to moderate due to huge capex plan and our conservative margin assumption
35% 30% 25% 20% 15% 10% 5% 0% FY11 ROCE FY12e ROE FY13e FY14e FY15e z 6.0 5.0 4.0 3.0 2.0 1.0 0.0 Volume (mmcmd, RHS)
32
Indraprastha Gas
Threats Any decline in APM gas production or decline in KG D6 gas production could result in a proportionate reduction in allocation for IGL as well. Potential threat of competition, as marketing exclusivity for Delhi CGD, has ended on 31st Dec 2011 Weakness in the rupee would result in an increase in the cost of gas and hence can put pressure on its margins. Slowdown in discretionary CNG conversion due to: a) limited CNG stations, b) upfront cost of installing the CNG kit, c) decline in differential between CNG and petrol/diesel price. As LNG is sourced via a mix of short term and spot contracts, prices of which are highly volatile, sudden spurt in cost of LNG would drive up the weighted average cost of gas, impacting margins. Proposed regulation of marketing margins for CGD companies by the PNGRB based on costs incurred in marketing could result in a decline in the return ratios.
33
Indraprastha Gas
Company background
Exhibit 1: IGLs shareholders
Entity GAIL BPCL Govt of NCT of Delhi Sundaram AMC LIC Pinebridge investments Asia Ltd Source: Bloomberg
major
Stake 22.50% 22.50% 5.00% 4.55% 1.81% 1.63%
Indraprastha Gas Ltd (IGL) was incorporated in December 1998, as a joint venture between GAIL, Indias largest natural gas transmission company, and BPCL, a leading Indian oil refining and marketing company, each holding 22.5% stake and the Government of NCT (National Capital Territory) of Delhi (5% stake). The Supreme Courts order of July 1998 to contain vehicular pollution was responsible for the incorporation of Indraprastha Gas (IGL). The Court directed all buses, three wheelers and taxis in Delhi to adopt CNG as a fuel by March 31, 2001. Further the Government of NCT, in July 2009, directed all light commercial vehicles operating in Delhi to convert to CNG. Thus IGL was formed with an objective to supply CNG to the transport sector and PNG to domestic and commercial sectors in the NCR region. IGL took over the Delhi CGD project in 1999 from GAIL with only 9 CNG stations and 1,000 PNG consumers. But given the regulatory push, it became the first company in India to commercialize the use of CNG for the automotive sector. It has not only emerged as the sole supplier of CNG and PNG in Delhi but is also expanding its footprint in the NCR cities of Noida, Greater Noida, Ghaziabad and Faridabad, though Delhi still accounts for the bulk of its volumes. By end-FY11, it had expanded the number of CNG stations to 278 and had ~245,000 PNG consumers. IGLs marketing exclusivity rights for the Delhi CGD expired on December 31, 2011 (though the company is contesting for its extension until end2013), but it still has the network exclusivity till 2033. Driven by the regulatory push for conversion of vehicles to CNG, its earnings during FY07-FY11 have grown at a CAGR of +17% closely tracking the ~20% CAGR in its sales volume. The low penetration of CNG in Delhi and rising differential between the cost of CNG versus liquid fuel (particularly petrol) has fuelled IGLs volume growth. The return ratios have also been strong with RoCE of 30%-35% and RoE of 28%-30%. RoEs are lower than RoCEs as the company has started using debt for expansion plans only from FY11. The return ratios have moderated over the last couple of years due to the significant jump in its capex from FY09 onwards and moderation in its margins due to usage of high-cost LNG. EBITDA margin appears to be declining over the years, but that is more mathematical in nature, as the increase in gas cost has resulted in an increase in the selling price of gas with margins remaining stable in absolute terms.
FY09
34
Indraprastha Gas
Infrastructure
IGL receives natural gas through a tap off point from GAILs Hazira-BijaipurJagdishpur (HBJ) pipeline, which is then distributed via its CNG stations and through its network of pipelines to PNG consumers. By end-FY11, IGL had 421km of steel pipeline network and 4,420km of MDPE (medium density polyethylene) pipeline network. IGLs PNG network currently covers 55 of the 77 charge areas and it targets to penetrate its PNG network in all the charge areas. Hence it plans to extend its steel pipeline network by 200km and MDPE pipeline network by 1,500km by end-FY13. In addition to its widespread network, IGL has a network of over 278 CNG stations across Delhi particularly at locations where the traffic density is high. Of the total of its CNG stations, it had ~16 stations operational in Noida and Greater Noida and three CNG stations operational in Ghaziabad.
