‘Fuel for Growth’

India Natural Gas‘Fuel for Growth’

June 14, 2011

GAIL – BUY CMP: Rs451 Target: Rs525 GSPL – BUY CMP: Rs97 Target: Rs113 Indraprastha Gas – BUY CMP: Rs370 Target: Rs409 Petronet LNG – BUY CMP: Rs141 Target: Rs162

Research Analyst Prayesh Jain [email protected]

India’s primary energy basket is on the threshold of witnessing a quantum jump in contribution from natural gas. While the demand for gas has always been strong in the country, availability of transmission infrastructure and regulatory issues has restricted supply matching up to the demand growth. However, the medium term outlook has improved considerably with 1) increased availability of gas; both domestic and imports, 2) huge investments in gas pipeline infrastructure and 3) fast pace implementation of related reforms. 1) Improved domestic availability of natural gas: Recently,

concerns have been raised with respect to sustenance of current level of gas production in the country given the declining trend of gas production from Reliance Industries’ KG-D6 field. However, we believe that in the near term, higher LNG imports will offset the impact to some extent, while over the medium to longer term; production at KG-D6 would revive. Furthermore, in the next three to five years, new fields such as GSPC’s Deendayal field, ONGC’s KG Basin field and Reliance Industries NEC-25 field are expected to commence production. Higher LNG import capacities with LNG terminals of Petronet, Shell and Dabhol project will also add to the supply. As per GAIL, domestic production of gas will increase from about 145mmscmd in CY10 to about 215mmscmd by CY15.

2) Better pipeline infrastructure: Lack of adequate pipeline

infrastructure has always been a key hindrance in meeting the rising demand for natural gas, especially so in the southern and eastern regions. Going ahead, GAIL, which transports more than 70% of gas available in the country, has embarked upon an aggressive capacity expansion program to double its transmission capacity over the next three years from about 8,000kms currently. Companies such as GSPL and Reliance Gas Infrastructure are also adding material capacities in the near future.

3) Reforms have gathered pace: Realizing the importance of gas

sector, the Indian government has over the past five years, implemented significant reforms such as i) raising APM gas prices and bringing them closer to market price, ii) regulating pipeline tariffs, iii) streamlining processes for awarding CGD projects and many more. Furthermore, the government is contemplating implementation of gas price pooling, which would even out the prices for end consumers.

Financial summary

Sales (Rs mn)

yoy (%)

OPM (%)

PAT (Rs mn)

yoy (%)

EPS (Rs)

P/E (x)

RoE (%)

FY11E 325,365 30.2 17.0 35,611 13.4 28.1 16.1 19.8 FY12E 368,258 13.2 18.3 44,269 24.3 34.9 12.9 21.2 GAIL FY13E 395,401 7.4 19.2 45,828 3.5 36.1 12.5 18.8 FY11E 10,465 4.6 92.6 5,064 22.4 9.0 10.8 28.4 FY12E 11,680 11.6 93.3 5,699 12.5 10.1 9.6 25.2 GSPL FY13E 12,848 10.0 93.3 6,290 10.4 11.2 8.7 22.5 FY11E 17,505 62.4 28.5 2,598 20.5 18.6 19.9 28.4 FY12E 23,431 33.9 24.8 2,938 13.1 21.0 17.6 26.6 IGL FY13E 30,288 29.3 24.7 3,821 30.0 27.3 13.5 28.3 FY11E 131,973 23.9 9.2 6,196 53.2 8.3 17.1 25.2 FY12E 185,990 40.9 7.9 6,691 8.0 8.9 15.8 22.8 Petronet FY13E 237,469 27.7 7.3 7,600 13.6 10.1 13.9 21.9

Source: Company, India Infoline Research

Doubling gas transmission capacity in two years

Exposure to city gas projects and E&P fields value accretive

Huge expansion planned for the petrochemical segment

Subsidy an overhang, but relatively better placed

Expansion of transmission capacity to serve rising demand in Gujarat

Three cross-country pipelines to add value

Tariffs to remain flattish post PNGRB authorization

Improving CNG economics and wider availability to drive demand in NCR region

Under-penetration to propel demand for PNG

Pricing power to enable margin sustenance

Near term LNG demand to remain strong on lower production at KG-D6 field

Expanding capacities at opportune time

Regasification tariffs would continue to rise

India Natural Gas

Sector Report 2

These developments, we believe, have created investment opportunities across the natural gas value chain. Pricing reforms are expected to be beneficial to both producers and LNG importers. While producers will gain from better realizations, LNG importers will benefit from correction in the pricing disparity (making LNG more affordable vis-à-vis domestic gas). Higher gas availability will lead to a jump in volumes for transmission companies. This coupled with stable tariffs would translate into better earnings visibility. City gas companies, which provide last mile connectivity for consumption by industries and vehicles, would also gain from increase in supplies and widening pipeline infrastructure of transmission companies. We recommend investors to BUY GAIL, GSPL, Indraprastha Gas and Petronet LNG. GAIL: GAIL, being the nodal gas transmission company in the country is all set to gain from the rising natural gas supplies in the country. The company is in the process of doubling its gas transmission capacity from current 8,000kms. It is also expanding its presence in the city gas business from 15 cities currently to about 50 cities in four years. E&P business will only add value as and when the discoveries are made. It also has aggressive expansion plans for its petrochemical segment. The subsidy overhang, we believe, has already been priced in. We expect FY11-13E revenue and PAT CAGR of 10% and 16% respectively. GSPL: With Gujarat accounting for about 30% of the natural gas demand in the country and rapid growth in industrialization in the state, the demand for gas is expected to surge. Furthermore, supplies from Petronet LNG and E&P players are also increasing over the medium term. With GSPL widening its transmission network in Gujarat from about 1,900kms currently to 2,400kms, it will be well poised to leverage on this opportunity. New cross-country pipelines will establish it as a nation-wide player. Additionally, its exposure to city gas projects will increase value for the company. We expect FY11-13E revenue and PAT CAGR of 11% and 12% respectively. Indraprastha Gas: Rising crude oil prices have improved the economic viability of CNG as an auto fuel. IGL, with a virtual monopoly in the NCR region is all set to gain from rising private vehicle conversions to CNG. Under penetration of PNG in both households and the industrial market will drive demand for the fuel. Its expansion beyond the Delhi region will add to its revenue and earnings growth over the medium term. We expect FY11-13E revenue and PAT CAGR of 32% and 21% respectively. Petronet LNG: With demand-supply for natural gas likely to remain strained in the country, we expect the demand for LNG to continue on a strong trajectory. Petronet is expanding its regasification capacity at Dahej from current 10.5mtpa to 14mtpa by FY14 and its Kochi terminal with a capacity of 2.5mtpa (expandable to 5mtpa) will commence operations in FY13. With majority of the volume on long term contracts and limited risk to regasification charges, earnings visibility remains strong. We expect FY11-13E revenue and PAT CAGR of 34% and 11% respectively.

India Natural Gas

Sector Report 3

Contents Topics Page NoIndustry section

India’s appetite for natural gas to remain strong 4Robust growth in gas supplies 7Huge investments in pipeline infrastructure 8Regulations have gathered pace 8

Company Section

GAIL 12Investment rationale 13Key concerns 17Company background 19Financials 20

GSPL 21

Investment rationale 22Key concerns 26Company background 27Financials 28

Indraprastha Gas 29


Petronet LNG 38


India Natural Gas

Sector Report 4

Primary energy mix

World

Oil34%

Natural Gas24%

Coal30%

Renew -ables1%

Nuclear Energy

5%

Hydro pow er

6%

India

Oil30%

Natural Gas11%

Coal52%

Renew -ables1%

Nuclear Energy

1%

Hydro pow er

5%

China

Oil18% Natural

Gas4%

Coal70%

Hydro pow er

7%

Nuclear Energy

1%

Renew -ables0%

Source: BP statistical review 2010, India Infoline Research

In India, natural gas accounts for only 10.6% of the primary energy basket as compared to global average of 24%

India currently consumes about 176mmscmd of gas. Power sector accounts for the maximum demand followed by fertilizers and industries

India’s appetite for natural gas to remain strong Primary energy mix to change in favour of natural gas India’s primary energy consumption has witnessed a CAGR of 6.5% over the last decade as against 9.5% for China, 5.9% for Asia Pacific region and 2.7% for the entire world. Over the next three years, India is expected to report the second fastest GDP growth in the world. This would translate into a strong demand for primary energy. The current primary energy mix is dominated by coal and crude oil, which contributes about 53% and 30% respectively. Natural gas accounts for only 10.6% of the basket as compared to global average of 24%.

India currently consumes about 170mmscmd of gas. Power sector accounts for the maximum demand followed by fertilizers and industries. On the supply side, domestic production is about 154mmscmd, while remaining is through LNG imports. However, considering the advantages of natural gas over other fuels, the total demand would actually be much higher than the current supply. The demand-supply gap today is estimated to be about 30mmscmd. We believe, this scenario is set to change considering improved supply situation and strengthening pipeline infrastructure in the country. Between 2008 and 2015, IEA expects natural gas demand and production in India to witness a CAGR of 9.8% and 11.1% respectively. India gas demand growth

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300

FY08 FY09 FY10 FY11 FY12

Pow er FertilizerCity gas IndustrialPetchem/ Refinieries Sponge iron/steel

mmscmd

Source: Infraline

India Natural Gas

Sector Report 5

While additional gas based capacities are expected to come on stream over the next few years, demand for gas will be huge even if the current plants are operated at above 80% PLF Higher gas availability to the fertilizer sector will mean lower subsidy burden for the government from the fertilizer sector

Power deficit at unsustainable levels India’s per capita power consumption is at 700units as compared to 11,000units for USA and 2,800units for China. Furthermore, the power deficit in the country is at 10%. The current gas based power capacity in the country is about 17,700MW. For this capacity to operate at a plant load factor of 90% more than 85mmscmd of natural gas supply is required, while the allocation currently is about 64mmscmd and the actual supply is even less. Leave apart additional gas-based capacities that are expected to come on stream over the next few years (NTPC has plans to double its gas based capacity by 2017), demand for gas will be huge even if the current plants are operated at above 80% PLF. Shortage of gas supply for the power sector

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Gas req @90% PLF Gas alloted Gas suppliedmmscmd

Source: Central Electricity Authority Critical for curtailing fertilizer subsidies Fertilizer subsidy has been of the key factors of a huge fiscal deficit in India. With agriculture GDP expected to remain strong backed by government initiatives, the demand for fertilizers will continue to remain strong. Significant portion of fertilizer production in the country uses naphtha as the feedstock, a far more expensive fuel relative to natural gas. Higher gas availability for the sector will not only improve financial performance of manufacturers, but will also lead to a reduction in subsidy burden for the government. Currently, about 25% of the India’s gas output is supplied to the fertilizer sector. Trend in fertilizer subsidy burden

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FY92

FY94

FY96

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FY00

FY02

FY04

FY06

FY08

FY10

Rs bn

Source: Government of India

India Natural Gas

Sector Report 6

India’s refining capacity is set to increase from 184mn tons in FY10 to about 240mn tons over the next couple of years Rising advantage of CNG over other liquid fuels, will keep demand strong for natural gas as a fuel

Refineries demand to gain traction India’s refining capacity is set to increase from 184mn tons in FY10 to about 240mn tons over the next couple of years. Most refineries are currently using fuel oil, which when replaced with natural gas could result in improvement in gross refining margins. RIL’s refineries have a combined demand of 9mmscmd of gas. With India having plans to emerge as a refining hub, usage of gas will allow refiners to be cost effective and improve their competitiveness. Trend in India’s refining capacity

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FY12

mtpa

Source: Ministry of Petroleum, Industry City gas demand to witness multi-fold jump Currently, city gas projects are active in more than 25 cities in India. With rising economic advantages of compressed natural gas (CNG) over petrol or diesel and that of piped natural gas (PNG) over liquefied petroleum gas (LPG) or other liquid fuels, the number of cities with CGD projects is likely to increase rapidly. This will be supported by improved pipeline infrastructure in the country. GAIL has plans to set up CGD projects in about 25 cities over the next couple of years. This would translate into strong demand growth for natural gas from this segment. Advantage of CNG over petrol and diesel

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10%

20%

30%

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50%

60%

70%

80%

Petrol Diesel

Source: India Infoline Research

India Natural Gas

Sector Report 7

India currently produces about 154mmscmd and imports about 30mmscmd. Adjusting for internal consumption and flaring, the net available supply is 170mmscmd Apart from expected scale-up of RIL’s KG-D6 field (beyond FY13), RIL’s D-3, D-9 blocks, ONGC’s NDA field and GSPC’s Deendayal field are expected to commence production of gas over the next three to four years Over the next five years, GAIL’s Dabhol terminal (5mtpa), Petronet LNG’s Kochi terminal (5mtpa), GSPC-Adani’s Mundra terminal (6.5mtpa) and IOC’s Ennore terminal (2.5mtpa) are expected to commence production

The key impediments for the growth in natural gas consumption were: 1) lack of adequate supply

2) inadequate pipeline infrastructure

3) irrational pricing of natural gas However, government initiatives along with increased investments in the sector could transform the scenario substantially over the medium term.

