IGL - Company Update - 220610 - Business...

Please refer to important disclosures at the end of this report

Company Update | Oil & GasCompany Update | Oil & GasCompany Update | Oil & GasCompany Update | Oil & GasCompany Update | Oil & Gas

June 22, 2010

Indraprastha GasIndraprastha GasIndraprastha GasIndraprastha GasIndraprastha GasTurning over a new leaf

The hike in CNG prices have eliminated key headwinds for IGL viz. expected margin

contraction and reduction in earnings and return ratios, to a large extent. Relative

ease in pass through of the APM gas price hike indicates absence of regulatory

risks in the near term. This coupled with strong CNG conversions and growth in

newer geographies would result in strong earnings growth and re-rating of the

stock. We revise our target price on the stock to Rs301 (Rs210) owing to the upward

revision in earnings estimates and lower WACC estimates (to reflect lower risk).

WWWWWe upgrade the stock to Buy from Reduce earliere upgrade the stock to Buy from Reduce earliere upgrade the stock to Buy from Reduce earliere upgrade the stock to Buy from Reduce earliere upgrade the stock to Buy from Reduce earlier.....

Margin erosion risk subsides:Margin erosion risk subsides:Margin erosion risk subsides:Margin erosion risk subsides:Margin erosion risk subsides: We had concerns over sustainability of IGL's

high margins, which we believed were fueled by lower gas costs (subsidised gas).

Also, post end of marketing exclusivity in CY2011 we believed a level playing field

would emerge and IGL would have to source gas at higher prices in turn squeezing

its marketing margins. However, with the hike in CNG prices, our assumption of

margin fall no longer holds good. It also points at the absence of regulatory risks in

the near term. Going ahead, given that KG-D6 and APM gas prices are freezed till

FY2014, IGL would not be required to make significant CNG price hikes. Thus, the

margin erosion risk has subsided substantially.

VVVVVolumes to propel profitability: olumes to propel profitability: olumes to propel profitability: olumes to propel profitability: olumes to propel profitability: We expect strong growth in CNG conversion in

IGL's area of operation driven by discretionary CNG demand due to better

economics. This coupled with strong growth expected in the domestic PNG segment

is likely to drive the company's volume growth going ahead. We expect CNG and

PNG volumes to register a CAGR of 14.4% and 36.2% over FY2010-12E respectively,

resulting in overall volumes CAGR of 16.9% during the mentioned period. Thus,

strong volume growth coupled with stable EBDITA/scm are likely to drive the

company’s profitability (CAGR of 17.5% over FY2010-12E) going ahead.

Stock Info

Shareholding Pattern (%)

Sector Oil & Gas

Market Cap (Rs cr) 3,575

Beta 0.5

52 Week High / Low 266/126

Avg Daily Volume 178384

Face Value (Rs) 10

BSE Sensex 17,750

Nifty 5,317

Reuters Code IGAS.BO

Bloomberg Code IGL@IN

Promoters 45.0

MF / Banks / Indian FIs 32.4

FII / NRIs / OCBs 11.9

Indian Public / Others 10.7

Abs. (%) 3m 1yr 3yr

Sensex 1.9 23.9 22.7

IGL 14.0 95.6 110.8

Investment Period 12 months

BUYBUYBUYBUYBUYCMP Rs255Target Price Rs301

Source: Company, Angel Research

Key Financials

Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E

TTTTTotal operating Incomeotal operating Incomeotal operating Incomeotal operating Incomeotal operating Income 853 853 853 853 853 1,084 1,084 1,084 1,084 1,084 1,612 1,612 1,612 1,612 1,612 1,985 1,985 1,985 1,985 1,985

% chg 20.8 27.1 48.7 23.1

Net PNet PNet PNet PNet Profitrofitrofitrofitrofit 172 172 172 172 172 215 215 215 215 215 244 244 244 244 244 298 298 298 298 298

% chg (1.1) 24.9 13.4 21.9

OPM (%) 35.2 35.7 29.3 30.5

EPS (Rs)EPS (Rs)EPS (Rs)EPS (Rs)EPS (Rs) 12.3 12.3 12.3 12.3 12.3 15.4 15.4 15.4 15.4 15.4 17.5 17.5 17.5 17.5 17.5 21.3 21.3 21.3 21.3 21.3

P/E (x) 20.7 16.6 14.6 12.0

P/BV (x) 5.2 4.3 3.6 3.0

RoE (%) 27.4 28.6 27.0 27.6

RoCE (%) 34.8 38.1 33.8 31.6

EV/Sales (x) 3.9 3.2 2.2 1.9

EV/EBITDA (x) 11.1 8.9 7.7 6.3

Amit VAmit VAmit VAmit VAmit Voraoraoraoraora+91 22 4040 3800 Ext: 322

[email protected]