Exhibit 5: IGLs infrastructure growth
Particulars Steel pipeline (km) MDPE pipeline (km) Total (km) CNG No of CNG stations (nos) Compression capacity (mn kg/day) Average CNG sale (mn kg/day) PNG No of domestic users (nos) No of commercial / Industrial (nos) Total (nos)
Source: IGL
Mar-07 178 931 1109 153 2.02 0.94 78,000 313 78,313
Mar-08 195 1272 1467 163 2.08 1.06 121,695 318 122,013
Mar-09 231 1700 1931 181 2.67 1.26 138,000 332 138,332
Mar-10 299 2330 2629 241 3.64 1.45 182,000 376 182,376
Mar-11 421 4420 4841 278 5.11 1.67 245,000 520 245,520
35
Indraprastha Gas
36
Indraprastha Gas
2.70 IGL is allocated 2.7mmcmd of APM gas for NCR No supply from KG D6 due to decline in gas 0.00 production 2.00 Balance gas is sourced via LNG imports. 4.70 5.50 Delivered price of APM gas to IGL 6.00 Delivered price of KG D6 gas to IGL Cost of LNG sourced from PLNG's RasGas contract, 14.00 GAIL's Marbueni contract, and from the spot market. Gas cost will gradually increase due to increase in the 9.11 proportion of high-cost LNG in the gas supply mix.
Interest exp net of other income -0.27 PBT 4.15 Tax 1.39 PAT 2.75 Balance sheet and cash flow assumptions: (` Gross fixed assets Gross debt including customer deposit Cash balance Operating cash flow Capex Free cash flow Net change in cash Source: Company, Ambit Capital research 11,053 552 1,213 3,231 3,891 -660 -249
0.39 3.30 1.09 Taxes as per normal applicable tax rate 2.21 Hence expect PAT/scm to stabilise at `2.2-`2.4/scm 36,060 Gross fixed asset to grow due to setting up of new CNG stations and expansion of PNG network
10,885 Part of the capex to be funded through raising debt 871 5,511 Strong operating cash flow generation to continue Capex plan of `28bn over FY12E-FY16E to expand 4,925 CNG and PNG infrastructure Huge capex plan to result in negative free cash flow till 586 FY13E. 341
37
Indraprastha Gas
Exhibit 7: Ambit v/s consensus table
Consensus Revenue (` mn) FY13 FY14 EBITDA (` mn) FY13 FY14 PAT (` mn) FY13 FY14 EPS (`) FY13 FY14
24.70 26.90 23.93 26.03 -3 -5 3,451 3,824 3,351 3,644 -3 -5 7,334 8,090 7,109 7,890 -3 -2 32,393 39,045 31,363 38,778 -3 -1
Ambit % Divergence
Comments Due to our conservative assumption that the company might absorb 3%5% of the increase in gas cost so as to safeguard its volume growth We have conservatively built in EBITDA/scm to stabilise at ~`4.8/scm, compared with `5.23/scm earned in FY12, to factor in the potential regulatory risk
We expect 12% earnings CAGR for IGL during FY11-FY14E on the back of rising volumes and robust margins. The earnings growth trend is expected to moderate in FY13-FY14 from 23% CAGR seen during FY09-FY11 on account of: a) an increase in depreciation due to IGLs extensive expansion plans; b) our conservative assumption of moderation in the EBITDA margin likely to stabilise at ~`4.8/scm from ~`5.23/scm earned during FY12, to provide a cushion against potential regulatory risks; and c) volume CAGR during FY12-14E to be still strong at 16%, though lower than the 23% CAGR seen in FY09-FY11 due to the high base effect.
Exhibit 8: Strong EPS growth, though it is expected to moderate from historical levels due to significant jump in depreciation due to its rapid expansion plans
(`/share) 30 25 20 15 10 5 FY10 FY11 Recurring EPS
Source: Company, Ambit Capital research
38
Indraprastha Gas
Absolute valuation
Using a DCF-based valuation methodology, we arrive at a valuation of `406, which implies an FY13 P/E of 17.0x, FY13 EV/EBITDA of 9.3x and P/B of 4.1x. Our DCF is based on explicit earnings forecast until FY16, and after that we model 8%10% volume growth to FY22. Post that we have assumed a terminal growth of 4.5%. We have used a WACC of 12.4% for our DCF valuation (based on a cost of equity of 14.0%, beta of 0.9x and cost of debt of 10.5%).