Robust growth in gas supplies India currently produces about 154mmscmd and imports about 30mmscmd. Adjusting for internal consumption and flaring, the net available supply is 170mmscmd. This has increased from about 100mmscmd in FY09. The growth was primarily on account of commencement of production from RIL’s KG-D6 field, which is currently producing ~45mmscmd after reaching a peak of 60mmscmd. With the company encountering technical glitches in the field, the production levels might remain flat over the next couple of years. Nevertheless, we believe increased imports of LNG and higher production from domestic fields will offset the impact to a greater extent. Domestic E&P fields on east coast to drive supply surge India’s east coast, especially the fields in Krisha-Godavari basin are likely to translate into strong gas supply growth over the medium term. Apart from expected scale-up of RIL’s KG-D6 field (beyond FY13), RIL’s D-3, D-9 blocks, ONGC’s NDA field and GSPC’s Deendayal field are expected to commence production of gas over the next three to four years. Furthermore, RIL’s NEC-25 field is also slated to commence production in the next couple of years. CBM production is set grow multifold from about 0.2mmscmd currently to about 2.6mmsmcd in the next three years. New LNG terminals and expansion of existing to propel supply Currently, two LNG terminals are in operation Petronet LNG’s Dahej terminal and Shell’s Hazira terminal. Together these two plants have a capacity of 12.5mtpa. While Petronet LNG is increasing its capacity at Dahej to 14mtpa by FY14, Shell’s Hazira terminal has infrastructure for an additional 2.5mtpa. Over the next five years, GAIL’s Dabhol terminal (5mtpa), Petronet LNG’s Kochi terminal (5mtpa), GSPC-Adani’s Mundra terminal (6.5mtpa) and IOC’s Ennore terminal (2.5mtpa) are expected to commence production. Gas supply break-up

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FY08

FY09

FY10

FY11

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FY13

FY14

FY15

FY16

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FY20

FY21

Pvt/JV ONGC OIL LNG

mmscmd

Source: Infraline

India Natural Gas

Sector Report 8

Over the next 2-3 years, another 7,450kms with a capacity of 248mmscmd is likely to be added PNGRB was set up in March 2006 Protect the interest of consumers by fostering fair trade Authorise entities to build and operated pipelines and city gas projects

Huge investments in pipeline infrastructure The present natural gas transportation infrastructure in the country is around 10,800kms with a capacity to move 270mmsmcd. Over the next 5 years, another 8,000-10,000kms pipeline is likely to be added. Majority of this would be added to GAIL’s network. Recently, as per media reports, GSPL won bids for three inter-state pipelines totaling 4,000kms. The aim is to have a nation-wide gas transmission network and add new markets for the fuel. This would widen the reach of gas suppliers and open new markets. GAIL’s current and future pipeline network

Source: Company Regulations have gathered pace Increased natural gas availability in the country along with widening transmission infrastructure across the country had prompted the government to set up a regulatory board in order to promote fair trade and ensure steady growth for the sector. Consequently, Petroleum and Natural Gas Regulatory Board (PNGRB) was set up in March 2006. The key functions of PNGRB are as follows: The Board shall- 1) protect the interest of consumers by fostering fair trade and

competition amongst the entities; 2) register entities to-

a) market notified petroleum and petroleum products and, subject to the contractual obligations of the Central Government, natural gas;

b) establish and operate liquefied natural gas terminals; c) establish storage facilities for petroleum, petroleum products or

natural gas exceeding such capacity as may be specified by regulations;

3) authorise entities to- a) lay, build, operate or expand a common carrier or contract

carrier; b) lay, build, operate or expand city or local natural gas

distribution network;

India Natural Gas

Sector Report 9

Regulate tariffs charged by transmission companies Monitor prices and take corrective measures to prevent restrictive trade practice by the entities

4) declare pipelines as common carrier or contract carrier; 5) regulate, by regulations,-

a) access to common carrier or contract carrier so as to ensure fair trade and competition amongst entities and for that purpose specify pipeline access code;

b) transportation rates for common carrier or contract carrier; c) access to city or local natural gas distribution network so as to

ensure fair trade and competition amongst entities as per pipeline access code;

6) in respect of notified petroleum, petroleum products and natural gas- a) ensure adequate availability; b) ensure display of information about the maximum retail prices

fixed by the entity for consumers at retail outlets; c) monitor prices and take corrective measures to prevent

restrictive trade practice by the entities; d) secure equitable distribution for petroleum and petroleum

products; e) provide, by regulations, and enforce, retail service obligations

for retail outlets and marketing service obligations for entities; f) monitor transportation rates and take corrective action to

prevent restrictive trade practice by the entities; 7) levy fees and other charges as determined by regulations; 8) maintain a data bank of information on activities relating to

petroleum, petroleum products and natural gas; 9) lay down, by regulations, the technical standards and specifications

including safety standards in activities relating to petroleum, petroleum products and natural gas, including the construction and operation of pipeline and infrastructure projects related to downstream petroleum and natural gas sector;

10)perform such other functions as may be entrusted to it by the Central Government to carry out the provisions of this Act.

Key highlights of the tariff regulations implemented by PNGRB

Post tax ROCE of 14% on capital employed by operators; however, the regulator will scrutinize capital costs

Tariff determination on DCF basis, where the regulator would ascertain operating costs on normative basis, to which ROCE would be added

Marketing exclusivity for the newly-appointed operator for three years and network exclusivity for a period of 25 years

Marketing margins on CNG and PNG to remain out of the regulatory purview

India Natural Gas

Sector Report 10

With increase in APM gas prices, government has taken a step towards market determined pricing

Key regulations for CGD operations

Source: Industry Pricing of gas: moving towards market prices One of the key reasons discouraging national oil majors ONGC and Oil India to increase their gas production was irrational APM gas pricing. However, in June 2010, government nearly doubled APM prices. This has made gas producing a positive cash flow business for ONGC and Oil India. Even for the private sector, the price decided for RIL’s KG-D6 field was derived as per a formula having linkage to crude prices. These moves have reduced the ambiguity on future pricing of the fuel, thus attracting new bidders to future rounds of NELP. Domestic gas prices

0123456789

10

PMT Ravva Lakshmi KG-D6 PLNGContract

PLNGSpot

US$/mmbtu

Source: Infraline

Reasonable Rate of Return

@14%

License Period/ Exclusivity

Mktg. – 3yrs

Infra – 25yrs from commencement

Service obligations on

PNG domestic

Network tariff

DCF CNG compression

charges Actual Opex and LUAG

End-user prices Regulator no to look at it

unless there’s a complaint

Allowable mktg. margins

Pressure regime

7 barg and above

Geographic area

Based on the criteria of economic viability

and contiguity

CCoommppaannyy SSeeccttiioonn

GAIL – BUY‘Transmitting gains’

Sector: Oil & Gas

Sensex: 18,309

CMP (Rs): 451 Target price (Rs): 525 Upside (%): 16.5 52 Week h/l (Rs): 536 / 411 Market cap (Rscr) : 57,151

6m Avg vol (‘000Nos): 1,174

No of o/s shares (mn): 1,268

FV (Rs): 10

Bloomberg code: GAIL IB

Reuters code: GAIL.BO

BSE code: 532155 NSE code: GAIL Prices as on 14 Jun, 2011

Shareholding pattern

March '11 (%) Promoters 57.3 Institutions 38.6 Non promoter corp hold 1.2 Public & others 2.9

Performance rel. to sensex

(%) 1m 3m 1yr GAIL (1.2) (2.5) (7.9) ONGC (10.6) (3.8) (13.6) GSPL (5.9) (2.7) (4.2) Guj Gas 9.0 (0.9) 33.4

Share price trend

80

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GAIL Sensex

Prime beneficiary of increased gas supplies GAIL, being the nodal gas transmission company in the country is all set to gain from the rising natural gas supplies in the country. To leverage upon the opportunity, the company has embarked upon an aggressive capacity expansion program whereby it plans to double its natural gas transmission capacity from current more than 170mmscmd (8,000kms) over the next three years. New transmission tariffs have also been favorable clearing ambiguities on future earnings for the company.

CGD and E&P businesses to be value accretive GAIL is planning to set up city gas distribution projects in 20 cities over the next two years. Price hike of petrol and diesel will only improve the economics of using CNG vis-à-vis auto fuels. We believe, this venture would be margin accretive for GAIL. To further extend its value chain, GAIL has increased its presence in exploration and production sector. It currently has 26 E&P and one CBM block. While nine discoveries have been made, it will take a couple of years before they achieve any scale. On a longer term perspective, this business would be value accretive for GAIL.

Expansion in petrochemicals business to spur growth GAIL is increasing the petrochemical manufacturing capacity at Pata, Uttar Pradesh from 410,000tpa to 500,000tpa. The company is currently evaluating options to scale up the capacity to 800,000tpa. Furthermore, GAIL-led JV (70% stake), Brahmaputra Cracker and Polymer Limited (BCPL) is implementing the Rs54.6bn Assam Gas Cracker Project to set up an integrated Petrochemical Complex at Lepetkata, District Dibrugarh. It will have a capacity of about 280,000tpa. GAIL also has a 19% stake in ONGC Petro Additions Ltd (OPaL) which is setting up a 1.1mn tons dual feed cracker.

Subsidy an overhang, but relatively better placed In a recent move, the government raised the contribution of upstream companies in the subsidy sharing pattern from 33% to 38%. However, amongst the upstream companies GAIL’s contribution reduced from 9.2% in FY10 to 7% in FY11. While the uncertainty would continue to persist on account of subsidy burden incidence, GAIL’s annuity like business of transmission (50% of the EBIT) provides better relative earnings visibility when compared with other oil PSUs. We recommend BUY with a price target of Rs525.

Financial summary Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13E Revenues 249,964 325,365 368,258 395,401 yoy growth (%) 5.1 30.2 13.2 7.4 Operating profit 46,688 55,324 67,547 75,942 OPM (%) 18.7 17.0 18.3 19.2 Pre-exceptional PAT 31,395 35,611 44,269 45,828 yoy growth (%) 12.0 13.4 24.3 3.5 EPS (Rs) 24.8 28.1 34.9 36.1 P/E (x) 18.2 16.1 12.9 12.5 Price/Book (x) 3.4 3.0 2.5 2.2 EV/EBITDA (x) 11.7 10.4 9.2 9.1 Debt/Equity (x) 0.1 0.1 0.2 0.5 RoE (%) 19.9 19.8 21.2 18.8 RoCE (%) 25.1 24.8 24.6 20.3


GAIL

Sector Report 13

GAIL’s pipeline projects

Pipeline projects Approved

cost (Rs bn)Capacity

(mmscmd)Length

(km) Status

DVPL Pipelines – Phase II Incl. compressor at Jhabua & Vijaipur

58.4 24 to 78 610

Mainline compressor commissioned at Jabhua and Vijaipur. Standby machine at Jhabua by June 11 and Vijaipur Dec 11.

Vijaipur Dadri pipelines Incl. Compressor at Kailaras & Chainsa

49.3 20 to 80 499

VijaipurDadri Pipeline commissioned Compressor at Kailaras and Chainsa: Commissioning by Dec 2011

Dadribawana Nangal Pipeline

23.6 31 594

Dadri Bawana Pipeline Commissioned. Bawana Nangal: Commissioning by Dec 2011

Chainsa-Jhajjar-Hissar Pipeline

13.2 35 349 Chainsa Sultanpur: Commissioned Sultanpur Neemrana: Commissioned

Jagdishpur - Haldia Pipeline

76.0 32 2,050 Being implemented in phased manner 2013-14 onwards

Dhabol Bangalore Pipeline

49.9 16 1,414 Phase I – Aug 2012, Phase II Dec 2012

Kochi-Koottanad-Mangalore / Bangalore

32.6 16 1,126 Phase I - Aug 2012, Phase II Dec 2012 Source: Company

For FY11, of the total gas availability of about 170mmscmd in the country, ~70% was transported via GAIL’s pipelines We expect GAIL to witness a 13% growth in FY11 and 7% in FY12 in its natural gas transmission volumes GAIL is doubling its natural gas transmission capacity from current 170mmscmd over the next three years

Key beneficiary of the increased gas consumption GAIL, we believe, would be the biggest beneficiary of the rising consumption of gas in the country. The company has been the nodal gas transmission company in the country. For FY11, of the total gas availability of about 170mmscmd in the country, ~70% was transported via GAIL’s pipelines and ~50% of the gas is marketed by GAIL. With the contribution of gas to India’s primary energy basket set to increase, GAIL would benefit substantially as it embarks upon an aggressive capacity expansion plan over the next few years. Core business of transmission to see robust growth With RIL’s KG-D6 gas production failing to ramp up to the expected levels of 80mmscmd, concerns were raised on GAIL’s future growth in transmission volumes. However, we believe that LNG imports will offset the impact of lower KG-D6 gas production to some extent. We expect GAIL to witness a 6% growth in FY12 and 8% in FY13 in its natural gas transmission volumes. Capacity expansion plans on track GAIL has plans to invest US$6bn in capacity expansion over the next three years. Of this, about two-thirds would be directed towards doubling natural gas transmission capacity from current 170mmscmd. Amongst the latest pipeline to commence operation would be the phase II of DVPL pipelines whereby the capacity would increase from 24mmscmd to 78mmscmd (addition of 610kms) by June 2011. Apart from this, additional 6,000kms of pipeline is expected to be added in the next couple of years. The company is also investing close to Rs16bn towards developing spur lines.

