Driving growth through expansion and penetration December 2018 B P W E A L T H Indraprastha Gas Ltd. Initiating Coverage Table of Content Summary on Business Profile & Explanation on why we like this company…………………...….………….....2&4 Overview of Gas Industry…………………………….………………………..…………………………………………….5-6 Government’s vision towards gas based economy.…………………………...…………...………..…..........………...7 City Gas Distribution Sector in India………………....…………………………...…………...………..…..........……...8-9 Investment Rationale……………………………………….………………………..……………….…………………...10-13 Efforts by regulatory authorities favoring natural gas demand...……...……………………………..………….10 Enjoys monopoly of being sole supplier of natural gas in Delhi-NCR…………………………………………..11 Strategic acquisitions will add growth visibility going forward…….…………………………………………....12 Beating the cyclicality with consistent performance……..………………………………...….……….………….13 Financial Highlights…....……..………………………………...………………………….……………….………….……..14 Company Background ..……..………………………………...………………………….……………….………….……..15 Peer Comparison, Key Concerns & PE Band…………………………………...….………...……………….…...........16 Valuation & Outlook …………………………………………………………………………...…………..…....…………...17 Financial Statements…...……………………………………………………………………….....................................18-21 Disclaimer………………………………………………………………………………………………….....………...….……22 Institutional Research BP Equities Pvt. Limited (www.bpwealth.com) 07/12/2018 1 2nd Feb , CY11 Buy Indraprastha Gas Ltd B P W E A L T H Oil & Gas | Initiating Coverage 07th December 2018 Company Background Stock Rating Incorporated in 1998, Indraprastha Gas Ltd. (IGL) is the sole city gas distribution (CGD) company for BUY HOLD SELL natural gas in the National Capital Region (NCR). It was formed following a Supreme Court directive to GAIL to set up a CNG infrastructure unit in the NCR. It caters to consumers in the domestic, transport, - - industrial and commercial sectors. Currently, GAIL, BPCL and the Government of Delhi hold 22.5%, > 15% 5% to 15% < 5% 22.5% and 5% respectively in the company. IGL is sole distributor of compressed natural gas (CNG) and piped natural gas (PNG) in Delhi, Noida, Greater Noilda and Ghaziabad. The CNG business con- Sector Outlook Positive tributed ~74% to the company's sales volumes in FY18. It has acquired 50% equity stake in Central Stock UP Gas Limited (CUGL) for a total consideration of Rs 700mn, which is the authorised CGD operator CMP (Rs) 247 in Bareilly, Kanpur, Unnao and Jhansi in Uttar Pradesh and also acquired a 50% equity stake in Maha- rashtra Natural Gas Limited (MNGL) for a total consideration of Rs 1.9bn which is the authorised CGD Target Price (Rs) 315 operator for Pune and the adjoining areas in Maharashtra. BSE code 532514 NSE Symbol IGL Investment Rationale Bloomberg IGL IN Efforts by regulatory authorities favoring natural gas demand Reuters IGAS.BO India is the world’s largest consumer of petcoke. The consumption of the dirty fuel has grown at CAGR of 16 per cent over the past 10 years. This has led to the fuel becoming the second-most con- Key Data sumed petroleum product in the country after diesel. While coal attracts a clean-energy levy of Rs 400/ Nifty 10,799 tonne, petcoke was exempt. As it was among the cheapest fuels available to the industry, it was wide- 52 Week H/L (Rs) 344/215 ly used for heating and generating electricity. About half of the Indian consumption of petcoke -- about O/s Shares (Crores) 70 26 mn tonnes in financial year 2017-18 was imported. Regulatory Authority passed complete ban on use of petcoke by industries, except for a few industries, such as cement and electricity gasification, Market Cap (Bn) 182 which have been exempted from the ban. Other industrial users would have to now shift to alternate Face Value (Rs) 2 fuels like natural gas over a period of time. The ban on pet coke came in response to the high level of pollution in several cities across the country. The ban would benefit the entire supply chain of natural Average volume gas as CGD entities should see an increase in PNG (industrial) volumes over medium term. The shift 3 months 23,09,430 from furnace oil which is around 30% cheaper and pet coke that is at a fraction of the cost of natural 6 months 24,75,300 gas will happen over time as those entities currently using pet coke need to incur investment to switch 1 year 25,24,360 fuels. Enjoys monopoly of being sole supplier of natural gas in Delhi-NCR Share Holding Pattern (%) 11.7% The statutory authorities like the Environment Pollution Control Authority (EPCA), Centre for Science and Environment (CSE), Delhi Pollution Control Committee (DPCC) and Uttar Pradesh Pollution Con- 45.0% trol Board (UPPCB) are working in a synchronized manner to curb pollution levels in Delhi and NCR . 