Exhibit 9: IGLs DCF valuation
Terminal FCF (` mn) Terminal growth rate WACC Terminal value (` mn) PV of terminal value (` mn) PV of cash flow (` mn) Enterprise value Net debt (2QFY12 end) Equity value (` mn) No of shares Valuation (`) CMP (`) Upside (%)
Source: Ambit Capital research
9,077 4.5% 12.4% 120,765 (A) (B) (C=A+B) (D) (E=C-D) (F) (G=E/F) 40,717 22,647 63,364 6,546 56,818 140 406 347 17%
The return ratios are expected to moderate going forward and stabilise at ~25% over the next 4-5 years on account of significant capex the company will incur to ramp-up its infrastructure across the NCR region. Further to provide a cushion against potential regulatory risks, we have conservatively assumed EBITDA margin to stabilise at ~`4.8/scm from ~`5.23/scm earned during FY12. But we expect RoCE to rise from FY16 onwards and stabilise at ~25%, at marginally higher than the regulated return of 21% allowed by the PNGRB, as the company improve utilisation of its CNG and PNG infrastructure.
39
Indraprastha Gas
Exhibit 11: Rising capacity utilization will results in high RoCE
(` bn) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 FY12e FY13e FY14e FY15e FY16e FY17e FY18e FY19e FY20e FY21e FY22e PV of FCFF
Source: Ambit Capital research
WACC (RHS)
ROCE (RHS)
Our bull case valuation of `441/share is after factoring in the following optimism: Commissioning of supply of 0.31mmcmd of firm gas allocated to IGL from KG D6, improving its ability to absorb the high-cost LNG No threat from the marketing margin regulation resulting in our gross margin being higher by 2%, as we have conservatively factored in lower margins Sales volume being 1% higher than our expectation due to stronger-thanexpected conversion to CNG.
40
Indraprastha Gas
Relative valuation
At the current market price, IGL is trading at: (a) 1-year forward EV/EBITDA of 8.1x, 25% higher than its own 5-year average multiple of 6.5x; (b) 1-year forward PE of 14.5x, 24% higher than its 5-year average multiple of 11.7x; and (c) 1-year forward PB of 3.5x, 17% higher than its 5-year average multiple of 3.0x. The comparison to the 5-year average multiple makes IGL look expensive. However, IGL was trading at low valuations before June 25, 2010 due to concerns on its pricing power as petrol prices were regulated impacting the competitiveness of CNG. But since the deregulation of petrol prices on June 25, 2010, the stock has traded at a 1-year forward PE of 15.8x, 1-year forward PB of 4.1x and 1-year forward EV/EBITDA of 8.9x. Hence post June 25, 2010 we note the following improvements in IGLs fundamentals: (i) cost competitiveness of CNG improved due to deregulation of petrol price amid high crude prices, (ii) allocation of additional APM gas to IGL for expansion into NCR lowered its gas cost, and (iii) there was increasing evidence of IGLs pricing power, as it managed to pass on the increase in gas cost by raising CNG prices by over 20% in the last one year.
Predictability
AMBER
Earnings Momentum
RED
41
Income statement
Year to March (` mn) Sales volume (mmcmd) Gross margin (`/scm) EBITDA (`/scm) Net revenue Total expenditure EBIDTA EBITDA (%) Depreciation EBIT EBIT (%) Interest expense Other income PBT Current tax Deferred tax Effective tax (%) PAT Recurring PAT PAT growth (%) Recurring EPS (`) Source: Company, Ambit Capital research FY10 2.14 7.45 4.87 10,781 6,973 3,808 35.3 775 3,033 28.1 211 3,244 (1,060) (29) 34 2,155 2,155 25% 15.4 FY11 2.73 7.62 4.93 17,441 12,518 4,923 28.2 1,029 3,894 22.3 132 95 3,857 (1,090) (170) 33 2,598 2,598 21% 18.6 FY12E 3.34 8.02 5.23 25,087 18,717 6,369 25.4 1,428 4,941 19.7 501 37 4,476 (1,424) 32 3,053 3,053 18% 21.8 FY13E 3.87 7.79 5.03 31,363 24,254 7,109 22.7 1,528 5,581 17.8 629 50 5,001 (1,650) 33 3,351 3,351 10% 23.9 FY14E 4.51 7.50 4.79 38,778 30,888 7,890 20.3 1,803 6,087 15.7 714 65 5,438 (1,795) 33 3,644 3,644 9% 26.0
42
Ratio analysis
Year to March (%) EBITDA margin (%) EBIT margin (%) Net profit margin (%) Dividend payout ratio (%) Net debt/equity (%) Total debt/operating cash flow (x) Interest coverage ratio (x) Gross block turnover (x) RoCE (%) RoE (%) Source: Company, Ambit Capital research FY10 35.3 28.1 20.0 29.2 (8.0) 0.2 NA 1.4 38.1 28.6 FY11 28.2 22.3 14.9 26.9 44.4 1.2 29.6 1.5 33.2 28.4 FY12E 25.4 19.7 12.2 35.0 64.2 1.7 9.9 1.5 28.8 27.8 FY13E 22.7 17.8 10.7 35.0 65.8 2.0 8.9 1.5 25.8 26.0 FY14E 20.3 15.7 9.4 35.0 62.1 2.0 8.5 1.5 24.1 24.3
Valuation parameters