GAIL

Sector Report 14

New tariffs higher than expectation and have now set the tone for tariff determination of the three new cross-country gas pipelines being laid by GAIL In a rising crude oil price scenario, while the petrochemical realizations will rise, higher subsidy burden will impact LPG segment

Revision in tariffs another important step In April 2010, PNGRB announced tariffs for GAIL’s HVJ-DVPL pipeline network. While the tariff for the old pipeline was fixed at Rs960/scm, the tariff for the expanded pipeline was fixed at Rs2,014/scm. With near doubling of the pipeline capacity by April 2011, the blended tariff works out to Rs1,385/scm, an increase of 45%. The new tariffs have set the tone for tariff determination of the three new cross-country gas pipelines being laid by GAIL. Realizations of transmission segment

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Source: Company, India Infoline Research Rising crude oil prices: petchem gains, LPG loses GAIL is part of subsidy sharing mechanism, whereby it shares about 8-10% of the upstream burden, which is close to one-third of the industry-wide gross under recoveries. In a rising crude oil price scenario, the burden on GAIL increases which results in lower realizations for its LPG segment. However, the impact is offset by increase in realizations for its petrochemical segment, the prices of which move in tandem with crude oil prices. GAIL uses natural gas as the feedstock for producing petrochemicals, the prices for which remain constant. Hence, the impact of subsidy burden is offset by margin gains in the petrochemical segment. Realizations of petrochemical segment

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Q4

FY10

Q1

FY11

Q2

FY11

Q3

FY11

Q4

FY11

-102030405060708090100Crude price (LHS)

GAIL petchem realization (RHS)US$/bbl Rs/'000 MT


GAIL

Sector Report 15

GAIL has identified 230 cities for CGD projects. By FY14, the company envisages presence in about 50 cities

Expanding presence in city gas business GAIL initiated its presence in the city gas business through forming joint ventures with BG Group (Mahanagar Gas Ltd) and BPCL (Indraprastha Gas Ltd). While MGL is present in Mumbai, IGL is dominant in Delhi and NCR region. Going ahead, GAIL has identified 230 cities for CGD projects. The company envisages presence in about 50 cities by FY14. With cost dynamics substantially in favor of natural gas as a fuel vis-à-vis liquid fuels, the demand is expected to remain strong in the near future. Considering the track record of IGL, we believe, these ventures would add significant value to GAIL.

PNG business locations State City Company Delhi Delhi

Noida Greater Noida UP Ghaziabad

IGL

Mumbai Thane Mira-Bhayandar Navi Mumbai

Maharastra

Pune

MGL

Kanpur Bareilly

CUGL

Lucknow Uttar Pradesh

Agra GGL

Gujarat Vadodara GAIL Vijaywada Hyderabad Andhra Pradesh Rajahmundery

BGL

Tripura Agartala TNGCL Dewas GAIL Gas

Madhya Pradesh Indore AGL

Haryana Sonepat GAIL Gas Source: Company

CNG business locations State City Company Delhi Delhi

Noida Greater Noida UP Ghaziabad

IGL

Mumbai Thane Mira-Bhayandar Navi Mumbai

MGL Maharastra

Pune MNGL Kanpur CUGL

Uttar Pradesh Bareilly

Tripura Agartala TNGCL Dewas GAIL Gas Indore Madhya Pradesh Ujaain

AGL

Haryana Sonepat Maharastra Panvel Gujarat Vadodara

GAIL Gas

Source: Company

GAIL

Sector Report 16

GAIL’s E&P blocks Sl

No Block GAIL's PI Operator & PI Non Operating Partners

NELP- II Blocks

1 MN-OSN-2000/2 20% ONGC - 40% IOC - 20%; OIL - 20%

2 CB-ONN-2000/1 50% GSPC - 50%

NELP- IV Blocks

3 AA-ONN-2002/1 80% JOGPL - 20%

4 CY-ONN-2002/1 50% JOGPL - 30% GSPC - 20%

Farm-in Blocks (Domestic)

5 CY-OS/2 25% HEPI - 75%

NELP- V Blocks

6 CB-ONN-2003/2 20% GSPC - 50% JCPL - 20%; GGR - 10%

7 AN-DWN-2003/2 15% Eni India - 40% ONGC - 45%

8 AA-ONN-2003/1 35% JOGPL - 10% GSPC - 20%; JSPL - 35%

NELP- VI Blocks

9 CY-DWN-2004/1 10% ONGC - 70% GSPC - 10%; HPCL - 10%




13 CY-PR-DWN-2004/1 10% ONGC - 70% GSPC - 10%; HPCL - 10%

14 CY-PR-DWN-2004/2 10% ONGC - 70% GSPC - 10%; HPCL - 10%

15 KG-DWN-2004/1 10% ONGC - 70% GSPC - 10%; HPCL - 10%

16 KG-DWN-2004/2 10% ONGC - 60% GSPC - 10%; HPCL - 10%; BPRL - 10%

17 KG-DWN-2004/3 10% ONGC - 70% GSPC - 10%; HPCL - 10%

18 KG-DWN-2004/5 10% ONGC - 50% GSPC - 10%; HPCL - 10%; OIL - 10%; BPRL - 10%

19 KG-DWN-2004/6 10% ONGC - 60% GSPC - 10%; HPCL - 10%; OIL - 10%

20 RJ-ONN-2004/1

22.23% GSPC (22.225%)-GAIL (22.225%)

HPCL (22.22%)-Hallworthy (11.11%)-Nitin Fire (11.11%)-BPRL (11.11%)

21 KG-ONN-2004/2 40% GSPC - 40% Petrogas - 20% 22 MB-OSN-2004/1 20% GSPC - 20% IOC - 20%; HPCL - 20%; Petrogas - 20% 23 MB-OSN-2004/2 20% Petrogas - 20% IOC - 20%; GSPC - 20%; HPCL - 20%

NELP- VII Block 24 CY-ONN-2005/1 40% GAIL - 40% GSPC - 30%; Bengal Energy-30%

Farm-in Blocks (Overseas) 25 A-1, Myanmar 8.50% Daewoo – 51% OVL - 17%; KoGas – 8.5%, MOGE – 15% 26 A-3, Myanmar 8.50% Daewoo – 51% OVL - 17%; KoGas – 8.5%, MOGE – 15%

CBM Blocks 1 TR-CBM-2005/III 35% Dart Energy - 35% EIG - 15%, Tata Power - 15%

Source: Company

GAIL has stakes in 26 oil and gas blocks and one CBM block. Hydrocarbon discoveries have been made in 9 E&P blocks

Presence in E&P segment to be value accretive over longer term GAIL has stakes in 26 oil and gas blocks and one CBM block. Out of the 26 conventional blocks, 8 are onshore blocks while 13 are deepwater and 5 are shallow water blocks. Hydrocarbon discoveries have been made in 9 E&P blocks. The blocks are: MN-OSN-2000/2, CB-ONN-2000/1, Block A-1 and A-3, Myanmar, CY-OS/2, CY-ONN-2002/1, AA-ONN-2002/1, CB-ONN-2003/2 and Block-56, Oman. Currently, GAIL has only one block generating revenues, which the company expects to increase to five by FY15. Until March 2011, GAIL had invested Rs23bn across various blocks and the company plans to invest Rs20bn over the next three years.

GAIL

Sector Report 17

Current capacity at Pata being expanded to 500,00tpa GAIL-led JV, Brahmaputra Cracker and Polymer Limited is implementing the Rs54.6bn Assam Gas Cracker Project to set-up an integrated Petrochemical Complex at Lepetkata having initial capacity of 280,000tpa GAIL also has a 19% equity stake in ONGC Petro Additions Ltd (OPaL) which is setting up a grass root Mega Petrochemical project in Dahej with a capacity of 1.1mn tons

Expansion in petrochemicals… leading to further diversification GAIL currently operates a gas-based integrated plant at Pata, Uttar Pradesh, with a capacity of producing 410,000tpa of polymers – HDPE and LLDPE. An additional gas cracker is being added which will take the total capacity to 500,000tpa. The company is currently evaluating options to further scale up the capacity to 800,000tpa by leveraging synergy of the existing facilities and augmenting these additional facilities. Furthermore, GAIL-led JV (70% stake), Brahmaputra Cracker and Polymer Limited (BCPL) is implementing the Rs54.6bn Assam Gas Cracker Project to set-up an integrated Petrochemical Complex at Lepetkata, District Dibrugarh. The project will be completed in 60 months from the date of approval. The petrochemical complex will comprise a cracker unit, downstream polymer and integrated off-site/utilities plants. The complex has been configured with a capacity of 220,000tpa of Ethylene and 60,000tpa of propylene with Natural Gas and Naphtha as feed stock. Recently, licensors for polyethylene and polypropylene technologies for the petrochemical plant have been finalized. GAIL also has a 19% equity stake in ONGC Petro Additions Ltd (OPaL) which is setting up a grass root Mega Petrochemical project in Dahej, Gujarat. The complex will have a 1.1mn ton dual feed cracker and will mainly produce HDPE (Swing and Dedicated lines), LLDPE, PP, Benzene, Butadiene, CBFS and Pygas. The plant is expected to commence production by December 2012. Subsidy an overhang, but relatively better placed In a recent move, the government raised the contribution of upstream companies in the subsidy sharing pattern from 33% to 38%. However, amongst the upstream companies GAIL’s contribution reduced from 9.2% in FY10 to 7% in FY11. While the uncertainty would continue to persist on account of subsidy burden incidence, GAIL’s annuity like business of transmission (50% of the EBIT) provides better relative earnings visibility when compared with other oil PSUs. We recommend BUY with a price target of Rs525. Key concerns

Higher than expected subsidy burden could dent our profit estimates

Delay in commencement production from new fields or operations at new LNG terminals could impact transmission volumes

GAIL

Sector Report 18

The growth will be driven by steady growth in natural gas transmission volumes from 106mmscmd in FY10 to about 135mmscmd in FY13E Robust growth in gas transmission and petchem business to keep margins resilient

Steady growth in transmission volumes to spur revenue growth During FY11-13E, we expect GAIL to report a revenue CAGR of 10%. The growth will be driven by steady growth in natural gas transmission volumes from 106mmscmd in FY10 to about 135mmscmd in FY13E. After a flattish revenue growth for the petrochemical segment in FY11, we expect both volume and realizations growth to drive revenues for the segment. LPG segment revenues would be impacted by the subsidy burden. Trend in revenue and revenue growth

-

50,000

100,000

150,000

200,000250,000

300,000

350,000

400,000

450,000

FY07 FY08 FY09 FY10EFY11EFY12EFY13E0%

5%

10%

15%

20%

25%

30%

35%Net sales yoy grow thRs mn

Source: Company, India Infoline Research Margins to remain resilient despite subsidy burden Natural gas transmission segment which accounts for about 11% of revenues, contributes to about 52% of EBIT with EBIT margins of ~70%. Petrochemicals segment which accounts for 6% of the revenues contributes about 15% of the EBIT with margins of ~35%. With robust revenue growth expected in both these segments, we expect margins to remain resilient. Trend in EBIT and EBIT margins

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

FY07 FY08 FY09 FY10EFY11EFY12EFY13E0%

5%

10%

15%

20%

25%EBIT EBIT Margin (%)Rs mn

Source: Company, India Infoline Research Balance sheet to remain strong in spite of aggressive capex GAIL has aggressive capital expenditure plan of Rs290bn over the next three years, with huge investments in increasing natural gas transmission capacity and petrochemical manufacturing capacity. This would require the company to raise about Rs110bn debt over the same period. In spite of this debt-equity for GAIL is expected to remain comfortable at 0.5x in FY13E.