Deepak PDeepak PDeepak PDeepak PDeepak Pareekareekareekareekareek+91 22 4040 3800 Ext: 340

[email protected]

June 22, 2010 2

Indraprastha Gas | Company Update

Investment Arguments

Margin erosion risks subside substantially

Following increase in the APM gas prices, IGL has hiked the prices of compressed

natural gas (CNG) by over 26%. The CNG rates in Delhi have increased by Rs5.6/kg

to Rs27.5/kg from Rs21.9/kg. Similarly, the prices in Noida, Greater Noida and

Ghaziabad stand increased at Rs30.6/kg. The hike has come as a positive surprise as

we had been building in 50% pass through of the APM as well as non-APM gas price

hike in our estimates. Earlier statements by the Petroleum Secretary and the government

had also indicated that IGL may not be able to fully pass through the price hike

needed to offset the impact on margins.

We had estimated the required increase in the CNG prices on account of the APM gas

price hike at around Rs3.4/kg (in FY2011E). Hence, the price hike of Rs5.6/kg more

than offsets the increase in the APM gas price (refer Exhibit 1). According to

management, the increase could be further segregated into Rs5.0/kg on account of

increase in gas cost, and the balance to the increase in operating expenditure. It may

be noted here that IGL has changed over from the gas-based compressors to electric

compressors, which has resulted in reduction in the repairs and maintenance costs.

However, the same has increased the company's operating expenditure.

Exhibit 1: APM gas prices break-upPPPPParticularsarticularsarticularsarticularsarticulars FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E

Consumer Gas Price (TSCM) (10,000) Cal. 3,840 6,322 6,818

Consumer Gas Price(TSCM) (8,300) Cal. 3,187 5,247 5,659

Royalty (@10%) (TSCM) 266 623 623

Purchase tax (TSCM) 117 274 274

Gas marketing margins (TSCM) 200 200 200

HBJ Transportation charges

(including service tax) (TSCM) 1,061 1,061 1,061

DESU Maruti Transportation charges

(including service tax)(TSCM) 614 633 652

Total Price (TSCM) 5,445 8,038 8,469

PPPPPrice per SCMrice per SCMrice per SCMrice per SCMrice per SCM 5.4 5.4 5.4 5.4 5.4 8.0 8.0 8.0 8.0 8.0 8.5 8.5 8.5 8.5 8.5

PPPPPrice per Kg (1 SCM = 1.31 kg)rice per Kg (1 SCM = 1.31 kg)rice per Kg (1 SCM = 1.31 kg)rice per Kg (1 SCM = 1.31 kg)rice per Kg (1 SCM = 1.31 kg) 7.1 7.1 7.1 7.1 7.1 10.5 10.5 10.5 10.5 10.5 11.1 11.1 11.1 11.1 11.1

Required Increase in CNG prices per KgRequired Increase in CNG prices per KgRequired Increase in CNG prices per KgRequired Increase in CNG prices per KgRequired Increase in CNG prices per Kg 3.40 3.40 3.40 3.40 3.40 0.56 0.56 0.56 0.56 0.56Source: Company, Angel Research

We believe that the increase of Rs5.0/kg on account of increase in gas cost captures

the increase in the APM gas prices (Rs3.4/kg), higher costs incurred in procuring

KG-D6 gas and R-LNG and higher gas costs for the domestic PNG segment.

CNG rates in Delhi have increased byCNG rates in Delhi have increased byCNG rates in Delhi have increased byCNG rates in Delhi have increased byCNG rates in Delhi have increased by

Rs5.6/kg to Rs27.5/kg from Rs21.9/kgRs5.6/kg to Rs27.5/kg from Rs21.9/kgRs5.6/kg to Rs27.5/kg from Rs21.9/kgRs5.6/kg to Rs27.5/kg from Rs21.9/kgRs5.6/kg to Rs27.5/kg from Rs21.9/kg.....

The hike has come as a positive surpriseThe hike has come as a positive surpriseThe hike has come as a positive surpriseThe hike has come as a positive surpriseThe hike has come as a positive surprise

as we had been building in 50% passas we had been building in 50% passas we had been building in 50% passas we had been building in 50% passas we had been building in 50% pass

through of the APM as well as non-APMthrough of the APM as well as non-APMthrough of the APM as well as non-APMthrough of the APM as well as non-APMthrough of the APM as well as non-APM

gas price hike in our estimatesgas price hike in our estimatesgas price hike in our estimatesgas price hike in our estimatesgas price hike in our estimates

According to management, the increaseAccording to management, the increaseAccording to management, the increaseAccording to management, the increaseAccording to management, the increase

could be further segregated intocould be further segregated intocould be further segregated intocould be further segregated intocould be further segregated into

Rs5.0/kg on account of increase in gasRs5.0/kg on account of increase in gasRs5.0/kg on account of increase in gasRs5.0/kg on account of increase in gasRs5.0/kg on account of increase in gas

cost, and the balance to the increase incost, and the balance to the increase incost, and the balance to the increase incost, and the balance to the increase incost, and the balance to the increase in

operating expenditureoperating expenditureoperating expenditureoperating expenditureoperating expenditure

June 22, 2010 3


The PNG prices have been left unchanged by IGL as any hike in the same would hit

the economics or inducement to switch from domestic LPG to domestic PNG.

