City Gas Distribution Dolat Report

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DOLAT CAPITAL

City Gas Distribution

India Research

C G D
Coming out of the Woods...!!!

Analyst: Priyank Chandra Tel : +9122 4096 9737 E-mail: priyank@dolatcapital.com

January 04, 2013

DOLAT CAPITAL

Index Executive Summary Regulatory Development Gujarat Gas Company Indraprastha Gas CGD Sector 3 5 9 19 29

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Executive Summary
City gas distribution (CGD), one of the rising sectors in the India energy pie, had seen an action packed CY12. In particular, the regulatory front played a key overhang on the sector and players’ valuations. Further, in the wake of regulatory issues being taken up at the Supreme Court level, the bidding for new areas took a back seat, and put to rest long term plans of government to promote CGD. We still believe that City gas distribution (CGD) space is an attractive long term investment option in the oil & gas space. The dynamism is fuelled by aspects as: Demand potential: Driven by Gas economics in comparison to alternate fuels Expanding gas grid network Acceptance of high prices by end users Environment friendly nature of gas Rising supplies: Fuelled by RLNG supply (though dearer) Energy majors looking to develop more LNG terminals Any new domestic finds would improve supply situation The two listed players in the CGD space, Indraprastha Gas (IGL) and Gujarat Gas Company (GGCL), are the pioneers of the segment in India. They will reap long term benefits of being the first movers. We are positive on the CGD space and like both IGL and GGCL as a structural play.

Valuation Matrix
Companies IGL Gujarat Gas* Net Sales EBITDA PAT EPS (`) ` FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E 25,151 34,405 42,198 55,901 6,345 23,819 31,459 34,591 39,535 3,952 7,925 4,169 8,979 10,209 3,064 5,258 5,851 2,739 3,765 2,927 4,206 3,281 4,849 21.9 3,607 21.4 26.9 22.8 30.0 25.6 34.6 28.1

* December Year Ending FY13 = CY12 Companies IGL Gujarat Gas* FY13 = CY12 Mkt Cap CMP Target Upside Rating P/E(x) (` bn) (`) (`) (%) FY12 FY13E FY14E FY15E ` ` ` 36 256 379 48 Buy 11.7 9.5 8.5 7.4 39 306 363 20 Buy 14.3 13.4 12.0 10.9 RoE(%) FY12 FY13E FY14E FY15E 27.4 27.4 25.2 24.5 33.9 36.0 35.7 33.3 RoCE(%) FY12 FY13E FY14E FY15E 29.5 29.9 28.6 28.9 35.0 35.7 37.0 35.3

* December Year Ending

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Key events which impacted the sector were: MoPNG asking PNGRB to look into fixing marketing margins charged by gas distribution companies PNGRB issuing order fixing the Network Tariff and Compression Charges for IGL and the same to be applicable to its customers The latter, is pending with the Supreme Court, after the High Court struck down the order issued by the PNGRB. In the interim, we learn from our interactions with the industry that the relevance of marketing margins at the regulatory front has taken a back seat. We expect this marketing margin matter to ultimately turn irrelevant in the scheme of things, implying players will be free to fix the same as per their P&L dynamics. Our View: We maintain our earlier view, based on the understanding of the PNGRB Act, that PNGRB does not have the rights to fix Network Tariff and Compression Charges to be charged to an end user by a CGD company. We still maintain this view. Marketing Margin fixation is unlikely because : If it comes, no fresh investments will come in the CGD space. Government still has ambitious plans for CGD space and if this has to move ahead there could be no capping of marketing margins. Should not be regulated as it can be determined by competition and alternative fuel prices If there is no cap on marketing margins and PNGRB does not want to control the final selling price, the outcome of the PNGRB – IGL case would not have any impact on financials of CGD companies.

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Regulatory Development:
Since December 2011, there has been lot of Regulatory (PNGRB) developments that...
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