GAIL

Sector Report 19

Company background

GAIL (India) Limited, is India's flagship Natural Gas company, integrating all aspects of the Natural Gas value chain (including Exploration & Production, Processing, Transmission, Distribution and Marketing) and its related services. In a rapidly changing scenario, the company is moving into a new era of clean fuel industrialisation, creating a quadrilateral of green energy corridors that connect major consumption centres in India with major gas fields, LNG terminals and other cross border gas sourcing points. GAIL is also expanding its business to become a player in the International Market.

Today, GAIL's Business Portfolio includes: 8,000kms of Natural Gas high pressure trunk pipeline with a

capacity to carry 170mmscmd of natural gas across the country

7 LPG Gas Processing Units to produce 1.2mmtpa of LPG and other liquid hydrocarbons

North India's only gas based integrated Petrochemical complex at Pata with a capacity of producing 410,000tons per annum of Polymers

1,922 km of LPG Transmission pipeline network with a capacity to transport 3.8mmtpa of LPG

26 oil and gas Exploration blocks and 1 Coal Bed Methane Blocks

13,000kms of OFC network offering highly dependable bandwith for telecom service providers

Joint venture companies in Delhi, Mumbai, Hyderabad, Kanpur, Agra, Lucknow, Bhopal, Agartala and Pune, for supplying Piped Natural Gas (PNG) to households and commercial users, and Compressed Natural Gas (CNG) to the transport sector

Participating stake in the Dahej LNG Terminal and the upcoming Kochi LNG Terminal in Kerala

GAIL has been entrusted with the responsibility of reviving the LNG terminal at Dabhol as well as sourcing LNG

GAIL Gas Limited, a wholly owned subsidiary of GAIL (India) Limited, was incorporated on May 27, 2008 for the smooth implementation of City Gas Distribution (CGD) projects. GAIL Gas Limited is a limited company under the Companies Act, 1956.

Established presence in the CNG and City Gas sectors in Egypt through equity participation in three Egyptian companies: Fayum Gas Company SAE, Shell CNG SAE and National Gas Company SAE.

Stake in China Gas Holding to explore opportunities in the CNG sector in mainland China

A wholly-owned subsidiary company GAIL Global (Singapore) Pte Ltd in Singapore

GAIL

Sector Report 20

Financials

Income statement Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13ERevenue 249,964 325,365 368,258 395,401 Operating profit 46,688 55,324 67,547 75,942 Depreciation (5,618) (6,503) (7,706) (10,406)Interest expense (700) (829) (2,655) (6,155)Other income 5,411 4,407 5,165 5,165 Profit before tax 45,781 52,400 62,351 64,546 Taxes (14,386) (16,789) (18,082) (18,718)Net profit 31,395 35,611 44,269 45,828

Balance sheet Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13EEquity capital 12,685 12,685 12,685 12,685 Reserves 155,305 179,849 213,177 248,065 Net worth 167,990 192,533 225,862 260,749 Debt 14,804 23,100 53,100 123,100 Def tax liab (net) 13,896 16,332 16,832 17,332 Total liabilities 196,689 231,966 295,795 401,182 Fixed assets 142,616 182,827 250,122 344,716 Investments 20,730 25,825 25,825 25,825 Net working cap (8,372) 2,000 18,807 29,282 Inventories 6,317 8,551 10,089 10,833 Sundry debtors 12,950 19,059 21,187 22,749 Other curr assets 76,144 62,538 83,502 98,502 Sundry creditors (20,318) (26,742) (30,268) (32,499)Other curr liabi (83,466) (61,406) (65,705) (70,304)Cash 41,715 21,314 1,041 1,359 Total assets 196,689 231,966 295,795 401,182 Cash flow statement Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13E

Profit before tax 45,781 52,400 62,351 64,546Depreciation 5,618 6,503 7,706 10,406Tax paid (14,386) (16,789) (18,082) (18,718)Working capital ∆ 14,628 (10,372) (16,807) (10,475)Operating cashflow 51,641 31,742 35,168 45,759

Capital expenditure (33,468) (46,714) (75,000) (105,000)

Free cash flow 18,174 (14,972) (39,832) (59,241)Equity raised 637 (127) - -Investments (3,358) (5,095) - -Debt raised/(repaid) 2,803 8,296 30,000 70,000

Dividends paid (11,738) (10,941) (10,941) (10,941)Other items 636 2,437 500 500Net ∆ in cash 7,154 (20,402) (20,272) 318

Key ratios

Y/e 31 Mar FY10 FY11E FY12E FY13EGrowth matrix (%) Revenue growth 5.1 30.2 13.2 7.4 Op profit growth 14.9 18.5 22.1 12.4 EBIT growth 8.1 14.5 22.1 8.8 Net profit growth 12.0 13.4 24.3 3.5 Profitability ratios (%) OPM 18.7 17.0 18.3 19.2 EBIT margin 18.6 16.4 17.7 17.9 Net profit margin 12.6 10.9 12.0 11.6 RoCE 25.1 24.8 24.6 20.3 RoNW 19.9 19.8 21.2 18.8 RoA 11.3 11.5 12.4 10.2 Per share ratios (Rs) EPS 24.8 28.1 34.9 36.1 DPS 8.0 7.5 7.5 7.5 Cash EPS 29.2 33.2 41.0 44.3 Book value per share 132.4 151.8 178.1 205.6 Valuation ratios (x) P/E 18.2 16.1 12.9 12.5P/CEPS 15.5 13.6 11.0 10.2P/BV 3.4 3.0 2.5 2.2EV/EBIDTA 11.7 10.4 9.2 9.1 Payout (%) Dividend payout 37.4 30.7 24.7 23.9 Tax payout 31.4 32.0 29.0 29.0 Liquidity ratios Debtor days 19 21 21 21 Inventory days 9 10 10 10 Creditor days 30 30 30 30 Leverage ratios Interest coverage 66.4 64.2 24.5 11.5 Net debt / equity (0.2) 0.0 0.2 0.5 Net debt / op. profit (0.6) 0.0 0.8 1.6

Du-Pont Analysis

Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13ETax burden (x) 0.69 0.68 0.71 0.71Interest burden (x) 0.98 0.98 0.96 0.91EBIT margin (x) 0.19 0.16 0.18 0.18Asset turnover (x) 0.90 1.05 1.03 0.88Financial leverage (x) 1.76 1.72 1.70 1.84RoE (%) 19.9 19.8 21.2 18.8

GSPL – BUY‘Expanding boundaries’

Sector: Oil & Gas

Sensex: 18,309


6m Avg vol (‘000Nos): 1,319

No of o/s shares (mn): 563

FV (Rs): 10

Bloomberg code: GUJS IB

Reuters code: GSPT.BO

BSE code: 532702 NSE code: GSPL Prices as on 14 Jun, 2011




(%) 1m 3m 1yr GSPL (5.9) (2.7) (4.2) GAIL (1.2) (2.5) (7.9) IGL 10.5 22.4 49.7 Guj Gas 9.0 (0.9) 33.4

Share price trend

80

100

120

140


GSPL Sensex

New sources to add to transmission volumes Gujarat State Petronet Ltd (GSPL) has a gas pipeline network of 1,900kms in the state of Gujarat. With Gujarat accounting for about 30% of the natural gas demand in the country and rapid growth in industrialization in the state, the demand for gas is expected to surge. Furthermore, supplies from Petronet LNG and E&P players are also increasing over the medium term. This would translate into increased demand for transmission capacity. GSPL plans to invest about Rs12-15bn during FY12E and FY13E to increase its reach in the state of Gujarat. The company aims to have a transmission grid spreading over 2,400kms with an outreach to all 25 districts of Gujarat by end of FY12E. We expect GSPL to witness a volume CAGR of 9% during FY11-15E. Expansion beyond Gujarat to drive long term revenue growth In the recent past, a consortium led by GSPL (52% stake) won two bids for cross-country pipelines enabling it to expand its operations beyond Gujarat. The two pipelines are 1) Mallavaram (Andhra Pradesh) to Bhilwara (Rajasthan) – 1,688kms and 2) Mehsana (Gujarat) to Bhatinda (Punjab) – 1,611kms. Additionally, the company has won the bid for the extension of Mehsana-Bhatinda pipeline up to Srinagar (a stretch of 740kms). The overall investments required for the pipeline would be to the tune of Rs122bn. We believe the tenure for laying the pipelines would be in the range of 30-36 months. Hence, these pipelines will contribute substantially to GSPL’s topline growth beyond FY14. Investment in CGD projects a positive GSPL has 36% stake in GSPC Gas and 13% stake in Sabarmati Gas. Sabarmati Gas, a JV between BPCL and GSPC has a supply of 0.8mmscmd and operates primarily in Mehsana, Gandhinagar and Sabarkatha. GSPC Gas operates in Vapi, Valsad and Navsari with a current supply of 3.8mmscmd. We believe that this investment in associate companies with combined sales of ~4.6mmscmd will enable GSPL to cash in on the strong growth in CGD. GSPL’s share in profits of these two companies together was about Rs630mn or 12% of GSPL’s FY11 PAT. Financial summary

Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13E Revenues 10,009 10,465 11,680 12,848 yoy growth (%) 105.3 4.6 11.6 10.0 Operating profit 9,414 9,694 10,896 11,985 OPM (%) 94.1 92.6 93.3 93.3 Pre-exceptional PAT 4,138 5,064 5,699 6,290 Reported PAT 4,138 5,064 5,699 6,290 yoy growth (%) 235.3 22.4 12.5 10.4 EPS (Rs) 7.4 9.0 10.1 11.2 P/E (x) 13.2 10.8 9.6 8.7 Price/Book (x) 3.5 2.7 2.2 1.8 EV/EBITDA (x) 6.9 6.9 6.1 5.6 Debt/Equity (x) 0.8 0.7 0.5 0.4 RoE (%) 29.8 28.4 25.2 22.5 RoCE (%) 26.5 25.6 24.5 24.3


GSPL

Sector Report 22

Sectoral break up of gas demand in Gujarat Trend in gas demand in Gujarat

27%

14%49%

10% 29%

8%50%

13%Pow er

Fertilizer

Industry

Distribution2009

2020

0

20

40

60

80

100

120

140

160

2009 2012 2015 2020

mmscmd

Source: Crisil

It is estimated that demand for natural gas in the Gujarat will increase from about 70mmscmd currently to about 146mmscmd in 2020 It is expected that contribution of power sector to demand for natural gas in Gujarat will increase from 27% in 2009 to 29% in 2020, while that of industry will increase from 49% to 50%

Increased gas production and higher LNG terminals capacity in Gujarat have widened supply base

Increasing gas consumption in Gujarat to propel demand for transmission services With rapid industrialization and increasing gas-based power capacities, it is estimated that demand for natural gas in Gujarat will increase from about 70mmscmd currently to about 146mmscmd in 2020, a CAGR of 6.9%. Supply is also catching up during the period with expansion of LNG terminals and monetization of new E&P finds. Total supplies for the state of Gujarat are expected to increase from 47mmscmd currently to about 101mmscmd in 2020, a CAGR of 7.2%. GSPL, with its wide-spread network of 1,900kms in the state and planned expansion projects, is well poised to leverage on the increasing consumption of natural gas in the state. Power and industrial sector driving demand growth The growth in demand for natural gas in Gujarat will be driven by continued increase in demand from industrial sector along with sharp jump in gas-based power generation capacities. City gas projects are providing further fillip to demand. Currently about 3,411MW capacity in Gujarat is purely based on Natural Gas, while another 810MW is dual fuel (one of which is gas). Going ahead, over the next couple of years, about 1,770MW of gas-based capacities are expected to arise in the state. Additionally, with increasing number of natural gas applications, industrial demand is expected to remain robust. Contribution of power sector to demand for natural gas in Gujarat will increase from 27% in 2009 to 29% in 2020, while that of industry will increase from 49% to 50%.

New sources of gas bridging the demand supply gap Post the commencement of natural gas production from Reliance Industries’ KG-D6 field, India’s domestic production has witnessed a quantum leap. At peak production levels of 80mmscmd (if it reaches in FY14), KG-D6 would be contributing more than 50% to India’s domestic production then. About 17mmscmd from 45mmscmd of current production is being supplied in Gujarat. Additionally, completions of expansion of Petronet LNG’s Dahej Terminal to 10mmtpa and Shell’s Hazira Terminal to 3.7mmtpa have further propelled supplies in Gujarat. Going ahead, as GSPC’s discovery in KG Basin and its LNG terminal commence operations, supply would increase further.