Currently, the new PNG user enjoys a marginal advantage of 3.4% over the domestic

LPG users.

Earlier, we had harbored concerns over sustainability of the company's high-margin

business model, as the margins were fueled largely by the lower gas costs (subsidised

gas). IGL charged its CNG and PNG customers based on the prices of alternative

liquid fuel, while it procured subsidised gas. Thus, IGL enjoyed the benefits of subsidy

rather than passing it on to customers. We held that post end of IGL's marketing

exclusivity in CY2011 a level playing field would emerge wherein IGL would be

required to source gas at higher prices in turn squeezing its marketing margins.

However, with the current hike in CNG prices by a significant 25.6%, our assumption

of margin compression no longer holds good. It also points at the absence of

regulatory risks in the near term.

Going ahead, given that KG-D6 and APM gas prices are freezed till FY2014, IGL

would not be required to make significant CNG price hikes barring a minor increase

due to change in the procurement mix and increase in operating expenditure. Thus,

the margin erosion risk has subsided substantially. Moreover, in spite of the recent

increase in the CNG prices in the NCT, the CNG prices in the region are the least in

the country owing to the lower taxes levied by the Delhi government (refer Exhibit

4 & 5). Therefore, further increase in the CNG prices would not be a tough task.

Exhibit 2: Weighted Average gas pricesPPPPParticularsarticularsarticularsarticularsarticulars FY10FY10FY10FY10FY10 FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E

APM gas purchased (mmscm)APM gas purchased (mmscm)APM gas purchased (mmscm)APM gas purchased (mmscm)APM gas purchased (mmscm) 748748748748748 767767767767767 803803803803803

as % of the total gas (%) 89.8 77.3 70.5

Cost of APM gas (Rs/scm) 5.4 8.0 8.5

Non-APM Gas purchased (mmscm)Non-APM Gas purchased (mmscm)Non-APM Gas purchased (mmscm)Non-APM Gas purchased (mmscm)Non-APM Gas purchased (mmscm) 8585858585 225225225225225 336336336336336

as % of the total gas (%) 10.2 22.7 29.5

Cost of Non-APM gas (Rs/scm) 11.9 12.1 11.8

WWWWWeighted average cost of gas (Rs/scm)eighted average cost of gas (Rs/scm)eighted average cost of gas (Rs/scm)eighted average cost of gas (Rs/scm)eighted average cost of gas (Rs/scm) 6.16.16.16.16.1 9.09.09.09.09.0 9.49.49.49.49.4

PPPPPrice per Kg (1 SCM = 1.31 kg)rice per Kg (1 SCM = 1.31 kg)rice per Kg (1 SCM = 1.31 kg)rice per Kg (1 SCM = 1.31 kg)rice per Kg (1 SCM = 1.31 kg) 8.08.08.08.08.0 11.711.711.711.711.7 12.412.412.412.412.4

Required Increase in CNG prices per KgRequired Increase in CNG prices per KgRequired Increase in CNG prices per KgRequired Increase in CNG prices per KgRequired Increase in CNG prices per Kg 3.743.743.743.743.74 0.650.650.650.650.65Source: Company, Angel Research

Exhibit 3: PNG economics for domestic consumers

Cost of Domestic LPG (14.2kg cylinder, Rs) 310

Rs/ kg 21.9

Calorific value of LPG (Kcal) 11,007

Price for Rs/10,000Kcal 19.9

Cost for new PNG connection (Rs/scm) 15.9

Calorific value of PNG sold (Kcal) 8,300

Price for Rs/10,000Kcal 19.2

Price advantage over LPG (Rs) 0.68

Advantage (%)Advantage (%)Advantage (%)Advantage (%)Advantage (%) 3.4 3.4 3.4 3.4 3.4Source: Company, Angel Research

Going ahead, given that KGGoing ahead, given that KGGoing ahead, given that KGGoing ahead, given that KGGoing ahead, given that KG-D6 and-D6 and-D6 and-D6 and-D6 and

APM gas prices are freezed till FY2014,APM gas prices are freezed till FY2014,APM gas prices are freezed till FY2014,APM gas prices are freezed till FY2014,APM gas prices are freezed till FY2014,

