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Feb 26, 2013, 05.46 PM IST | Source: Moneycontrol.com

Buy Indraprastha Gas; target Rs 375: Dolat Capital

Dolat Capital is bullish on Indraprastha Gas and has recommended buy rating on the stock with a target price of Rs 375 in its February 26, 2013 research report.

Dolat Capital is bullish on Indraprastha Gas and has recommended buy rating on the stock with a target price of Rs 375 in its February 26, 2013 research report.

"Indraprastha Gas, management seems positive about their stance in the case with PNGRB. Management maintains that PNGRB does not have the power to fix network tariffs and compression charges for IGL’s own consumers. Management opine that PNGRB has the right to fix it for third party gas distribution company that distributes gas using IGL’s infrastructure. The matter is with Supreme court and management believes that final verdict could take up to six months. However, we belive that verdict can come as early as May 2013.

Increase in APM gas prices: Government is most likely to raise APM gas prices significantly from the current levels of USD 4.2 per MMBTU. IGL consumes 2.7 MMSCMD of APM gas from its current gas volumes of 3.9 MMSCMD. Incremental volumes will be catered by high cost RLNG. IGL is confident on raising prices in tune with the hike in APM gas price and maintain their gross spreads in absolute terms. We have factored in a hike of USD 3 to USD 7.2 per MMBTU from April 2014 onwards.

Competition threat post Marketing Exclusivity Period: IGL does not face any competition in Delhi region even though marketing exclusivity for Delhi region got expired in December 2011. Formal authorization for other areas Noida, Greater Noida and Ghaziabad is yet to be received from PNGRB. Marketing exclusivity of 3 years for the above regions will start from the date of receiving a formal authorization from PNGRB.

Volume Growth: IGL volume has suffered during the last two quarters in Industrial segment due to competition from furnace oil and in CNG segment due to no new addition in public transport. RLNG prices are also at peak and any correction in RLNG prices and rupee appreciation can make industrial PNG competitive as compared to furnace oil. Delhi government is expected to add nearly 5,000 buses in next 2-3 years. This will be a new cluster of buses. In FY14, IGL expects an addition of 1200 new buses. This will propel the CNG volume growth. IGL management is confident of achieving a blended volume growth in the range of 13% - 14% for the next 3 years.

Capital Expenditure: IGL has maintained its capex guidance of Rs 4 bn in FY13 and Rs 4.5 bn in FY14. Current debt is around Rs 5 bn and this is expected to remain at current levels as IGL would have adequate cash flows to fund the capex in coming years.

Valuation: IGL’s ability to maintain gross spreads in absolute terms, coupled with decent volume growth, will drive revenue and profit growth. We believe that current market price is factoring extreme negatives of regulatory hurdles. We feel that risk reward is highly in favour of IGL. At CMP of Rs 260, the stock trades at 8.8x FY14E and 7.7xFY15E earnings. We reiterate our BUY recommendation with a DCF based target price of Rs 375, at which it would trade at 11.1x FY15E earnings," says Dolat Capital research report.

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