GSPL

Sector Report 23

The company is currently in the process of building additional pipelines in Gujarat, which include Darod-Jafrabad, Mehsana-Palanpur, Mundra spur lines and Satej Sanand A consortium led by GSPL (52% stake) won two bids for cross-country pipelines Mallavaram to Bhilwara and Mehsana to Bhatinda Mallavaram–Bhilwara Pipeline will connect east coast where bulk of new production is likely to arise Mehsana-Bhatinda pipeline to arise from Gujarat, where LNG imports are set to increase at a rapid pace

GSPL expanding its presence in Gujarat GSPL currently supplies gas to places such as Surat, Bharuch, Baroda, Anand, Ahmedabad, Gandhinagar, Himmatnagar, Mehsana, Morbi, Vapi and Jamnagar through its network of 1,900kms of pipeline (trunk and spur lines). The company is in the process of building additional pipelines in Gujarat, which include Darod-Jafrabad, Mehsana-Palanpur, Mundra spur lines and Satej Sanand. This would enable it to increase its transmission volumes until FY14. We expect GSPL to report volumes of 40mmscmd in FY12E and 44mmscmd in FY13E. Cross-country pipelines to add substantial value In the recent past, a consortium led by GSPL (52% stake) won two bids for cross-country pipelines enabling it to expand its operations beyond Gujarat. The two pipelines are 1) Mallavaram (Andhra Pradesh) to Bhilwara (Rajasthan) – 1,688kms and 2) Mehsana (Gujarat) to Bhatinda (Punjab) – 1,611kms. Additionally, the company has won the bid for the extension of Mehsana-Bhatinda pipeline up to Srinagar (a stretch of 740kms). The overall investments required for the pipeline would be to the tune of Rs122bn. We believe the tenure for laying the pipelines would be in the range of 30-36 months. Hence, these pipelines will contribute substantially to GSPL’s topline growth beyond FY14. Mallavaram–Bhilwara Pipeline The Mallavaram-Bhilwara pipeline will transport gas from the eastern coast of India to the central region. KG Offshore basin, which accounts for more than one-third of the gas production in the country houses few of India’s largest gas finds. This includes RIL’s KG-D6 field, GSPC’s Deendayal block and ONGC’s KG-DWN-98/2 block. The pipeline will transport gas from the KG basin to the gas-consuming market along the HVJ pipeline in North India and likely to Gujarat. Considering a capacity of 52mmscmd, life of 25 years, tariff of Rs1,150/scm and capital expenditure of Rs65bn we estimate a NPV of Rs24bn. For GSPL’s 52% stake in the consortium, the value works out to Rs22/share. With high element of risks such as delay in executions, increase in capital costs, availability of gas, demand from customers, we assign a 50% discount and add Rs11/share to GSPL’s valuation. Mehsana-Bhatinda Pipeline As discussed earlier, Gujarat has been the landfall point for imported LNG into the country and also Mumbai Offshore, a dominant gas production block in the country is in its vicinity. The Mehsana-Bhatinda pipeline of GSPL will transmit this gas to the northern region of the country. Considering a capacity of 45mmscmd, life of 25 years, tariff of Rs1,250/scm and capital expenditure of Rs45bn we estimate a NPV of Rs24bn. For GSPL’s 52% stake in the consortium, the value works out to Rs22/share. For the aforementioned risks, we assign a 50% discount and add Rs11/share to GSPL’s valuation.

GSPL

Sector Report 24

GSPL Pipelines expansion in Gujarat

Source: Company GSPL’s cross country pipelines

Source: Company

GSPL

Sector Report 25

As per the management, post the implementation of PNGRB regulations tariffs can, at most, decline to Rs0.75/scm Stakes in city gas projects of GSPC Gas Company, Sabarmati Gas, Krishna Godavari Gas to be value accretive as they sell more than 5mmscmd

Company guides for flat tariffs post authorization from PNGRB As per the PNGRB regulations, natural gas pipeline tariffs will be calculated by considering a reasonable rate of return on normative level of capital employed plus a normative level of operating expenses in the natural gas pipeline. PNGRB has fixed regulated post-tax RoCE at 12% and pre-tax RoCE at 18% (based on current tax structure). GSPL has submitted the authorization requirements and is awaiting an approval from PNGRB. During FY11, average tariffs were Rs0.8/scm. As per the management, post the implementation of PNGRB regulations tariffs will continue to remain at the current level. Take-or-pay nature of agreements secures cash flows GSPL’s agreements with RIL and Torrent Power have built-in take-or-pay clauses. This means that if the second party to the contract fails to meet its commitment to transmit gas as per the agreement, GSPL can claim capacity charge from it. On an average, capacity charge forms nearly 90% of the tariffs. Stake in CGD projects through group companies GSPL has picked up strategic stakes in group companies—GSPC Gas, Sabarmati Gas and Krishna Godavari Gas Network Ltd—which are setting up city gas businesses in Gujarat and Andhra Pradesh. City gas distribution, which includes supply of compressed natural gas for automobiles, will be a natural diversification for GSPL from its transportation business. As in the cases of Indraprastha Gas Ltd and Gujarat Gas Ltd, the CGD projects are likely to contribute significantly to profit growth for GSPL. We have not factored any upsides in profits or valuations in our model GSPC Gas Company Ltd – This company marked the foray of GSPC into CGD business. It has a mandate to set up CGD projects in 18 cities across Gujarat, with an investment of Rs15bn. The company is supplying Piped Natural Gas (PNG) to nearly 172,111 domestic households, 734 commercial establishments, 907 industrial customers and operating 71 CNG Stations. The daily gas sales volume is in tune of 3.29mmscmd. The Company plans to setup total 300 CNG Stations by year 2013 in phased manner all across Gujarat. Sabarmati Gas Ltd, a JV between BPCL and GSPC, was incorporated in June 2006 to set up CGD projects in Gandhinagar, Mehsana and Sabarkantha districts of Gujarat. It has chalked out a business development plan involving a capex of Rs4.1bn. Krishna Godavari Gas Network Ltd – The company has been set up by INCAP, GSPC and IDFC Private Equity to develop an intra-state transportation grid in Andhra Pradesh.

GSPL

Sector Report 26

We estimate 8% revenue CAGR during FY11-13E. This will be driven by 11% volume CAGR

FY11-13E revenue CAGR of 8% and PAT CAGR of 13.5% Conservatively, we estimate 8% revenue CAGR during FY11-13E. This will be driven by 11% volume CAGR. We expect tariffs to remain flat at Rs0.8/scm in FY12E and FY13E. Margins are expected to remain strong as better utilization translates into benefits of operating leverage. As a change of result in depreciation rate in Q3 FY11 and Q4 FY11 depreciation expense declined 45% in FY11. This would translate into earnings CAGR of 11.5% during FY11-13E. Trend in revenues and yoy growth

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

FY07 FY08 FY09 FY10 FY11EFY12EFY13E0%

20%

40%

60%

80%

100%

120%Revenue yoy grow th

Rs mn

Source: Company, India Infoline Research DCF valuation of Rs113/share, recommend BUY With annuity like cash flows for GSPL, we prefer to value the company on DCF basis. We value its extant pipelines at Rs88/share considering a stable transmission tariff of Rs0.8/scm. Increase in transmission tariffs would result in higher valuations. Further, we value its 52% stake in the three cross-country pipelines at Rs25/share taking the total valuations to Rs113/share. Recommend BUY. Key concerns

Delay in decision or adverse decision on the pipeline authorization could significantly impact our NPV valuations.

Higher than expected decline in tariffs could dent our earning estimates

GSPL

Sector Report 27

Company background GSPL, a GSPC Group company, is a pioneer in developing energy transportation infrastructure and connecting natural gas supply basins and LNG terminals to growing markets. GSPL is constantly expanding its pipeline network in Gujarat to reach demand centres by laying a gas pipeline network. The company has developed the requisite expertise and confidence with proven project management competencies. GSPL is the first pipeline company in India operating on open-access basis and is a pure transmission network. The company’s transmission network envisages development of systematic and seamless pipeline network across Gujarat connecting various suppliers and users. The suppliers of natural gas include traders, producers and LNG terminals. The users comprise industries such as power, fertilizer, steel, chemical plants and local distribution companies. Key operational milestones for GSPL Year Event

FY01 GSPL first Pipeline section Hazira - Mora was commissioned. The section was 36” x 14 kms long.

FY02 Commissioning of 24” x 45 kms Amboli - Dahej pipeline. The total length increased to 59 kms.

FY03 Commissioning of 66 kms of gas pipeline, which included 12” X 25 Kms Mora - Utran, 24” x 6.0 Kms Cairn - Mora and 24” x 26 Kms Bhadhut - Paguthan pipelines, and 12” x 5.0 Kms GNFC, 12” x 1.0 Km Videocon and 12” x 3.0 Kms Mora - Kribhco spur lines. The total length increased to 125 kms.

FY04 Commissioning of 24” x 64 Kms Paguthan - Baroda pipeline. The total length increased to 209 kms.

FY05 Commissioning of Baroda – Ahmedabad - Kalol pipeline, GACL - Petronet pipeline, Mora - Sajod pipeline and the Kalol - Santej pipeline. The total grid length increased to 433 kms. Completion of construction of the Gandhinagar spur line, which was 15 kms in length. The total grid length increased to 448 kms.

FY06 Commissioned Anklav Dhuvaran, GFL spurline, NTPC kawas Pipeline projects. The EPC and engineering contracts for Mora - Vapi, Anand - Rajkot, Kalol-Himmatnagar, Kalol - Mehsana and Aanklav - Dhuvaran pipelines are awarded and under execution.

FY07 Commissioning of Mora Vapi, Anand Rajkot Pipeline, Kalol Mehsana Pipeline, Kalol Himmatnagar Pipeline Project.

FY08 Commissioned Torrent connectivity at Surat, Padamla-Halol Pipeline, Petronet LNG connectivity.

FY09 Rajkot - Jamnagar Pipeline on 25.03.2009.

FY10 Commissioned Olpad- Utran Pipeline at Surat on 29.10.2009.

FY11 Ajanta Spurlines and Jamnagar Spurlines. Morbi Mundra Pipeline, Gana Hadala Pipeline, Euro Spur line. Ajanta Spurline Project. Sumangalam Glass Spurline and Euro-Metrade Spurline

Source: Company

GSPL

Sector Report 28

Financials

Income statement Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13ERevenue 10,009 10,465 11,680 12,848 Operating profit 9,414 9,694 10,896 11,985 Depreciation (2,365) (1,299) (1,631) (1,853)Interest expense (938) (961) (880) (880)Other income 159 216 225 250 Profit before tax 6,269 7,650 8,610 9,502 Taxes (2,131) (2,586) (2,911) (3,212)Net profit 4,138 5,064 5,699 6,290

Balance sheet Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13EEquity capital 5,624 5,626 5,626 5,626 Reserves 10,014 14,440 19,495 25,141 Net worth 15,638 20,066 25,121 30,767 Debt 12,595 14,835 13,585 13,585 Def tax liab (net) 1,405 2,641 1,200 1,200 Total liabilities 29,639 37,541 39,906 45,552 Fixed assets 29,754 35,363 38,829 44,840 Investments 666 766 766 766 Net working cap (2,527) (980) (1,093) (1,203)Inventories 1,327 623 695 764 Sundry debtors 752 698 779 857 Other curr assets 3,728 5,286 5,900 6,490 Sundry creditors (4,848) (2,894) (3,230) (3,553)Other curr liabilities (3,486) (4,692) (5,237) (5,760)Cash 1,746 2,393 1,404 1,149 Total assets 29,639 37,541 39,906 45,552

Cash flow statement Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13EProfit before tax 6,269 7,650 8,610 9,502Depreciation 2,365 1,299 1,631 1,853Tax paid (2,131) (2,586) (2,911) (3,212)Working capital ∆ 1,837 (1,547) 114 109Operating cashflow 8,339 4,816 7,444 8,252Capital expenditure (7,987) (6,907) (5,098) (7,863)Free cash flow 352 (2,092) 2,346 389Equity raised (202) 8 - -Investments (310) (100) - -Debt raised/repaid 1,086 2,239 (1,250) -Dividends paid (449) (644) (644) (644)Other items 261 1,235 (1,441) -Net ∆ in cash 738 647 (988) (255)

Key ratios

Y/e 31 Mar FY10 FY11E FY12E FY13EGrowth matrix (%) Revenue growth 105.3 4.6 11.6 10.0 Op profit growth 121.7 3.0 12.4 10.0 EBIT growth 158.9 19.5 10.2 9.4 Net profit growth 235.3 22.4 12.5 10.4 Profitability ratios (%) OPM 94.1 92.6 93.3 93.3 EBIT margin 72.0 82.3 81.2 80.8 Net profit margin 41.3 48.4 48.8 49.0 RoCE 26.5 25.6 24.5 24.3 RoNW 29.8 28.4 25.2 22.5 RoA 12.2 12.2 12.2 12.2 Per share ratios EPS 7.4 9.0 10.1 11.2 Dividend per share 0.7 1.0 1.0 1.0 Cash EPS 11.6 11.3 13.0 14.5 Book value per share 27.8 35.7 44.7 54.7 Valuation ratios (x) P/E 13.2 10.8 9.6 8.7 P/CEPS 8.4 8.6 7.4 6.7 P/B 3.5 2.7 2.2 1.8 EV/EBIDTA 6.9 6.9 6.1 5.6 Payout (%) Dividend payout 10.9 12.7 11.3 10.2 Tax payout 34.0 33.8 33.8 33.8 Liquidity ratios Debtor days 27 24 24 24 Inventory days 48 22 22 22 Creditor days 177 101 101 101 Leverage ratios Interest coverage 7.7 9.0 10.8 11.8 Net debt / equity 0.7 0.6 0.5 0.4 Net debt / op. profit 1.2 1.3 1.1 1.0