Year to March (` mn) Diluted shares (mn) FDEPS (`) CEPS (`) BV (`) DPS (`) Dividend yield (%) P/E (x) EV/EBITDA (x) P/B (x) Source: Company, Ambit Capital research FY10 140 15.4 20.9 59.0 4.5 1.3 22.6 12.6 5.9 FY11 140 18.6 25.9 71.7 5.0 1.4 18.7 10.8 4.8 FY12E 140 21.8 32.0 84.9 7.6 2.2 15.9 8.8 4.1 FY13E 140 23.9 34.8 99.4 8.4 2.4 14.5 8.1 3.5 FY14E 140 26.0 38.9 115.2 9.1 2.6 13.3 7.4 3.0
43
Indraprastha Gas
44
Gujarat Gas
Bloomberg: GGAS IN EQUITY Reuters: GGAS.BO
SELL
On the backfoot
GGas might face challenges ahead due to its: (i) Rising dependency on LNG (owing to the decline in supply from the mature PMT field) while its limited exposure to the CNG/PNG business reduces its chances of incremental domestic gas allocation; (ii) Low pricing power given its presence in the Industrial segment and given the high taxes on CGD in Gujarat; and (iii) Its volume growth stagnating at 5% due to saturating demand from its key Industrial segment. We Initiate with a SELL. Competitive position: MODERATE Changes to this position: NEGATIVE
Recommendation
CMP: Target Price (12 month): Previous TP: Downside (%) EPS (CY12): Change from previous (%) Variance from consensus (%) `393 `369 NA -6% `25.2 NA -9%
GGas has relatively low allocation of domestic gas as only 18% of its sales come from the CNG/PNG segment. Moreover, the decline in supply from the matured PMT field and the lack of additional domestic gas allocation could result in GGass entire volume growth being met via import of LNG. Furthermore, the cost of LNG is higher for GGas due to its high dependence on LNG imports via spot contracts. To make things worse, the exit of BG Group could pose a threat to its ability to source LNG at competitive prices. GGas has relatively low pricing power as it is only marginally present in the cost competitive CNG segment. In fact, GGas is in the unenviable position of having to procure imported gas at a high cost and then sell it to price sensitive Industrial consumers who have considerable bargaining power. To make matters worse, the Gujarat Government imposes high taxes on CGD. GGass volume growth is stagnating at ~5% CAGR as its growth is primarily dependent on the saturated Industrial segment demand. As industry in Gujarat has been historically well served by gas, the demand from this segment is saturated. Higher growth for GGas would be contingent on winning bids for new cities. In the 3rd round of CGD bidding, GGas had bid for Bhavnagar CGD (potential demand of ~1mmcmd); the winner is likely to be announced by March 2012. Although GGas is trying to grow its CNG and PNG business, the firm lacks an aggressive capex plan to build a more extensive distribution network. Furthermore, the change of ownership, with the exit of BG, could further impact its capex plan. Valuation: Using a DCF-based model we value GGas at `369 (assuming cost of equity of 13.3% and perpetuity growth of 4% from CY23), implying CY12 P/E of 15.1x, EV/EBITDA of 10.0x and P/B of 4.5x. Due to low volume growth and pressure on its margins, we forecast CY11-CY14E earnings CAGR to be muted at 4%. That being said given that BGs 65% stake is up for sale (and given that this will be followed by a 26% open offer), a significant takeout premium could result in shares trading well above our fundamental valuation.
Exhibit 1: Key financials
Year to March Sales volume (mmcmd) Gross margin (`/scm) EBITDA (` Mn) EBITDA (%) EPS (`) RoCE (%) P/E (x)
Source: Company, Ambit Capital research
Stock Information
Mkt cap: 52-wk H/L: 3M ADV: Beta: BSE Sensex: Nifty: `50bn/US$1,023mn `485/321 `36mn/US$0.7mn 0.8x 18,145 5,505
Performance (%)
25,000 20,000 15,000 10,000
Sensex
Feb-12
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Gujarat Gas
Company Background Gujarat Gas was formed in January 1980 with the primary objective of procuring and distributing natural gas to industrial, commercial and domestic consumers in Gujarat. It became the subsidiary of BG Group in 1997. Over the last five years, the company has expanded in southern Gujarat particularly in Surat, Ankleshwar and Bharuch. GGas, unlike other CGD players, supplies 80% of its gas to industrial customers given the large scale usage of gas in the industrial segment in Gujarat. It sources its gas primarily from the PMT field and also from Niko and Cairn Indias gas field. The remaining quantity is sourced from LNG via a mix of short term and spot contracts.