43.3% This has paved the thrust for city gas distribution sector for use of more greener sources of energy like natural gas. Under the PNGRB Act, entities were provided ultimate monopoly through exclusive mar- keting rights and infrastructure rights for 8 years and 25 years respectively. IGL stood to grab this op- portunity and now it services the highest no. CNG vehicles in India with ~33% market share. Measures Promoter Institutions Others taken by the various authorities have been instrumental in supporting CNG growth. IGL is now looking Relative Price Chart at setting up CNG dispensation stations within residential housing complexes to ease queues at CNG pumps. It has set up two CNG dispensation pumps at a residential complex in Noida on a pilot basis. 400 Overall, the company is targeting to add 60 CNG dispensation stations (out of which 2 were added in 350 Q1FY19).In comparison, its peer Mahanagar Gas Ltd recorded a total volume growth of just 19% and 300 CAGR of 4.5% from FY14-18, shows taking same period for comparison IGL’s operations grew almost 250 at double rate compared to MGL. Going forward, we expect the revenue growth to be driven by 1) 200 associate companies-CUGL and MNGL and 2) expansion into new geographical areas. IGL has en- Nov-17 Mar-18 Jul-18 Nov-18 tailed a capex outlay of around Rs.25bn over FY18-20. IGL Nifty Research Analyst Kunal Kothari [email protected] 022-61596408 2 B P W E A L T H Indraprastha Gas Ltd. Initiating Coverage Strategic acquisitions to add growth visibility going forward The Petroleum and Natural Gas Regulatory Board (PNGRB) recently announced the results for the 9th round of city gas distribution auction, comprising 86 geographical areas (GAs) that were offered for bid- ding to develop the CGD network. Following the success of the recently concluded 9th round of CGD auction, it has commenced planning for the 10th round, which is likely to have 55 geographical areas for auction and tentatively would be held around February 2019. IGL had bid for 11 areas in the 9th city gas distribution (CGD) licensing round. It has won one license area which comprised of districts of Meerut (excluding area already authorised), Muzaffarnagar & Shamli. Its 50% associate MNGL has won three license areas: Ramnanagra (Karnataka); Sindhudurg (Maharashtra); and districts of Valsad (excluding area already authorised), Dhule & Nashik (Maharashtra). Commencement of natural gas distribution and expansion in the existing and newly acquired geographical areas would drive future growth for the company. Beating the cyclicality of natural gas with consistent performance The rise in pollution level related concerns has prompted the need for CNG conversions in Delhi, thus benefitting IGL’s CNG volumes at 406 mmscm in Q2FY19 up 12.8% YoY. On PNG front, volumes in- creased by 13.3% YoY. We expect combined (CNG+PNG) volumes to reach 2569 mmscm from 1891 mmcsm cultivating 11% CAGR for FY2018 to FY2021. The recent new geographical areas addition will also add to volumes and provide visibility for growth in the years ahead. The rise in domestic gas prices and rupee depreciation has impacted margins marginally. IGL has made appropriate gas price hike, would help to carter with consistent margins at full year basis. It has reported gross margins Rs.10.6/ scm in Q2FY19 and going forward, we expect gross margins at Rs.11.4/scm for FY19E, Rs. 11.5/scm in FY20E and Rs.11.6/scm in FY21. RoE and RoCE have great consistency of above 20% and 25% re- spectively. Going forward we expect, return ratios to decline marginally due to ongoing capex plan. The company continues to be a positive Free Cash Flow company due to strong operating cash flows and controlled working capital requirement. We expect debt to remain zero and we think that existing cash flows are sufficient to fund the existing capex plans. Why we like this stock & Valuation methodology The industry as a whole have been in forth momentum with central government, state government or other authorities taking right steps lately to curb pollution and protect the environment. The CGD is ac- corded with highest priority for cheaper source of gas along with providing marketing and infrastructure exclusivity rights and ability to pass the cost have helped to change the traditional commodity based cyclicality business structure to sustainable, consistent and strong business model. IGL is the pioneer in CGD, and the key beneficiary of changing landscape in favour of natural gas. It has proven credentials with higher sales volume and have consistent positive volume growth rate every year for last decade. Company has secure source of gas and a favourable demand outlook for CNG and PNG segments which reduces the risk factor for the company. It has healthy balance sheet with zero debt and negative working cycle, which gives ability to pursue expansion from strong and consistent internal accruals. ICRA Ltd has reaffirmed the highest credit rating of AAA (stable) for long term loans. We expect the momentum in volume growth to continue at 11% CAGR for FY18-FY21. The monopolistic nature of business and better economic benefit of natural gas compared to other energy mix are the major tail- winds of the company. IGL is also rewarding shareholders with consistent increase in dividend payouts.