Du-Pont Analysis


Indraprastha Gas – BUY‘Stepping on the gas’

Sector: Oil & Gas

Sensex: 18,309


6m Avg vol (‘000Nos): 275


FV (Rs): 10

Bloomberg code: IGL IB

Reuters code: IGAS.BO

BSE code: 532514 NSE code: IGL Prices as on 14 Jun, 2011




(%) 1m 3m 1yr IGL 10.5 22.4 49.7 GAIL (1.2) (2.5) (7.9) GSPL (5.9) (2.7) (4.2) Guj Gas 9.0 (0.9) 33.4

Share price trend

80

100

120

140

160


IGL Sensex

Demand for CNG to remain strong Over the past one decade, IGL has reported a CNG volume CAGR of 46% led by 1) mandatory conversion of all public transport vehicles to CNG, 2) growing conversion of private vehicles, 3) increased number of stations and higher compressing capacity at stations and 4) improving availability of fuel across the NCR region. While demand from mandatory conversions might not witness substantial growth, momentum in private vehicle conversions would continue on the back of increasing cost advantage of CNG as an auto fuel. We expect IGL to witness a 16% CNG volume CAGR during FY11-13E. PNG volume growth momentum to continue IGL currently supplies PNG to about 0.17mn households compared to total of 4.3mn households using LPG. We believe with rising awareness about advantages of PNG over LPG (safety and convenience) the acceptance of the fuel will increase at a robust pace. Industrial segment, which has accounted for significant portion of IGL's PNG sales will also witness strong growth as cost effectiveness of PNG can improve profitability for these players. Compared to Gujarat, where PNG has a wide acceptance for co-generation, Delhi has been under penetrated. This would keep PNG volume growth strong for IGL. We expect a 30% CAGR in IGL's PNG volumes during FY11-13E. Expanding beyond Delhi IGL is now extending its reach beyond Delhi to tap markets of Noida, Greater Noida and Ghaziabad. PNG would be the key growth segment in these areas considering fast development of small and medium industrial units. In Noida and Greater Noida combine, IGL has 11 CNG stations and more than 3,500 PNG customers. In Ghaziabad the operations are at a nascent stage with only three CNG stations and a very small number of PNG customers. All three regions have a strong potential and we reckon over the next two to three years these markets can contribute about 15-20% of IGL's total volumes. Strong earnings visibility, recommend BUY We believe IGL has strong earnings visibility considering rapid conversions of private vehicles to CNG and increasing usage of gas in industries. Superior pricing power will enable them to sustain margins and strong return ratios. Recommend BUY with a 9-month price target of Rs409 (P/E of 15x FY13E EPS). Financial summary Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13ERevenues 10,781 17,505 23,431 30,288yoy growth (%) 26.4 62.4 33.9 29.3 Operating profit 3,808 4,987 5,812 7,486 OPM (%) 35.3 28.5 24.8 24.7 Reported PAT 2,155 2,598 2,938 3,821yoy growth (%) 24.9 20.5 13.1 30.0 EPS (Rs) 15.4 18.6 21.0 27.3P/E (x) 24.0 19.9 17.6 13.5Price/Book (x) 6.3 5.1 4.3 3.5EV/EBITDA (x) 13.2 10.4 8.9 6.8 Debt/Equity (x) 0.0 0.2 0.2 0.1 RoE (%) 28.6 28.4 26.6 28.3 RoCE (%) 41.8 38.1 34.0 37.1 Source: Company, India Infoline Research

Indraprastha Gas

Sector Report 30

CNG sales volume of IGL Per km cost comparison of diesel vs CNG car

-

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

mn kgs/day

-

0.5

1.0

1.5

2.0

2.5

Q1

FY05

Q3

FY05

Q1

FY06

Q3

FY06

Q1

FY07

Q3

FY07

Q1

FY08

Q3

FY08

Q1

FY09

Q3

FY09

Q1

FY10

Q3

FY10

Q1

FY11

Q3

FY11

CNG DieselRs/km

Source: Company Source: Company, IOC

While demand from mandatory conversions might not witness substantial growth, momentum in private vehicle conversions would continue on the back of increasing cost advantage of CNG as a fuel

The number of private car conversions has increased from 2,000 per month in FY08 to about 4,000 per month in FY10 OEMs such as Maruti and Hyundai have launched CNG variants of many small cars

CNG volume growth to remain strong Over the past one decade IGL has reported a CNG volume CAGR of 46% led by 1) mandatory conversion of all public transport vehicles to CNG, 2) growing conversion of private vehicles, 3) increased number of stations and higher compressing capacity at stations and 4) improving availability of fuel across the NCR region. While demand from mandatory conversions might not witness substantial growth, momentum in private vehicle conversions would continue on the back of increasing cost advantage of CNG as a fuel.

Going ahead, we expect the pace of private car conversion to gather momentum as petrol prices have been deregulated and government is also contemplating decontrol of diesel prices. In a rising crude oil price scenario, viability of CNG as an auto fuel will only improve. Furthermore, the penetration of CNG vehicles is substantially lower despite being 10 years into existence. At the end of FY10, compared to a total vehicular population of 4mn only 0.35mn vehicles operated on CNG. As per the management, the number of private car conversions has increased from 2,500 per month previous year to about 5,000 per month in FY11. In the recent past, OEMs such as Maruti and Hyundai have launched CNG variants of many small cars. Furthermore, radio taxi concept has gathered substantial momentum in the recent past in the city. Post the Commonwealth Games, the number of DTC buses have also risen considerably. All these factors will provide additional fillip to IGL's CNG volumes. We expect a 16% CAGR in CNG sales volumes over the next couple of years. OEM Models on CNG

FY11 Total passenger car sales – 1,979,996 Maruti mkt share 49% Hyundai mkt share 18%

Model with CNG variant

% of Maruti vol

Model with CNG variant

% of Hyundai vol

Alto 35% i10 45% Wagon R 17% Santro 23% Estilo 5% Accent 4% SX4 2%

Source: Crisil, India Infoline Research

Indraprastha Gas

Sector Report 31

No of IGL CNG stations Compression capacity of IGL

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50

100

150

200

250

300

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

Nos

-0.51.01.52.02.53.03.54.04.55.05.5

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

mn kgs/day

Source: Company

Average per station compression capacity Ratio of CNG sales to compression capacity

-2.04.06.08.0

10.012.014.016.018.020.0

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

'000 kgs/day

0.20

0.25

0.30

0.35

0.40

0.45

0.50

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

x

Source: Company

IGL over the years has built in a wide and efficient CNG network across the capital

Strong CNG infrastructure built up by IGL One of the key hindrances for a quantum jump in private vehicle conversions to CNG has been lack of adequate infrastructure (number of stations or capacity at the stations) in the initial stage. This led to long queues at various stations causing a sentimental impact to the demand. However, over the past few years IGL has adopted three-pronged strategy to widen its infrastructure network. 1) FY2000 to FY04: During this phase, IGL focused on establishing a

presence in New Delhi by capturing the prime locations for stations. It increased the number of stations from 30 in FY2000 to 120 in FY04, while the average compressing capacity per station increased from close to 1,000 kgs/day to 13,000 kgs/day.

2) FY05 to FY08: During this period, IGL widened its network by adding new locations (43 stations). The average capacity per station during the period remained in the range of 12,500-13,500 kgs/day.

3) FY09 to FY11: During FY09, the company not only added 18 new stations but also increased the average compression capacity per station to 14,700 kgs/day. In FY10 and FY11, the company added 100 stations and also increased its average compression capacity per station to 18,200 kgs/day.

Indraprastha Gas

Sector Report 32

Under-penetration and rising awareness of PNG’s advantage would drive the demand PNG Competition would find difficult to hurt IGL considering relatively high capital costs and already a wide reach of IGL Noida, Greater Noida and Ghaziabad have a strong potential and we reckon over the next two to three years these markets can contribute about 15-20% of IGL's total volumes

PNG volume growth momentum to continue IGL currently supplies PNG to about 0.24mn households compared to total of 4.3mn households using LPG. We believe with rising awareness about advantages of PNG over LPG (safety and convenience) the acceptance of the fuel will increase at a robust pace. Industrial segment, which has accounted for significant portion of IGL's PNG sales will also witness strong growth as cost effectiveness of PNG can improve profitability for these players. Compared to Gujarat, where PNG has a wide acceptance for co-generation, Delhi has been under- penetrated. This would keep PNG volume growth strong for IGL. We expect a 30% CAGR in IGL's PNG volumes during FY11-13E. Trend in number of domestic customers for PNG

-25,00050,00075,000

100,000125,000150,000175,000200,000225,000250,000275,000

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

Nos

Source: Company Strong foothold in Delhi market to continue IGL has been enjoying a virtual monopoly status in Delhi since its inception. However, this was under threat when PNGRB decided to regulate the sector with a perspective of regulating tariffs and bring in competition. As per the regulations, IGL will continue to have monopoly in marketing till January 2012 and network exclusivity till 2025. Post 2012, new players although will be allowed to market the gas but will have to use IGL's network for transmission. For these services, IGL will receive a fixed charge. We believe competition would be difficult to arise considering IGL's substantially low capital costs and widespread network (2,300kms across Delhi). Going ahead, IGL plans to further strengthen its network by expanding into areas where it has no presence currently. Furthermore, IGL has tied up long term contracts with DTC, which accounts for 25% of IGL’s CNG volumes and is looking to enter into similar contracts with oil marketing companies. Expanding beyond Delhi IGL is now extending its reach beyond Delhi to tap markets of Noida, Greater Noida and Ghaziabad. PNG would be the key growth segment in these areas considering fast development of small and medium industrial units. In Noida and Greater Noida together IGL has 11 CNG stations and more than 3,500 PNG customers. In Ghaziabad the operations are at a nascent stage with only three CNG stations and a very small number of PNG customers. All three regions have a strong potential and we reckon over the next two to three years these markets can contribute about 15-20% of IGL's total volumes.

Indraprastha Gas

Sector Report 33

IGL CNG penetration in Delhi

Source: Company

IGL’s PNG penetration in Delhi

Source: Company

Indraprastha Gas

Sector Report 34

30% PNG volume and 16% CNG volume CAGR to drive 31% revenue CAGR during FY11-13E Pricing power to enable passing of high price of R-LNG leading to sustenance of gross margins

Financials

Strong volume growth to result in 30% revenue CAGR We expect IGL to report a strong volume CAGR of 19% during FY11-13E driven by 16% CNG volume CAGR and 30% PNG volume CAGR. This would translate into a revenue CAGR of 31% during the same period.

Trend in revenues and yoy growth

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

FY07 FY08 FY09 FY10 FY11E FY12E FY13E0%

10%

20%

30%

40%

50%

60%

70%Net sales yoy grow th

Rs mn


Gross margins to be sustained During FY08-10, IGL has witnessed raw material cost pressures as the government has raised gas prices. Additionally, with IGL current volumes much above its contracted APM (2.2mmscmd) and KG-D6 (0.15mmscmd) gas, contribution of LNG has increased substantially and will rise further. With the cost advantage of CNG over petrol and diesel, IGL has been able to pass on the hike and maintain its gross margin per unit sold. In the PNG segment, the pricing power is relatively less considering only 5% discount of PNG over domestic LPG. In a rising crude oil price scenario though, IGL will be able to pass on the impact to industrial customers. We expect IGL to report earnings CAGR of 22% during FY11-FY13E.