IGL would not be required to makeIGL would not be required to makeIGL would not be required to makeIGL would not be required to makeIGL would not be required to make

significant CNG price hikessignificant CNG price hikessignificant CNG price hikessignificant CNG price hikessignificant CNG price hikes

June 22, 2010 4


IGL's profitability and fair value estimates are highly sensitive to the per unit change in

its gross margins. To put things in perspective, if the gross margins are reduced by

Rs1.0/scm from FY2011E onwards, our fair value estimates would decline by a

whopping 26% to Rs221/share. Similarly, our earnings estimates also stands reduced

by 25.4% and 23.9% for FY2011E and FY2012E respectively under the same scenario.

However, with the recent increase in the CNG prices, the pricing risk has subsidised to

a greater extent. Factoring the same, we have reduced our discount rate/WACC

(weighted average cost of capital) by 50bp to 11.5% from 12.0% earlier.

Volumes to propel profitability

The conversion economics continues to remain strong irrespective of the recent hike in

CNG prices, as CNG vehicle continue offer savings of around 57.3% over the petrol

driven vehicles (largely on account of lower taxes on CNG compared to Petrol prices).

Moreover, in Delhi penetration of the CNG vehicles is still at lower levels and launch

of the newer CNG variants cars by the automotive companies could keep conversions

in high growth orbit.

Exhibit 4: Comparative Taxes on CNG pricesStateStateStateStateState NCT of DelhiNCT of DelhiNCT of DelhiNCT of DelhiNCT of Delhi Uttar PUttar PUttar PUttar PUttar Pradeshradeshradeshradeshradesh HaryanaHaryanaHaryanaHaryanaHaryana GujaratGujaratGujaratGujaratGujarat MumbaiMumbaiMumbaiMumbaiMumbai ThaneThaneThaneThaneThane PunePunePunePunePune

Applicable TApplicable TApplicable TApplicable TApplicable Taxesaxesaxesaxesaxes

Service Tax on

City Gas Network (%) 10.30 10.30 10.30 10.30 10.30 10.30 10.30

Excise Duty +

Educational Cess (%) 14.42 14.42 14.42 14.42 14.42 14.42% 14.42

VAT (%) N.A. 13.50 12.50 12.25 12.50 12.50 12.50

Additional Vat N.A. N.A. N.A. 2.50 N.A. N.A. N.A.

Octroi N.A. N.A. N.A. N.A. N.A. 5% of Gas Cost 2.50Source: Infraline, Angel Research

Exhibit 5: Comparative CNG prices across key cities in India

Name of the CityName of the CityName of the CityName of the CityName of the City CNG PCNG PCNG PCNG PCNG Price (Rs/kg)rice (Rs/kg)rice (Rs/kg)rice (Rs/kg)rice (Rs/kg)

Delhi 27.5

Rajahmundry 28.0

Kanpur 29.0

Bareilly 29.0

Surat, Bharuch, Ankleswar 30.0

Noida 30.6

Greater Noida 30.6

Ghaziabad 30.6

Lucknow 31.0

Mumbai 31.5

Mira Bhayandar 31.7

Navi Mumbai 31.8

Thane 32.4

Agra 35.0

Pune 35.4Source: Infraline, Angel Research

With the recent increase in the CNGWith the recent increase in the CNGWith the recent increase in the CNGWith the recent increase in the CNGWith the recent increase in the CNG

prices, the pricing risk has subsidised toprices, the pricing risk has subsidised toprices, the pricing risk has subsidised toprices, the pricing risk has subsidised toprices, the pricing risk has subsidised to

a greater extent. Fa greater extent. Fa greater extent. Fa greater extent. Fa greater extent. Factoring the same, weactoring the same, weactoring the same, weactoring the same, weactoring the same, we

have reduced our discount rate/Whave reduced our discount rate/Whave reduced our discount rate/Whave reduced our discount rate/Whave reduced our discount rate/WAAAAACCCCCCCCCC

(weighted average cost of capital) by(weighted average cost of capital) by(weighted average cost of capital) by(weighted average cost of capital) by(weighted average cost of capital) by

50bp to 11.5% from 12.0%50bp to 11.5% from 12.0%50bp to 11.5% from 12.0%50bp to 11.5% from 12.0%50bp to 11.5% from 12.0%

June 22, 2010 5


Exhibit 6: CNG saving over PetrolPPPPParticularsarticularsarticularsarticularsarticulars FY2007FY2007FY2007FY2007FY2007 FY2008FY2008FY2008FY2008FY2008 FY2009FY2009FY2009FY2009FY2009 FY2010FY2010FY2010FY2010FY2010 CurrentCurrentCurrentCurrentCurrent