Return ratios to moderate due to the capex plan and marginal decline in its margins
40% 35% 30% 25% 20% 15% 10% 5% 0% CY10 ROCE CY11e CY12e CY13e CY14e ROE
4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Volume (mmcmd, RHS)
CY11e
CY12e
CY13e
CY14e
LNG
Domestic Gas
46
Gujarat Gas
Low cost domestic gas constitutes 63% of its CY11 gas mix, thereby lowering the weighted average cost of gas for GGas. Cost competitiveness of: (a) CNG versus petrol/diesel for the automobile segment, (b) gas versus alternative liquid fuels like naphtha, fuel oil etc. for the Industrial segment, and (c) ease of usage of PNG versus LPG in household/commercial segment, provides substantial opportunity for volume growth. This would also provide a degree of pricing power to GGas. A presence in the potential growth market in the Gujarat region gives GGas the first mover advantage to capture this opportunity.
As High-cost LNG comprised ~37% of its CY11 gas mix, and with no additional domestic gas expected to be allocated to GGas over the next 2-3 years, growth would have to be fuelled via import of high-cost LNG. This in turn will likely require frequent increases in end-gas prices. As industries in Gujarat has been well served with gas due to geographic proximity to the sources of gas supply, the scope for growth in gas consumption in the Industrial segment is limited to a CAGR of 4% compared with 13%-15% volume CAGR in the CNG and PNG segments. As ~82% of GGass volume is sold to the Industrial segment, it drags down the overall volume CAGR expectation for GGas to ~5%. As all gas purchased is denominated in US dollars while all gas sales are in rupee terms, depreciation in the rupee has a direct impact on GGass margins. Higher sales tax on gas in Gujarat compared with the other states reduces the relative attractiveness of the CGD business in Gujarat.
Threats
Opportunities
Increase in KG D6 gas production could result in commencement of gas supply to GGas, as it has been allocated 0.6mmcmd of KG D6 gas on a fallback basis. Pricing power in the CNG segment will strengthen if the Government sticks to its decision of deregulating petrol prices and re-regulating diesel prices. This will strengthen pricing power for the CNG business of GGas. The Governments proposed plan to cap subsidised LPG cylinders to 5-6 p.a. per household will help make PNG more competitive and boost its volume growth. This will strengthen pricing power for the PNG business of GGas. Winning CGD licences for new cities will support growth, as demand from the Industrial segment currently in its area of operations is saturated. GGas has already submitted bids for the setting up of a CGD network in Bhavnagar, the 6th fastest city in Gujarat, with a potential demand of ~1mmcmd; the winner is likely to be announced by March 2012.
GGas sources a majority of its domestic gas from the matured PMT field, production from which is declining. Hence, GGas runs the risk of a significant decline in allocations from the PMT field. As 82% of GGass sales are to the unregulated Industrial segment, GGas will be given lower priority over other CGD companies for incremental allocation of domestic gas. As LNG is sourced via a mix of short term and spot contracts, the prices of which are highly volatile, a sudden spurt in the cost of LNG would drive up the weighted average cost of gas thereby impacting margins. Exit of the BG group will likely raise questions about GGass ability to source LNG from the international market at a competitive price. GGas might not able to easily pass on the increase in gas costs due to stiff resistance from Industrial customers. Pricing power for distributors in the Industrial segment is not as strong as in the CNG segment, due to only 10%-25% cost competitiveness of LNG v/s alternative fuel for the Industrial segment compared with 40%-50% cost competitiveness of CNG v/s petrol. Weakness in the rupee would result in increasing the cost of gas for GGas and hence squeeze its margins. The PNGRBs proposed regulations for CGD companies with respect to marketing margins (based on costs incurred in the marketing business), could lead to a decline in return ratios for GGas.
47
Gujarat Gas
Company background
Exhibit 1: GGas major shareholders
BG Group Aberdeen AMC GGas employee welfare stock option Sundaram AMC Templeton AMC Birla Sun Life AMC Source: Company 65.12% 11.66% 1.33% 1.16% 0.86% 0.71%
Gujarat Gas (GGas) was formed in January 1980 by the textile focused Mafatlal Group with the primary objective of procuring and distributing natural gas to the industrial, commercial and domestic consumers in Gujarat. GGas became a subsidiary of the BG Group in 1997 as it acquired more than 60% shares from Mafatlal and others and later increased its stake to 65.12%. During the last five years, the company has expanded in southern Gujarat and has exclusive distribution rights in the industrialized cities of Surat, Ankleshwar and Bharuch in Gujarat. Today, it supplies gas to more than 317,000 domestic, commercial and industrial customers and serves over 1,44,000 CNG users. The companys pipeline network is spread over 3,700km. Sourcing of gas: GGas taps its gas requirement from various sources such as PMT (Panna-Mukta-Tapti gas field), APM (administered price mechanism), Niko and Cairns Lakshmi field, with the supply from PMT constituting ~45% of its total supply. GGas sources the balance gas via a mix of short term and spot LNG contracts. Currently GGas has two short term LNG agreements with the BG group: (i) A 0.2mmcmd LNG supply agreement until December 2013; and (ii) A 1mmcmd LNG supply agreement until December 2012. The remaining LNG requirement is sourced from the spot market.