Strong earnings visibility, recommend BUY We believe IGL has strong earnings visibility considering rapid conversions of private vehicles to CNG and increasing usage of gas in industries. Superior pricing power will enable them to sustain margins and strong return ratios. Recommend BUY with a 9-month price target of Rs409 (P/E of 15x FY13E EPS). Concerns

Slower than expected roll out of CNG outlets and PNG network in the new territories

Higher than anticipated increase in cost of natural gas

Delay in diesel price hike or de-regulation

Indraprastha Gas

Sector Report 35

Company background IGL was incorporated in 1998, with the prime objective of taking over the City Gas Distribution project from GAIL (India) Ltd. The initial participants in the project were BPCL, GAIL and Government of NCT of Delhi. The objective of the project was to set up infrastructure for CNG and PNG distribution in the NCT of Delhi. With Delhi appearing in the list of the most polluted cities in the world, the Government required to implement the usage of CNG at a rapid pace. IGL has done so quite remarkably and has seen all DTC buses, auto rickshaws and Taxis getting converted to CNG. Latest additions to the list have been LCVs and private cars. IGL has also increased the usage of PNG in the NCT of Delhi. The pace of expansion, however for PNG, has been slower as compared to that of CNG. Nevertheless, the scope of penetration for both the segments continues to remain high. CNG CNG is a natural gas that is compressed to a pressure of 200-250kg/cm2(g) (due to its low density) to enhance the vehicle on-board storage capacity. Thus, this compressed form of natural gas is used as a fuel for transportation purposes. With pollution levels reaching alarming levels in Delhi, the Supreme Court issued several directives, which had a major influence on IGL’s operations. Following directives were issued by the apex court:

No 8-year old buses to ply except on CNG or other clean fuels by April 1, 2000.

The entire city bus fleet (DTC and private) to be steadily converted to single fuel mode on CNG by March 31, 2001. Subsequently, the time period for compliance with these directives was extended from time to time by the Supreme Court.

Replacement of all pre-1990 autos and taxis with new vehicles on clean fuels.

Further, on April 5, 2002, the Supreme Court passed an order stating that, among other things, the Union of India and all governmental authorities including IGL shall allocate and make available 16.1 lakh kgs per day (2 MMSCMD) of CNG in the NCT of Delhi by June 30, 2002 for use by the transport sector. Advantages of using CNG Green fuel Commonly referred to as the green fuel because of its lead-free and sulphur-free character, CNG reduces harmful emissions. Being non-corrosive, it enhances the longevity of spark plugs. Due to the absence of any lead or benzene content in CNG, the lead fouling of spark plugs, and lead or benzene pollution are eliminated. Increased life of oils Another practical advantage observed is the increased life of lubricating oils, as CNG does not contaminate and dilute the crankcase oil.

Indraprastha Gas

Sector Report 36

Safety CNG is less likely to auto-ignite on hot surfaces, since it has a high auto-ignition temperature (540 degrees centigrade) and a narrow range (5%-15%) of inflammability. It means that if CNG concentration in the air is below 5% or above 15%, it will not burn. This high ignition temperature and limited flammability range makes accidental ignition or combustion very unlikely. Low operational cost The operational cost of vehicles running on CNG, as compared to those running on other fuels, is significantly low. At the prevailing price of fuel in Delhi, operational cost of CNG vehicles is 60% lower than petrol and 40% lower than diesel. PNG PNG is nothing but piped natural gas ie processed natural gas piped to the homes and establishments for the kitchen and home heating like geysers etc. PNG installation inside the premises contains only a limited quantity of natural gas at low pressure around 21 milibar and is much safer compared to LPG which is stored in a liquefied form in a cylinder. Advantages of PNG Versatile: Natural Gas is being used predominantly as a versatile fuel for domestic and commercial applications such as cooking, water heating, space heating and air conditioning. Environment-friendly: Natural Gas is one of the cleanest burning fossil fuels. Its combustion results in virtually no atmospheric emissions of sulphur dioxide (SO2), and far lower emissions of carbon monoxide (CO), reactive hydrocarbons and carbon dioxide, than combustion of other fossil fuels. In fact, when Natural Gas burns completely, it gives out carbon dioxide and water vapour, the same components that human beings exhale while breathing. Uninterrupted supply: PNG offers the convenience of ensuring continuous and adequate supply at all times, without any problems of storing in cylinders. Convenient to use: The domestic consumers of LPG are required to order a cylinder refill periodically and wait for its delivery. Switching to PNG renders this entire exercise unnecessary. PNG also eliminates the tedious routine of checking LPG cylinders for any suspected leakage, or it being underweight, at the time of delivery. Moreover, the user is spared the inconvenience of connecting and disconnecting the LPG cylinder when out of gas. Space occupied by LPG cylinders is also saved. Safe: The combustible mixture of Natural Gas and air does not ignite if the mixture is leaner than 5% and richer than 15% of the fuel:air ratio required for ignition. This narrow inflammability range puts PNG amongst the safest fuels. Natural Gas is lighter than air, therefore, in case of a leak, it rises and disperses into air, given adequate ventilation.

Indraprastha Gas

Sector Report 37

Financials

Income statement Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13ERevenue 10,781 17,505 23,431 30,288 Operating profit 3,808 4,987 5,812 7,486 Depreciation (775) (1,029) (1,509) (1,859)Interest expense 0 (132) (168) (168)Other income 211 31 270 270 Profit before tax 3,244 3,857 4,405 5,729 Taxes (1,089) (1,259) (1,467) (1,908)Net profit 2,155 2,598 2,938 3,821

Balance sheet Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13EEquity capital 1,400 1,400 1,400 1,400 Reserves 6,854 8,636 10,676 13,518 Net worth 8,254 10,036 12,076 14,918 Debt 0 2,098 2,098 2,098 Def tax liab (net) 238 290 290 290 Total liabilities 8,493 12,424 14,465 17,307 Fixed assets 8,340 12,485 15,077 18,218 Investments 170 170 170 170 Net working cap (1,230) (1,906) (2,754) (3,735)Inventories 278 480 642 830 Sundry debtors 335 671 899 1,162 Other curr assets 747 600 600 600 Sundry creditors (1,217) (1,679) (2,247) (2,904)Other curr liab (1,373) (1,978) (2,648) (3,423)Cash 1,213 1,674 1,972 2,654 Total assets 8,493 12,424 14,465 17,307 Cash flow statement Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13EProfit before tax 3,244 3,857 4,405 5,729Depreciation 775 1,029 1,509 1,859Tax paid (1,089) (1,259) (1,467) (1,908)Working capital ∆ 559 675 848 981Operating cashflow 3,488 4,302 5,295 6,662Capital expenditure (3,904) (5,174) (4,100) (5,000)Free cash flow (415) (872) 1,195 1,662Equity raised (0) - - -Investments 872 - - -Debt raised/repaid - 2,098 - -Dividends paid (735) (816) (898) (980)Other items 29 52 - -Net ∆ in cash (249) 462 298 682

Key ratios Y/e 31 Mar FY10 FY11E FY12E FY13EGrowth matrix (%) Revenue growth 26.4 62.4 33.9 29.3 Op profit growth 26.9 31.0 16.6 28.8 EBIT growth 25.3 22.9 14.7 28.9 Net profit growth 24.9 20.5 13.1 30.0 Profitability ratios (%) OPM 35.3 28.5 24.8 24.7 EBIT margin 30.1 22.8 19.5 19.5 Net profit margin 20.0 14.8 12.5 12.6 RoCE 41.8 38.1 34.0 37.1 RoNW 28.6 28.4 26.6 28.3 RoA 21.6 19.1 16.6 17.8 Per share ratios EPS 15.4 18.6 21.0 27.3 Dividend per share 4.5 5.0 5.5 6.0 Cash EPS 20.9 25.9 31.8 40.6 Book value per share 59.0 71.7 86.3 106.6 Valuation ratios (x) P/E 24.0 19.9 17.6 13.5 P/CEPS 17.6 14.2 11.6 9.1 P/B 6.3 5.1 4.3 3.5 EV/EBIDTA 13.2 10.4 8.9 6.8 Payout (%) Dividend payout 34.1 31.4 30.6 25.6 Tax payout 33.6 32.7 33.3 33.3 Liquidity ratios Debtor days 11 14 14 14 Inventory days 9 10 10 10 Creditor days 41 35 35 35 Leverage ratios Interest coverage - 30.3 27.2 35.1 Net debt / equity (0.1) 0.0 0.0 (0.0)Net debt / op. profit (0.3) 0.1 0.0 (0.1) Du-Pont Analysis Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13ETax burden (x) 0.66 0.67 0.67 0.67Interest burden (x) 1.00 0.97 0.96 0.97EBIT margin (x) 0.30 0.23 0.20 0.19Asset turnover (x) 1.08 1.29 1.32 1.41Financial leverage (x) 1.32 1.49 1.60 1.59RoE (%) 28.6 28.4 26.6 28.3

Petronet LNG – BUY‘Opportune player’

Sector: Oil & Gas

Sensex: 18,309


6m Avg vol (‘000Nos): 1,964


FV (Rs): 10

Bloomberg code: PLNG IB

Reuters code: PLNG.BO

BSE code: 532522 NSE code: PETRONET Prices as on 14 Jun, 2011




(%) 1m 3m 1yr Petronet 5.1 20.4 66.9 GAIL (1.2) (2.5) (7.9) GSPL (5.9) (2.7) (4.2) Guj Gas 9.0 (0.9) 33.4

Share price trend

80100120140160180


Petronet Sensex

Gas demand-supply balance favours Petronet The demand-supply balance for natural gas in the country is expected to be stretched over the next few years as 1) demand growth is likely to remain strong with newer applications across industries, 2) peak production from RIL’s KG-D6 field delayed and 3) no other major gas field going into production in the near term. These factors, we believe would translate into strong demand for LNG in the near term. With Petronet having tied up 7.5mtpa for Dahej and 1.5mtpa for Kochi, it is well poised to gain on the increasing gas deficit. Expanding capacities at opportune time Petronet has more than doubled its re-gasification capacity at the Dahej terminal from 5mtpa in FY08 to 10.5mtpa in FY10. While the re-gasification capacity is much higher, lack of marine facilities will prevent Petronet from operating beyond 10.5mtpa. Hence, the company is setting up a new jetty, which will allow the company to scale up its capacity to 14mtpa by FY14. To gain on the rising demand of gas in southern India, Petronet is setting up a terminal at Kochi having an initial capacity of 2.5mtpa is expected to commence operations in FY13E. The capacity can be further scaled up to 5mtpa. Port and power projects to aid growth Petronet is currently setting up a solid cargo port through a JV company; Adani Petronet (Dahej) port, where it has a 26% stake. The project commenced operations in H2 CY10 and involved an investment of US$270mn (Petronet’s equity share of US$26mn). The company also plans to set up a 1,200MW gas based power plant at Dahej. The construction of the project is likely to commence in CY11. These projects, we believe, would be earnings and value accretive over the medium term. Strong earnings visibility Petronet has long term sale and purchase agreement for 7.5mtpa of LNG with Rasgas of Qatar. On the customer side, it has offtake agreement with GAIL, IOC and BPCL. This provides a strong revenue visibility for Petronet over the longer term. Further, with limited threat to re-gasification margins, earnings visibility is also robust. Over FY11-13E we expect revenue CAGR of 34% and PAT CAGR of 11%. Financial summary Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13ERevenues 106,491 131,973 185,990 237,469yoy growth (%) 26.3 23.9 40.9 27.7 Operating profit 8,465 12,163 14,634 17,431 OPM (%) 7.9 9.2 7.9 7.3 Reported PAT 4,045 6,196 6,691 7,600yoy growth (%) (22.0) 53.2 8.0 13.6 EPS (Rs) 5.4 8.3 8.9 10.1P/E (x) 26.1 17.1 15.8 13.9Price/Book (x) 4.7 3.9 3.3 2.8EV/EBITDA (x) 15.0 11.2 10.4 8.8 Debt/Equity (x) 1.1 1.2 1.5 1.3 RoE (%) 19.2 25.2 22.8 21.9 RoCE (%) 16.3 19.5 18.1 17.0 Source: Company, India Infoline Research

Petronet LNG

Sector Report 39

Revision in LNG import forecasts for US Gas production and consumption in Qatar

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Production Consumptionbcm

Source: LNG Journal Source: BP Statistical Review

Increased shale gas production in US and higher liquefaction capacity in Qatar will keep LNG prices soft over the medium term

With peak production at KG-D6 field not expected to reach over the near term, LNG demand would offset the supply source

Global LNG scenario to keep prices soft over medium term We believe that the global gas scenario is likely to witness substantial changes following sharp increase in production of shale gas in the US. Against an expected increase in imports of LNG in the US, there are expectations that the country might start exporting LNG. With a 5% CAGR in shale production over the next decade, gas imports in the US (inclusive of pipeline imports from Canada and LNG imports) are estimated to account for only 8% of the total consumption as compared to about 11% in 2010. Apart from US, Qatar the largest exporter of LNG has also scaled up its capacity from nil to 77mtpa over the last 14 years. With supply growth substantially outpacing demand growth, we expect LNG prices to remain soft in the medium term.