Petrol (Rs/litre) 45.37 43.65 47.25 43.93 47.43

CNG (Rs/kg) 18.98 19.18 18.90 20.55 27.50

Equivalent petrol prices (Rs/kg) 62 59 64 60 64

Savings (Rs/kg) 43 40 45 39 37

Savings over petrol (%) 69.2% 67.6% 70.5% 65.5% 57.3%Source: PPAC, Angel Research

We expect strong growth in CNG conversion in IGL's area of operation driven by

discretionary CNG demand due to better economics. This coupled with strong growth

expected in the domestic PNG segment is likely to drive the company's volume growth

going ahead. We expect CNG volumes to register a CAGR of 14.4% over

FY2010-12E. The growth would be driven by additional 2,000 buses expected to hit

the road in FY2011E on account of the Commonwealth games along with strong

conversion of private vehicles. We expect private vehicle conversion at 4,250/month

for FY2011E and FY2012E. Moreover, given talks of possible deregulation of the auto

fuel prices, the conversion trend could further gather momentum from current levels

and pose upside risk to our estimates. To keep pace with increasing CNG demand,

IGL is likely to commission additional 53 CNG stations over the period.


Exhibit 8: Strong vehicle conversions

-

100,000

200,000

300,000

400,000

500,000

FY2006 FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E

CNG Buses Auto RTV (LCVs) Others


Exhibit 7: CNG stations

134146 153

163181

191

219

-

50

100

150

200

250

FY2006 FY2007 FY2008 FY2009 FY2010E FY2011E FY2012E

June 22, 2010 6


The company's PNG segment contributes a mere 13% to overall revenues. Lowercontribution is however due to greater focus on development of the CNG infrastructurein the past adhering to the judicial verdict. However, now with most of IGL's CNGinfrastructure in place, it has turned its focus towards the fast-growing PNG segment.IGL expects to add 50,000 domestic users annually. Given the relatively lowerpenetration of PNG in the region, we believe the targets can be achieved and aidvolumes. With this, we expect the PNG segment volumes to post a robust CAGR of36.2% over FY2010-12E.

Owing to the significant improvement in gas availability in the country, IGL has alsostarted tapping the industrial users. IGL's industrial sales volumes constitute less than5% of its overall sales volumes unlike peer Gujarat Gas, which has higher share ofindustrial volumes. Thus, IGL's industrial segment has huge potential to ramp up inthe long run particularly with Delhi and its adjoining areas having demand of around3-4mmscmd. The company currently supplies to around 25-26 users in the industrialsegment, with the off-take increasing from around 1,600/scm per day per user inFY2010 to 4,500/scm per day per user now.

Overall volumes are expected to register 16.9% CAGR over FY2010-12E on robustvolume growth expected in CNG and PNG. We estimate revenue to register a robustCAGR of 35.5% over FY2010-12E on the back of strong volumes and higher realisations(on account of the 25.5% hike in CNG prices undertaken in Delhi to pass through theincrease in gas cost). Thus, we expect bottom-line to register 17.5% CAGR over thementioned period.

Growth beyond NCT - Scalability concerns reducing

Apart from the margin erosion concerns, lack of growth in the newer areas, viz. Noida,Greater Noida, Ghaziabad, Faridabad and Gurgoan impacted performance of thestock on the bourses. Pertinently, growth beyond the NCT was restricted for IGL due tolitigation and gas allocation constraints in the earlier years. In case of the NCR townsof Faridabad and Gurgoan, networks were built by Adani Energy and Haryana CityGas respectively, which prevented entry of IGL into these regions. Also, gas allocationinitially made to IGL for these regions were given to respective companies on thedirections of the Supreme Court. IGL's expansion plan in Ghaziabad was hit due to


Exhibit 9: EBITDA/scm likely to hold on

4.805.22

5.48

4.554.99 5.12

5.72

-

1.00

2.00

3.00

4.00

5.00

6.00

7.00

FY2006 FY2007 FY2008 FY2009 FY2010 FY2011EFY2012E

(Rs/

scm

)


Exhibit 10: PAT growth trend

14.5

30.0

26.5

(1.1)

24.9

13.4

21.9

(5.0)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

0

50

100

150

200

250

300

350

FY2006 FY2008 FY2010 FY2012E

PAT (Rs Cr) PAT growth (%)

(Rs

cr)

(%)

WWWWWe expect the PNG volumes to post ae expect the PNG volumes to post ae expect the PNG volumes to post ae expect the PNG volumes to post ae expect the PNG volumes to post arobust CArobust CArobust CArobust CArobust CAGR of 36.2% over FY2010-12EGR of 36.2% over FY2010-12EGR of 36.2% over FY2010-12EGR of 36.2% over FY2010-12EGR of 36.2% over FY2010-12E

