INDRAPRASTHA GAS: Accumulate on every dip.Better positioned,Good stock.

Scrip Code: 532514 / IGL

CMP:  Rs. 337.45; Buy at Rs. 310-325.
Short term Target: Rs. 350, LT – Rs. 450. 

Market Cap: Rs. 4,724.30 cr. 52 Week High/Low: Rs. 374.00 / Rs. 256.70. Total Shares: 14,00,00,160 shares; Promoters : 6,30,00,080 shares –45.00 %; Total Public holding : 77,00,00,080 shares –55.00 %; Book Value: Rs. 58.96; Face Value: Rs. 10; EPS: Rs. 17.29; Div: 45 %. P/E: 19.49 times; Ind P/E: 20.88; EV/EBITDA: 11.59.

Total Debt: Rs. 55.16 cr; Enterprise Value: Rs. 4,694.06 cr

Indraprastha Gas Ltd was incorporated in 1998, provides natural gas for automobile, domestic & commercial use in Delhi, India. The company is a joint venture of GAIL (India) Limited, Bharat Petroleum Corporation Limited & the Government of the National Capital Territory of Delhi. The company is the supplier of Compressed Natural Gas (CNG) to the automotive sector in the National Capital Territory of Delhi (NCT of Delhi). As on March 31, 2010, the company operated 241 CNG stations, provided PNG to 1,82,000 domestic & 355 commercial customers.  The company also markets and distributes Piped natural Gas (PNG) for domestic and commercial users in NCT of Delhi. As on March 31, 2010, the Company is supplying Re-LNG to 21 industrial consumers in Delhi. PNG was supplied to the domestic and commercial sectors in the areas of Kaka Nagar, Bapa Nagar, Pandara Road, Pandara Park, Sunder Nagar and Sujan Singh Park. BPCL holds 3,15,00,080 shares (22.5 %) & GAIL holds 3,15,00,000 shares (22.5 %) in Indraprastha Gas Limited.

Investment Rationale

Demand still robust in NCT of Delhi and NCR for CNG: Compressed Natural Gas (CNG) volumes (90% of total volumes) grew at a CAGR of 15% between FY07-10 led by private car conversions due to favorable pricing of CNG. Considering the beneficial pricing scenario (CNG being 67% cheaper than petrol and 36% than diesel) as well as robust CNG demand in the operational areas, it is expected that CNG volumes to grow at 18% Y-o-Y from FY10 to FY13. With a view to cater to the increasing demand, IGL plans to add 40 CNG stations by FY11 (241 stations in FY10) and 30 CNG stations in FY12 and FY13 each.

PNG segment set to become the next growth driver: The Piped Natural Gas (PNG) segment which includes the relatively under penetrated domestic households and industrial/commercial customers is expected to be the key catalyst for growth going forward. On the back of strong volume growth from the relatively high margin industrial segment, it is expected that PNG volumes to grow from 87 MMSCM in FY10 to 398 MMSCM by FY13 (CAGR of 66%).

End of Marketing Exclusivity should not pose a hurdle in Delhi: The biggest entry barrier for any new player in CGD business in Delhi is the non-availability of cheap gas (APM gas or KG-D6) gas. The government has allotted 2 MMSCMD of gas to IGL for their Delhi operation which is currently utilized fully. In the event of the government increasing the allocation of APM or KG-D6 gas in Delhi, IGL would get first preference over any new player with its already established network in Delhi.

Ability to pass on high input costs: Historically, IGL has consistently been able to pass on cost increases by way of price hikes of CNG which helped in sustaining its margins. With blended cost of gas expected to be Rs 13.16 per SCM in FY13 as compared to Rs 5.96 per SCM in FY10, gradual price increases (recently hiked prices by Rs. 1.25 per SCM with effect from Jan 1, 2011) would be a key to sustain its margins. With petrol and diesel prices expected to increase going forward, it is believed that IGL should not find it difficult to pass on cost increases by way of price hikes.

Outlook & Valuation: The correct measure to evaluate operating performance for the Consumer Gas Distribution business is at EBITDA level. Drived by robust demand in the CNG segment and increasing revenues from PNG segment led by industrial volumes, IGL’s revenues to grow at an AGR of 45% over FY10-13E. The aggressive expansion plans for establishing the CNG and PNG infrastructure in the operational areas of IGL will reap rich dividends going forward. At current market price of Rs. 300 the stock trades at a P/E of 14.3x and 11.6x for FY12E and FY13E respectively. It will be a good BUY on IGL with a price target of Rs. 350/share.

KEY FINANCIALS	FY09	FY10	FY11E	FY12E	FY13E
SALES (Rs. crs)	852.80	1,078.10	1,723.00	2,414.70	3,304.20
NET PROFIT (Rs. crs)	172.50	215.50	254.30	293.40	363.50
EPS (Rs.)	12.30	15.40	18.20	21.00	26.00
PE (x)	24.40	19.50	16.50	14.30	11.60
P/BV (x)	6.10	5.10	4.20	3.40	2.80
EV/EBITDA (x)	13.60	10.90	8.90	7.40	6.00
ROE (%)	25.20	26.10	25.30	23.90	24.00
ROCE (%)	40.30	43.30	34.80	33.00	35.10

I maintain my accumulation status on IGL with the price target of Rs. 350 in short term. For long term my target is of Rs. 450. As I always say do respect the market and keep a strict stop loss of 8 % on your every purchase.