Exhibit 4: Gas sourcing mix for GGas (mmcmd)
Allocation Domestic gas: PMT, APM, Niko and Cairn Lakshmi field RIL KG D6 (0.61on fallback basis) Total domestic gas LNG Total
Source: GGas, Ambit Capital Research ... *for CY11
Sep 1989 Apr 1990 Sep 1991 Oct 1991 Feb 1992 Dec-99 Jan 2001 Nov 2002 Nov 2004 Dec 2005 Dec 2006 Nov 2007 Nov 2011
During CY11 the company transmitted ~3.47mmcmd of gas across various segments such as CNG, domestic and Industrial PNG. But, unlike other city gas distribution (CGD) players, GGas supplies the bulk of its gas to industrial customers. In CY11, industrial customers accounted for about 82% of its gas volumes while the more cost competitive CNG segment accounted for only 11% of its gas sales volumes with PNG accounting for the rest.
Exhibit 5: GGas gas sourcing and customers
Source: Company
48
Gujarat Gas Profits during CY09-CY11 grew at 33% CAGR due to volume growth of 17% in CY10 (after it reported negative volume growth during CY08-CY09). Furthermore, the company was able to improve its EBITDA margin to `3.4/scm in CY10 and to ~`3.7/scm in CY11 from `2.7/scm in CY09. Hence the return ratios strengthened during CY10-CY11 to +30%. EBITDA margin declined in CY11, but that is more mathematical in nature, as the increase in gas cost has resulted in an increase in the selling price of gas with margins remaining stable in absolute terms.
Exhibit 6: PAT tracks volume growth
3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 CY07 CY08 CY09 CY10 CY11 PAT (Rs Bn) 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Sales volume (mmcmd, RHS)
40% 35% 30% 25% 20% 15% 10% 5% 0% CY07 ROCE CY08 CY09 ROE CY10 CY11
Growth plans
GGass volume growth is primarily dependent on the saturated Industrial segment demand. Industries in Gujarat have been well served with gas for the last couple of decades due to its proximity to the source of gas supply and pipeline connectivity, thus the demand from this segment would see only a 3%-4% volume CAGR. Although GGas is trying to grow its CNG and PNG business, the firm lacks an aggressive capex plan to build a more extensive distribution network. GGas plans to incur capex of approximately `1.5bn p.a. over the next three years for expansion within its existing operational area. Hence higher growth for GGas would be contingent on winning bids for new cities. In the 3rd round of CGD bidding, GGas had bid for Bhavnagar CGD (potential demand of ~1mmcmd); the winner is likely to be announced by Mar 2012. If it were to win the bid for Bhavnagar, then it would require incremental capex of `1.0bn to 1.2bn annually for the first five years.