Overall volumes are expected to registerOverall volumes are expected to registerOverall volumes are expected to registerOverall volumes are expected to registerOverall volumes are expected to register16.9% CA16.9% CA16.9% CA16.9% CA16.9% CAGR over FY2010-12E onGR over FY2010-12E onGR over FY2010-12E onGR over FY2010-12E onGR over FY2010-12E onrobust volume growth expected in CNGrobust volume growth expected in CNGrobust volume growth expected in CNGrobust volume growth expected in CNGrobust volume growth expected in CNGand PNGand PNGand PNGand PNGand PNG

June 22, 2010 7


authorisation issues with the regulator. However, with the regulatory concerns alreadyaddressed by the Delhi High Court, we expect growth in Noida, greater Noida andGhaziabad to take care of the scalability concerns.

According to the PNGRB, the demand estimates for Ghaziabad currently stands closeto 0.5mmscmd (18.4% of IGL's expected throughput for FY2011E), which could rise to0.94mmscmd in the long run. Similarly, for Noida the demand estimates currentlystand at 0.14mmscmd, which could rise to 0.35mmscmd in the long run. Thus,expansion in these geographies is likely to drive the company's growth going ahead.

Exhibit 11: Demand potentialPPPPParticularsarticularsarticularsarticularsarticulars Noida Noida Noida Noida Noida Ghaziabad Ghaziabad Ghaziabad Ghaziabad Ghaziabad

Population (2001 Census, in mn) 0.30 0.96

Estimated households (mn) 0.07 0.18

VVVVVehicle Pehicle Pehicle Pehicle Pehicle Populationopulationopulationopulationopulation

Buses 3,150 7,200

Three wheelers 480 11,200

Four Wheelers 2,750 50,500

Estimated Current demand (mmscmd)Estimated Current demand (mmscmd)Estimated Current demand (mmscmd)Estimated Current demand (mmscmd)Estimated Current demand (mmscmd) 0.14 0.14 0.14 0.14 0.14 0.50 0.50 0.50 0.50 0.50

Estimated demand - 2020 (mmscmd)Estimated demand - 2020 (mmscmd)Estimated demand - 2020 (mmscmd)Estimated demand - 2020 (mmscmd)Estimated demand - 2020 (mmscmd) 0.35 0.35 0.35 0.35 0.35 0.94 0.94 0.94 0.94 0.94Source: PNGRB, Angel Research

With the regulatory concerns alreadyWith the regulatory concerns alreadyWith the regulatory concerns alreadyWith the regulatory concerns alreadyWith the regulatory concerns alreadyaddressed by the Delhi High Court, weaddressed by the Delhi High Court, weaddressed by the Delhi High Court, weaddressed by the Delhi High Court, weaddressed by the Delhi High Court, weexpect growth in Noida, greater Noidaexpect growth in Noida, greater Noidaexpect growth in Noida, greater Noidaexpect growth in Noida, greater Noidaexpect growth in Noida, greater Noidaand Ghaziabad to take care of theand Ghaziabad to take care of theand Ghaziabad to take care of theand Ghaziabad to take care of theand Ghaziabad to take care of thescalability concernsscalability concernsscalability concernsscalability concernsscalability concerns

June 22, 2010 8


Robust top-line on price increase and stable volume growth

IGL posted CAGR of 18.9% in overall volumes over FY2008-10, with the CNG segmentrecording 16.8% CAGR and the PNG segment registering healthy 38.3% CAGR in thementioned period. Going ahead, we expect IGL to register 16.9% CAGR in volumesover FY2010-12E backed by expected strong growth in the CNG and PNG segment.CNG volumes are projected to post CAGR of 14.4% over FY2010-12E primarily dueto high addition in private vehicles, which we expect to increase from around 2,13,000in FY2010 to 3,15,000 in FY2012E. The Commonwealth Games, to be held in FY2011,is also expected to result in healthy addition of DTC buses. In the PNG segment, weexpect robust consumption growth to continue as the company has fulfilled mandatoryCNG conversions. We expect the PNG segment to post a robust CAGR of 36.2% overFY2010-12E, with the number of households having PNG connections increasingfrom 1,80,000 in FY2010E to 2,80,000 in FY2012E.

IGL's revenues recorded CAGR of 23.6% during FY2008-10. We expect the company'sRevenue growth to expand and post robust CAGR of 35.5% over FY2010-12E mainlyon account of the substantial 25.6% CNG price hike (from Rs21.9 per kg to Rs27.5per kg) undertaken in Delhi and also in the NCR region to pass through the impact ofsubstantial increase in gas cost coupled with strong volume growth.