Domestic demand for LNG to remain strong LNG imports accounted for 20% of natural gas consumption in the country. While the demand for natural gas continues to remain strong, domestic production has not been on expected lines. This is primarily on account of delay in peak production from RIL’s KG-D6 field and dawdling on commencement of production from other important deep water blocks. We believe this would translate into strong demand for LNG in the domestic markets. Expected trend in LNG supplies

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mmscmd

Source: Infraline

Petronet LNG

Sector Report 40

Increased transmission network will result in access to new markets for Petronet While capacity at Dahej is being expanded from 10.5mtpa to 14mtpa by FY14, Kochi terminal will commence operations with 2.5mtpa capacity and will be further expanded to 5mtpa With majority of the volumes on contracts, Petronet’s business is safeguarded from gyrations in international LNG markets

Expanding domestic gas transmission network to increase market reach for Petronet One of the key reasons restricting the demand growth for LNG has been the lack of gas transmission pipeline capacity along with an uneven spatial distribution. Majority of the pipelines are in the western and northern India. Southern and Eastern parts of the country are lagging behind. The current operational LNG terminals are also located mainly in the western India. With GAIL embarking on an aggressive capacity expansion program whereby it plans to double its transmission capacity over the next three years, we believe the demand will get a boost from newer markets within the country. Petronet expanding capacities at opportune time Petronet has doubled its re-gasification capacity at the Dahej terminal from 5mtpa in FY08 to 10.5mtpa in FY10. While the re-gasification capacity is much higher, lack of marine facilities will not allow Petronet to operate beyond 10.5mtpa. Hence, the company is setting up a new jetty, which will allow the company to scale up its capacity to 14mtpa by FY14. To gain on the rising demand of gas in the southern India, PLG is setting up a terminal at Kochi having an initial capacity of 2.5mtpa is expected to commence operations in FY13E. The capacity can be further scaled up to 5mtpa. Petronet capacity expansion trend

02468

101214161820

FY09 FY10 FY11E FY12E FY13E FY14E FY15E

Dahej Kochi

mtpa

Source: Company, India Infoline Research Substantial portion of Petronet volumes on long term contracts For its Dahej plant, Petronet has a long term contract with Rasgas, Qatar for 7.5mn tons. Additionally, the company has tied up 1.1mn tons for FY12 and FY13 while GAIL and GSPC have reserved 0.8mtpa capacity taking the total long term contracts to about 9.4mtpa. This means the company would have 1.1mtpa at Dahej for re-gasifying spot cargos, whereby it earns US$0.3/mmbtu marketing margins over and above its re-gasification charges. For Kochi, Petronet has tied up 1.4mtpa from Exxon Mobil’s Gorgon project in Australia. The company is scouting for other longer term contracts as well.

Petronet LNG

Sector Report 41

With a strained demand supply scenario Petronet will be well placed to take an annual 5% increase in its re-gasification charges Pooling of high-priced LNG with low-priced domestic gas will ensure that high-priced LNG is absorbed in the market

Re-gasification charges would continue to rise Petronet’s re-gasification charges for its Dahej terminal were fixed at Rs23.7/mmbtu for CY04 with a 5% escalation per annum. Considering that the current tariffs are at Rs33.35/mmbtu. The original formula was based on the capacity of 5mtpa and initial project costs of Rs25bn to enable the company earn equity IRR of 16%. However, Petronet has increased the capacity since then through de-bottlenecking and new expansion which has brought the per ton capital cost of the project much below the initial estimates. This has enabled the company to earn RoE of more than 20% for the past few years. Market participants have been skeptic of sustenance of such high RoE and are expecting that further increase in re-gas charges would be difficult to come by for the company. However, we believe that strong demand for LNG would allow the company to implement the 5% hike per annum. Petronet re-gasification charges trend

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5.0

10.0

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35.0

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1

CY1

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3

Rs/mmbtu

Source: Company, India Infoline Research Implementation of gas pooling could be a big positive Power sector would continue to be the largest consumer of gas in the country. However, with LNG contracts being expensive than domestic supplies, the power plants would be able to dispatch power only during peak requirements. Hence the viability of LNG-based power plants for base load is impacted. In order to improve dynamics for such plants. the Ministry of Petroleum and Natural Gas has been contemplating pooling of volumes from various domestic fields and LNG terminals. This would make gas more affordable to priority sectors such as power and fertilizer. The mixing of high-priced LNG with low-priced domestic gas will ensure that high-priced LNG is absorbed in the market. Thus, capacities at existing and planned re-gasification terminals would be better utilized leading to direct benefits for players like Petronet. Port and power projects to aid growth Petronet is currently setting up a solid cargo port through a JV company; Adani Petronet (Dahej) port, where it has a 26% stake. The project has recently commenced operations. It involved an investment of US$270mn (Petronet’s equity share of US$26mn). Petronet also plans to set up a 1,200MW gas based power plant at Dahej. The construction of the project is likely to commence in CY11. These projects, we believe, would be earnings and value accretive over the medium term.

Petronet LNG

Sector Report 42

Volume growth to drive topline CAGR of 34% during FY11-13E

Strong topline growth led by increased volumes During FY11-13E, we expect Petronet to report a revenue CAGR of 34%. The growth would be primarily driven by increase in volumes from 7.5mn tons in FY10 to about 11mn tons in FY13. While we expect volumes from Dahej to be at 10mn tons in FY13 from 7.5mn tons in FY10, Kochi terminal is estimated to process 1.2mn tons in its first year of commercial operations. 5% per annum increase in re-gas charges would add to realizations. Petronet revenue growth

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50,000

100,000

150,000

200,000

250,000

FY08 FY09 FY10 FY11E FY12E FY13E0%

5%

10%

15%

20%

25%

30%

35%Total sales yoy grow th

Rs mn

Source: Company, India Infoline Research Free cash flow positive by FY13 We expect the company to generate robust operating cash flows over the next three years based on strong volume growth. However, capital expenditure related to Kochi terminal will keep the company free cash flow negative until FY13. Recommend BUY with a target price of Rs162 Considering strong earnings growth expectations in the near term, we prefer to value Petronet on PE basis. We assign a P/E of 16x to FY13E EPS of Rss10.1, arriving at a target price Rs162. We recommend BUY. Concerns

Spike in LNG prices could lower the demand for spot LNG

Delays in capacity expansion at Dahej and commencement of Kochi terminal could impact our estimates

Steep fall in crude prices could impact the economic viability of LNG vis-à-vis liquid fuels

Petronet LNG

Sector Report 43

Company background Petronet LNG, incorporated in 1998, was formed as a JV by the Government of India to import LNG and set up LNG terminals in the country. Its promoters are GAIL, ONGC, Indian Oil Corporation Limited (IOCL) and Bharat Petroleum Corporation Limited (BPCL). It currently has one terminal at Dahej and is in the process of constructing another at Kochi. LNG chain

Source: Company, India Infoline Research Dahej LNG Terminal

Located at West coast, Gujarat (India) in the Gulf of Cambay. Commenced operations in 2004 with nameplate capacity of 5mtpa. Capacity expanded to 10mtpa in July, 2009. Terminal comprising :

2.5 KM long Jetty with unloading facilities Four LNG storage tanks (of 148000 CBM each) Re-gas facilities Truck loading facilities for onland sales.

7.5mtpa sourced through Long Term Contract with RasGas, Qatar with back to back sales arrangement with GAIL, IOCL & BPCL.

Additional LNG being sourced through Spot /Short Term Contracts & sold to Offtakers/ Bulk Buyers.

Connected to major trunk pipelines HBJ & DUPL of GAIL and Gujarat’s GSPL Network.

Kochi Terminal

LNG Terminal part of newly created Special Economic Zone & Petronet one of the Codevelopers.

Capacity - 2.5mtpa, being expanded to 5mtpa. Tied up 1.44mtpa LNG from Exxon Mobil’s Gorgon Venture in

Australia. Work for building two LNG Storage Tanks awarded to IHI, Japan. Work related to Re-gasification Facilities awarded to CTCI, Taiwan. Work related to Marine Facilities awarded to Afcons Infrastructure

Limited. Progress on schedule, overall completion 71%, Scheduled

Commissioning in Q3 CY12.

Petronet LNG

Sector Report 44

Financials

Income statement Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13ERevenue 106,491 131,973 185,990 237,469 Operating profit 8,465 12,163 14,634 17,431 Depreciation (1,609) (1,847) (2,182) (3,622)Interest expense (1,839) (1,931) (3,065) (3,065)Other income 978 680 600 600 Profit before tax 5,995 9,064 9,986 11,343 Taxes (1,950) (2,868) (3,295) (3,743)Net profit 4,045 6,196 6,691 7,600

Balance sheet Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13EEquity capital 7,500 7,500 7,500 7,500 Reserves 14,849 19,302 24,267 30,142 Net worth 22,349 26,802 31,767 37,642 Debt 24,998 32,161 47,161 47,161 Def tax liab (net) 3,262 3,480 2,692 2,692 Total liabilities 50,609 62,443 81,621 87,495 Fixed assets 42,012 49,053 68,829 74,829 Investments 5,386 11,649 11,649 11,649 Net working cap (194) 201 582 730 Inventories 2,223 2,480 3,519 4,493 Sundry debtors 5,035 8,472 12,023 15,350 Other curr assets 1,554 1,383 1,645 1,965 Sundry creditors (6,043) (8,500) (12,063) (15,402)Other curr liab (2,963) (3,634) (4,542) (5,678)Cash 3,405 1,540 561 288 Total assets 50,609 62,443 81,621 87,495 Cash flow statement Y/e 31 Mar (Rs m) FY10 FY11E FY12E FY13EProfit before tax 5,995 9,064 9,986 11,343Depreciation 1,609 1,847 2,182 3,622Tax paid (1,950) (2,868) (3,295) (3,743)Working capital ∆ 2,791 (395) (381) (148)Operating cashflow 8,445 7,648 8,492 11,074Capital expenditure (10,465) (8,888) (21,958) (9,622)Free cash flow (2,020) (1,240) (13,466) 1,452Equity raised 5 (18) - -Investments (2,344) (6,263) - -Debt raised/repaid 2,181 7,163 15,000 -Dividends paid (1,536) (1,725) (1,725) (1,725)Other items 540 218 (788) -Net ∆ in cash (3,173) (1,865) (979) (273)

Key ratios

Y/e 31 Mar FY10 FY11E FY12E FY13EGrowth matrix (%) Revenue growth 26.3 23.9 40.9 27.7 Op profit growth (6.1) 43.7 20.3 19.1 EBIT growth (10.5) 40.4 18.7 10.4 Net profit growth (22.0) 53.2 8.0 13.6 Profitability ratios (%) OPM 7.9 9.2 7.9 7.3 EBIT margin 7.4 8.3 7.0 6.1 Net profit margin 3.8 4.7 3.6 3.2 RoCE 16.3 19.5 18.1 17.0 RoNW 19.2 25.2 22.8 21.9 RoA 7.1 9.2 7.7 7.3 Per share ratios EPS 5.4 8.3 8.9 10.1 Dividend per share 1.8 2.0 2.0 2.0 Cash EPS 7.5 10.7 11.8 15.0 Book value per share 29.8 35.7 42.4 50.2 Valuation ratios P/E 26.1 17.1 15.8 13.9P/CEPS 18.7 13.1 11.9 9.4P/B 4.7 3.9 3.3 2.8EV/EBIDTA 15.0 11.2 10.4 8.8 Payout (%) Dividend payout 38.0 27.8 25.8 22.7 Tax payout 32.5 31.6 33.0 33.0 Liquidity ratios Debtor days 17 23 24 24 Inventory days 8 7 7 7 Creditor days 21 24 24 24 Leverage ratios Net debt / equity 1.0 1.1 1.5 1.2 Net debt / op. profit 2.6 2.5 3.2 2.7

Du-Pont Analysis


Recommendation parameters for fundamental reports:

Buy – Absolute return of over +10%

Market Performer – Absolute return between -10% to +10%

Sell – Absolute return below -10%

Published in 2011. © India Infoline Ltd 2011 This report is for the personal information of the authorised recipient and is not for public distribution and should not be reproduced or redistributed without prior permission. The information provided in the document is from publicly available data and other sources, which we believe, are reliable. Efforts are made to try and ensure accuracy of data however, India Infoline and/or any of its affiliates and/or employees shall not be liable for loss or damage that may arise from use of this document. India Infoline and/or any of its affiliates and/or employees may or may not hold positions in any of the securities mentioned in the document. The report also includes analysis and views expressed by our research team. The report is purely for information purposes and does not construe to be investment recommendation/advice or an offer or solicitation of an offer to buy/sell any securities. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. Investors should not solely rely on the information contained in this document and must make investment decisions based on their own investment objectives, risk profile and financial position. The recipients of this material should take their own professional advice before acting on this information. India Infoline and/or its affiliate companies may deal in the securities mentioned herein as a broker or for any other transaction as a Market Maker, Investment Advisor, etc. to the issuer company or its connected persons. This report is published by IIFL ‘India Private Clients’ research desk. IIFL has other business units with independent research teams separated by 'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc and therefore, may at times have, different and contrary views on stocks, sectors and markets.

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‘Fuel for Growth’

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