49
Gujarat Gas
4.0% 4.0% 15.0% 15.0% 13.0% 13.0% 5.9% 6.0% 80% 12% 8% 79% Industrial segment to still dominate the gas sales mix 13% CNG segment to grow due to low base 8%
1.50 0.14 0.56 0.00 1.31 3.51 6.50 5.50 5.00 13.00 8.65
1.49 0.14 0.56 0.00 1.53 3.72 6.50 5.50 5.00 15.00
1.47 Supply from PMT field to gradually decline 0.14 Govt has allocated 0.14mmcmd of APM gas to GGas. Supply of ~0.16mmcmd from Niko and ~0.40mmcmd from 0.56 Cairn India's Lakshmi field 0.00 No supply from KG D6 due to decline in gas production 1.77 Balance gas is sourced via LNG imports 3.94 6.50 5.50 5.00 15.00
Delivered price of PMT gas to GGas Delivered price of APM gas to GGas Delivered price of gas to GGas LNG sourced via a mix of short term and spot contracts Gas cost will gradually increase due to increase in the 9.74 10.07 proportion of high-cost LNG in the gas supply mix
Average cost of gas 9.69 10.61 Blended gross spread 3.71 4.35 Net other expense/ (income) 0.96 1.01 EBITDA 2.70 3.43 Depreciation 0.46 0.45 Interest exp net of other income -0.26 -0.18 PBT 2.50 3.16 Tax 0.81 1.03 PAT 1.69 2.14 Balance sheet and cash flow assumptions: (` mn) Gross fixed assets Gross debt and customer deposit Cash balance Operating cash flow Capex Free cash flow 9,140 1,554 79 3,164 1,433 1,731
17.23 4.60 1.07 3.55 0.49 -0.32 3.38 1.01 Taxes as per the normal applicable tax rate 2.37 Expect PAT/scm to stabilise ~`2.3-2.4/scm
10,191 11,491 12,791 14,091 2,074 94 3,663 1,079 2,584 2,175 1,650 4,041 1,300 2,741 2,282 2,696 3,982 1,300 2,682
Gross fixed asset to grow due to setting up of new CNG stations and expansion of PNG network 2,394 Capex funded via internal accruals and customer deposits 3,782 4,158 Marginal growth in operating cash flow to continue Capex plan of `1.5bn p.a. over the next 3 years for 1,300 expansion within the existing cities 2,858 Moderate capex plan to result in marginal growth in FCF
50
Gujarat Gas
Exhibit 9: Ambit v/s consensus table
Consensus Revenue (` mn) CY12 CY13 EBITDA (` mn) CY12 CY13 PAT (` mn) CY12 CY13 EPS (`) CY12 CY13
27.6 28.9 25.2 26.2 -10 -9 3,586 3,695 3,226 3,356 -10 -9 5,436 4,856 -11 28,870 30,842 29,529 31,441 2 2
Ambit
Divergence %
Comments
Due to marginally higher assumption for the cost of LNG Due to our assumption of EBITDA/scm to stabilise at ~`3.5/scm, compared to `3.67/scm earned during CY11 (to factor in its higher dependence on LNG and potential regulatory risk).
5,658
5,025
-11
As volume growth is expected to stagnate at ~5% and given the rising pressure on its margins, we forecast CY11-CY14E earnings CAGR to be muted at 4%. We have assumed EBITDA/scm to stabilise at ~`3.5/scm, compared with `3.67/scm earned during CY11, to factor in GGass higher dependence on LNG.
Exhibit 10: Muted earnings growth on the back of stagnating volume growth
`/share 30 24 18 12 6 0 CY09 CY10 Recurring EPS
Source: Company, Ambit Capital research
51
Gujarat Gas
Absolute valuation
Using a DCF-based valuation methodology, we arrive at a valuation of `369, which implies a CY12 P/E of 15.1x, EV/EBITDA of 10.0x and P/B of 4.5x. Our DCF is based on explicit earnings forecast until CY16, and after that we model 5% volume growth to CY22. Post that we have assumed a terminal growth of 4%. We have used a WACC of 11.1% for our DCF valuation (based on a cost of equity of 13.3%).
Exhibit 11: DCF valuation for GGas
Terminal FCF (` mn) Terminal growth rate WACC (%) Terminal value (` mn) PV of terminal value (` mn) PV of cash flow (` mn) Enterprise value (` mn) Net debt (CY11 end) (` mn) Equity value (` mn) No of shares Valuation (`) CMP (`) Downside (%)
Source: Ambit Capital research 4,943 4% 11.1% 72,401
We expect RoCE to decline to sub-30% based on stagnating volume growth and rising pressure on its margins due to increased usage of LNG.
Exhibit 13: Rising capacity utilization results in high RoCE
(` bn) 2.6 2.2 1.8 1.4 1.0 CY12e CY13e CY14e CY15e CY16e CY17e CY18e CY19e CY20e CY21e CY22e PV of FCFF
Source: Ambit Capital research
52
Gujarat Gas
Our bull case valuation of `404/share is after factoring in the following optimism: Commissioning of part supply of 0.6mmcmd of KG D6 gas allocated to GGas on a fallback basis, improving its ability to absorb the high-cost LNG No threat from marketing margin regulation leading to our gross margin expectation being higher by 2%, as we have conservatively factored in lower margins Sales volume being 1% higher than our expectation.
53
Gujarat Gas
Relative valuation
At the current market price, GGas is trading at: (a) 1-year forward EV/EBITDA of 10.3x, 24% higher than its own 5-year average multiple of 8.3x; (b) 1-year forward PE of 15.6x, 28% higher than its 5-year average multiple of 12.2x; and (c) 1-year forward PB of 4.8x, 41% higher than its 5-year average multiple of 3.4x. GGas is trading at a PE multiple in line with IGL. But GGas trades at 15% premium to IGL on the PB and EV/EBITDA multiples despite its volume growth stagnating at ~5% and resulting in muted earnings growth of 4.4% over CY11-CY14E. This is despite its pricing power being under risk due to its higher dependence on LNG.