OPMs to contract, EBITDA/scm to hold

IGL has long been under the scanner of various stakeholders due to high RoE andEBITDA Margins. It managed superior margins compared to other CGD players likeGujarat Gas as it procured gas from GAIL at APM prices, while the others procuredgas at market prices. However, with the ease with which the company managed topass through the increase in gas and operating costs, we expect the company to

Financial Analysis

Exhibit 12: Key Operating AssumptionsPPPPParticularsarticularsarticularsarticularsarticulars FY2009FY2009FY2009FY2009FY2009 FY2010FY2010FY2010FY2010FY2010 FY2011EFY2011EFY2011EFY2011EFY2011E FY2012EFY2012EFY2012EFY2012EFY2012E

Sales VSales VSales VSales VSales Volume breakolume breakolume breakolume breakolume break-up-up-up-up-up

CNG volumes (mmscm) 605 692 789 907

PNG volumes (mmscm) 54 82 132 152

Total volumes (mmscm) 660 774 922 1,059

Gas Sourcing VGas Sourcing VGas Sourcing VGas Sourcing VGas Sourcing Volume breakolume breakolume breakolume breakolume break-up-up-up-up-up

APM Gas (mmscm) 713 748 767 803

KG Gas (mmscm) - 85 225 336

Natural Gas consumed (mmscm) 713 833 992 1,139

Other AssumptionsOther AssumptionsOther AssumptionsOther AssumptionsOther Assumptions

APM Gas Price (Rs/scm) 5.3 5.4 8.0 8.5

KG Gas Price (Rs/scm) - 11.9 12.1 11.8

Blended cost of Gas sold (Rs/scm) 6.2 6.4 9.6 10.2

Other Operating Expenditure (Rs/scm) 2.2 2.6 2.7 2.9

EBITDA (Rs/scm) 4.5 5.0 5.1 5.7

Capex (Rs cr) 172 386 500 550Source: Company, Angel Research

WWWWWe expect IGL to register 16.9% CAe expect IGL to register 16.9% CAe expect IGL to register 16.9% CAe expect IGL to register 16.9% CAe expect IGL to register 16.9% CAGRGRGRGRGRin volumes over FY2010-12E backed byin volumes over FY2010-12E backed byin volumes over FY2010-12E backed byin volumes over FY2010-12E backed byin volumes over FY2010-12E backed byexpected strong growth in the CNG andexpected strong growth in the CNG andexpected strong growth in the CNG andexpected strong growth in the CNG andexpected strong growth in the CNG andPNG segmentPNG segmentPNG segmentPNG segmentPNG segment

WWWWWe expect the company's Revenuee expect the company's Revenuee expect the company's Revenuee expect the company's Revenuee expect the company's Revenuegrowth to expand and post robust CAgrowth to expand and post robust CAgrowth to expand and post robust CAgrowth to expand and post robust CAgrowth to expand and post robust CAGRGRGRGRGRof 35.5% over FY2010-12Eof 35.5% over FY2010-12Eof 35.5% over FY2010-12Eof 35.5% over FY2010-12Eof 35.5% over FY2010-12E

June 22, 2010 9


maintain its EBITDA margin per unit of sales volume. But, as the same margin per unitwill be earned on higher sales, we estimate EBIDA margins to contract. Thus, weexpect OPMs to hover around 30% levels in FY2011E and FY2012E from around 35%levels registered in FY2009 and FY2010.

Profit to rise despite higher depreciation

We estimate depreciation to increase by a whopping 48.6% yoy in FY2011E and34.2% yoy in FY2012E due to estimated capex of around Rs500cr and Rs550cr inFY2011E and FY2012E, respectively. The company plans to incur capex towards addingaround 53 CNG outlets and expanding its PNG roll out. During FY2008-10, IGLposted 11.1% CAGR in Bottom-line despite cost pressures. Over FY2010-12E, weexpect Profit to register 17.5% CAGR on robust volume growth.

RoE to stabilise as margin pressures ease

Historically, IGL's RoE has been hovering around 30.0% levels. In FY2009 and FY2010,the company's RoE stood at 27.4% and 28.6%, respectively. Going ahead, because ofthe company's ability to maintain its margins, we expect RoE to be maintained aroundsimilar levels of 27% in FY2011E and 27.6% in FY2012E.

WWWWWe expect Pe expect Pe expect Pe expect Pe expect Profit to register 17.5% CArofit to register 17.5% CArofit to register 17.5% CArofit to register 17.5% CArofit to register 17.5% CAGRGRGRGRGRon robust volume growthon robust volume growthon robust volume growthon robust volume growthon robust volume growth

June 22, 2010 10


Concerns

Regulatory risks:Regulatory risks:Regulatory risks:Regulatory risks:Regulatory risks: As per the PNGRB regulations, the regulator can only controlnetwork tariffs, while the end product pricing is not controlled. However, if there is anychange in the regulation, which caps the overall returns to be made by the CGDentity, there could be a change in our view on the stock. The concerns over fixation ofthe overall returns have arisen especially after zero tariff bidding by various entitiessuch as IOC-Adani Energy for Ghaziabad, making a mockery of the entire biddingexercise. 'Zero' tariff will be recouped by the bidding companies through the CNGcharges levied on users - household or industries - as they deem fit. So, it is believedthat if the retail prices are not regulated and regulations create monopolies, theconsumer interest is bound to get compromised.

