Wednesday, January 18, 2012

>INDRAPRASTHA GAS LIMITED: Prices charged for CNG & PNG by IGL include a marketing margin component

Marketing margin to be capped?
Media reports indicate that the central government has entrusted PNGRB with the determination of quantum of marketing margin chargeable on sale of natural gas to end consumers by a marketing entity on the basis of marketing costs incurred by it. Currently, GAIL charges marketing margin of ~$ 0.18/mmbtu on PMT, ~$ 0.12/ mmbtu on APM gas and ~$ 0.7/mmbtu on non-APM gas and LNG. RIL charges $ 0.135/mmbtu for KG D6 gas. Petronet LNG charges ~$ 0.4/mmbtu as marketing margin for spot LNG cargoes. Prices charged for CNG & PNG by IGL also include a marketing margin component.

Scope of regulations limited to domestic gas
The primary target for capping marketing margins would be domestic gas producers & marketers since customers for domestic gas are earmarked & allocated by the Govt. Thus, there are no marketing costs incurred in the process. However, it is not clear whether the current set of rules & regulations are applicable on CGD & LNG terminals. Importing spot LNG from the global market requires an ability to source competitively priced LNG. Also, the company makes its own efforts for identifying customers and signing offtake agreements with the same, which involves considerable resources. CGD companies have to make investments in pipelines, CNG stations, spur lines to ensure last mile connectivity to reach out to new areas and add more customers. Hence, we believe that LNG terminals & CGD companies would not be treated similar to passive sellers of domestic gas.

Implementation to take time
The PNGRB is yet to be fully constituted only after which it can pursue long pending issues related to authorization of transmission networks, transmission tariffs (GSPL), CGD rollout; besides the latest issue of linking marketing margins to marketing costs. PNGRB would also likely invite the various companies to present their case and evaluate the same. Meanwhile, it would also obtain opinions from other Govt. agencies on the scope and ambit of the current regulatory structure. Ultimately, the whole process would take a lot of time.

IGL looks attractive
We had initiated coverage on IGL in Oct 2011 with a contra-consensus SELL call, citing risks to continuance of the past rosy growth & margin scenario. Subsequently, the stock has corrected from Rs 426 at the time of our initiation to Rs 327 currently. Prior to the news flow regarding clamping down on marketing margins, the stock had fallen due to margin pressure resulting from increased dependence on spot LNG and steep rupee depreciation. Price hikes by the company have proved to be insufficient to protect margins. Accordingly, we have revised our estimates downward with FY12E & FY13E EPS going from Rs 25.2 & Rs 27.8 to Rs 19.8 & Rs 22.4 respectively. At the current market price, the stock looks attractively valued @ FY13E P/E of 14.6x and we upgrade our recommendation to a trading BUY at current levels and on dips with a target price of Rs 366.