>INDRAPRASTHA GAS (EDELWEISS)

Rise in CNG price in line with estimates

CNG price in Delhi higher by INR 2.1/kg
Indraprastha Gas (IGL) increased the retail price of CNG in Delhi from INR 18.9/kg to INR 21.0/kg w.e.f. from June 16, 2009. The increase encapsulates an INR 2.0/kg increase in CNG price and an INR 0.1/kg increment in applicable taxes. This implies an average price of INR 20.56/kg for FY10 (as the older price of INR 18.9/kg has prevailed for two-and-a-half months of the financial year). However, CNG retail prices in Noida have been left unchanged at INR 22.1/kg.

Price hike in CNG to mitigate impact of rise in input costs
The subsidized APM (Administered Pricing Mechanism) gas supplied to IGL was becoming increasingly inadequate for NCR’s growing demand of CNG. This compelled IGL to buy the costlier imported LNG to meet the shortfall, which raised the company’s input costs. Further, the incremental gas to be sourced from RIL’s KG-D6 basin (after RIL’s production ramps-up to start supplying to the city gas distribution sector, and replaces LNG) is priced much higher than APM gas which itself could face price revisions upwards. Hence, the increase in CNG pricing serves to mitigate the effect of current increase in raw material costs, and also partially alleviates concerns on increase in blended gas costs in future.

Outlook and valuations: Earning estimates retained; maintain ‘BUY’
We had assumed a CNG retail price of INR 20.5/kg and INR 21/kg for FY10 and FY11 respectively. Since the difference between FY10E average actual CNG prices (INR 20.56/kg) and our existing assumptions (INR 20.5/kg) is marginal, we are maintaining our earnings estimates and outlook. We had assumed a sales volume growth of 15.4% for FY10 in line with the high demand expected on account of the commonwealth games (please refer our recent report titled “Regulations and new supplies to energise growth” dated May 06, 2009 for more details), which provides significant upsides to the stock in the short-to-medium term.

At CMP of INR 145, IGL is trading at 9.3x and 8.7x our FY10E and FY11E EPS, respectively, a 2.5x FY10E P/BV and a 4.1x FY10E EV/EBITDA. We maintain our ‘BUY’ recommendation on the stock.

To see full report: INDRAPRASTHA GAS