Predictability
RED
54
Gujarat Gas
55
CY09 401 7,396 7,796 1,554 1,554 560 52 9,962 9,140 3,331 5,809 1,356 7,165 4,481 1,714 3,476 (1,763) 79 9,962
CY10 401 8,191 8,591 2,074 2,074 669 63 11,397 10,191 3,832 6,359 1,298 7,657 5,831 1,866 4,051 (2,184) 94 11,397
CY11E 401 9,087 9,487 2,175 2,175 669 76 12,407 11,491 4,389 7,102 1,018 8,120 4,939 2,467 5,020 (2,553) 1,650 12,407
CY12E 401 10,063 10,463 2,282 2,282 669 88 13,503 12,791 5,028 7,763 1,018 8,781 4,445 2,885 5,554 (2,670) 2,696 13,503
CY13E 401 11,078 11,478 2,394 2,394 669 101 14,643 14,091 5,718 8,373 1,018 9,391 4,001 3,068 5,849 (2,781) 3,782 14,643
Income statement
Year to March (` mn) Sales volume (mmcmd) Gross margin (`/scm) EBITDA (`/scm) Net revenue Total expenditure EBIDTA EBITDA (%) Depreciation EBIT EBIT (%) Interest expense Other income PBT Current tax Deferred tax Effective tax (%) PAT Recurring PAT PAT growth (%) Recurring EPS (`)
Source: Company, Ambit Capital research
CY09 2.88 3.71 2.70 14,197 11,402 2,795 19.7 474 2,321 16.4 1 266 2,586 (774) (62) 32 1,742 1,742 8% 13.6
CY10 3.36 4.35 3.43 18,493 14,337 4,156 22.5 542 3,614 19.5 5 224 3,833 (1,176) (67) 32 2,577 2,577 48% 20.2
CY11E 3.51 4.75 3.67 25,030 20,395 4,636 18.5 586 4,050 16.2 1 361 4,410 (1,323) 30 3,074 3,074 19% 24.1
CY12E 3.72 4.70 3.63 29,529 24,674 4,856 16.4 639 4,216 14.3 1 394 4,609 (1,383) 30 3,214 3,214 5% 25.2
CY13E 3.94 4.60 3.55 31,441 26,416 5,025 16.0 690 4,335 13.8 2 461 4,794 (1,438) 30 3,343 3,343 4% 26.2
56
Ratio analysis
Year to March (%) EBITDA margin (%) EBIT margin (%) Net profit margin (%) Dividend payout ratio (%) Net debt/equity (%) Total debt/operating cash flow (x) Interest coverage ratio (x) Gross block turnover (x) RoCE (%) RoE (%) Source: Company, Ambit Capital research CY09 19.7 16.4 12.3 59.5% 18.9% 0.7 1,707 1.6 26.0 23.2 CY10 22.5 19.5 13.9 59.8% 23.0% 0.6 782 1.8 36.1 31.5 CY11E 18.5 16.2 12.3 60.0% 5.5% 0.6 2,933 2.2 36.3 34.0 CY12E 16.4 14.3 10.9 60.0% -4.0% 0.6 2,911 2.4 34.5 32.2 CY13E 16.0 13.8 10.6 60.0% -12.1% 0.6 2,852 2.4 32.6 30.5
Valuation parameters
Year to March (` mn)
Diluted shares (mn) FDEPS (`) CEPS (`) BV (`) DPS (`) Dividend yield (%) P/E (x) EV/EBITDA (x) P/B (x) Source: Company, Ambit Capital research
CY09
128 13.6 17.3 60.8 8.1 2.1% 29.0 18.6 6.5
CY10
128 20.1 24.3 67.0 12.1 3.1% 19.5 12.6 5.9
CY11E
128 24.0 28.5 74.0 14.4 3.7% 16.3 11.0 5.3
CY12E
128 25.1 30.0 81.6 15.1 3.8% 15.6 10.3 4.8
CY13E
128 26.1 31.5 89.5 15.7 4.0% 15.0 9.8 4.4
57
Gujarat Gas
Note:
58
Gujarat Gas
59
Gujarat Gas
Buy Sell
Disclaimer
This report or any portion hereof may not be reprinted, sold or redistributed without the written consent ot Ambit Capital. AMBIT Capital Research is disseminated and available primarily electronically, and, in some cases, in printed form.
Ambit Capital Pvt. Ltd. Ambit House, 3rd Floor 449, Senapati Bapat Marg, Lower Parel, Mumbai 400 013, India. Phone: +91-22-3043 3000 Fax: +91-22-3043 3100 60