>INDRAPRASTHA GAS: CNG Price Hike Boosts Margin Visibility

■ Announces CNG price hike; positive for margins — Following up on the Rs1.75/kg CNG price hike in end-Dec, IGL has today (source: Hindustan Times) announced another Rs1.70/kg hike, taking CNG prices in Delhi to Rs35.45/kg. This provides a significant boost to IGL's near-term margin visibility and should help the company not only comfortably meet our full-year FY12 estimates but also increases the possibility of
upside risks (9MFY12 EPS of Rs16.2/sh).


■ 4Q margins should revert to ~Rs5/scm levels — As we had highlighted in our recent 3Q note (see '3Q Ahead of Estimates; 4Q to Be Even Stronger' dated Jan 24), we believe IGL’s EBITDA margins in 4Q could revert to the ~Rs5/scm levels (from Rs4.7/scm in 3Q) driven by a combination of: (i) softening of LNG prices (have declined from a Nov peak of ~US$16 to ~US$13 – see our report titled, 'India Natural Gas - Falling LNG Prices + Rising Regulatory Concerns' dated 17 Jan), (ii) the CNG price hikes, and (iii) strengthening of the rupee. Given the robust volume growth (up 26% yoy in 3Q) which is being incrementally driven at the margin by short-term/spot LNG, today's price hike significantly raises the likelihood of EBITDA margins reverting to the ~Rs5/scm levels in the near term.


■ Reiterate Buy with Rs426 TP — Our current estimates are conservatively based on EBITDA/scm of Rs4.6/4.5 over FY13/14E and CNG prices of Rs35.5/37.0 per kg, which should help the company deliver a 2-yr EPS CAGR of 15% (vs. 0.5-2.5% for its peers). We believe the recent stock underperformance (by 17% in the last 2 months), on the back of the gov’t move to refer the marketing margins earned by gas marketers to the PNGRB, could partly reverse following the price hike, as: (i) margin visibility, a key driver of stock performance, has materially improved, at least in the near term, (ii) regulating the distribution margins of city gas companies would be tantamount to determining the end price of the gas, something which is out of the purview of the PNGRB, (iii), the PNGRB’s near-term focus could be on other issues related to city gas licensing, gas pipeline authorizations, pipeline tariff regulations, etc., and (iv) competition is anyway allowed to exist in city gas distribution post-exclusivity. IGL, along with GSPL, remain among our preferred picks in the gas sector.


To read full report: IGL