Change in TChange in TChange in TChange in TChange in Tax structure of CNGax structure of CNGax structure of CNGax structure of CNGax structure of CNG::::: A large part of the arbitrage between the CNGand petrol prices is primarily fueled due to the differential tax structure. In case of MS(petrol) and gas oil (diesel), taxes constitute 48.8% and 34.6% of the current sellingprice, respectively. While the CNG attracts lower taxation at 14.4%. If the Delhigovernment were to change the tax rate on CNG, it could impact margins as well asthe new vehicle conversions.

Source: PPAC, Angel Research

Exhibit 13: Break-up of Petrol, Diesel, CNG prices in Delhi

51.2534.64

14.42

48.7565.36

85.58

0

20

40

60

80

100

Petrol Diesel CNG

Taxes Prices without Taxes

(%)

June 22, 2010 11


Outlook and Valuation

Following the recent hike in the CNG prices, the key headwinds for IGL by way ofexpected margin contraction and reduction in earnings and return ratios are likely todissipate to a large extent. Relative ease in pass through of the APM gas price hike isindicative of the absence of regulatory risks in the near term. This coupled with strongCNG conversions and growth in newer geographies is likely to result in strong earningsgrowth and result in re-rating of the stock.

We believe that even post end of the marketing exclusivity in CY2011E, IGL will beable to maintain its margins, as the PNGRB regulations limits network and compressiontariffs with marketing margins being left out presuming it will be self-regulated due tocompetitive forces. As for the impact of the end of the marketing exclusivity on volumesis concerned, we believe that competition is likely to have minuscule impact on IGL'svolumes. On the CNG volumes front, IGL is likely to maintain large market share inthe visible future post end of marketing exclusivity due to its strong parentage (BPCL,GAIL and Government of Delhi), tie-ups with oil marketing companies (OMCs) fordispensing CNG, significant expansion of CNG stations till end of the exclusivity period.

Exhibit 14: Change in estimatesPPPPParticularsarticularsarticularsarticularsarticulars Old estimates Old estimates Old estimates Old estimates Old estimates New estimates New estimates New estimates New estimates New estimates % chg% chg% chg% chg% chg

Rs(cr)Rs(cr)Rs(cr)Rs(cr)Rs(cr) FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E FY11EFY11EFY11EFY11EFY11E FY12EFY12EFY12EFY12EFY12E

Revenues 1,403 1,636 1,612 1,985 14.9 21.3

EBITDA 367 422 472 606 28.5 43.6

EBITDA Margins(%) 26.2 25.8 29.3 30.5

EPS 13.3 14.5 17.5 21.3 31.2 46.7Source: Company, Angel Research

At current levels of Rs255, the stock is discounting 14.6x and 12.0x FY2011E andFY2012E Earnings. IGL has historically traded in the range of 9-13x its one-yearforward earnings. We upgrade our DCF-based target price of the IGL to Rs301 (Rs210)on the back of upward revision in earnings estimates and lower WACC estimates (toreflect lower pricing risk). Hence, we upgrade the stock to Buy from Reduce.Hence, we upgrade the stock to Buy from Reduce.Hence, we upgrade the stock to Buy from Reduce.Hence, we upgrade the stock to Buy from Reduce.Hence, we upgrade the stock to Buy from Reduce.

CompanyCompanyCompanyCompanyCompany RoCE (%)RoCE (%)RoCE (%)RoCE (%)RoCE (%) P/E (x)P/E (x)P/E (x)P/E (x)P/E (x) P/B (x)P/B (x)P/B (x)P/B (x)P/B (x) EV/EBITDEV/EBITDEV/EBITDEV/EBITDEV/EBITDA (x)A (x)A (x)A (x)A (x)

FY10FY10FY10FY10FY10 FY11FY11FY11FY11FY11 FY12FY12FY12FY12FY12 FY10FY10FY10FY10FY10 FY11FY11FY11FY11FY11 FY12FY12FY12FY12FY12 FY10FY10FY10FY10FY10 FY11FY11FY11FY11FY11 FY12FY12FY12FY12FY12 FY10FY10FY10FY10FY10 FY11FY11FY11FY11FY11 FY12FY12FY12FY12FY12

IGL 38.1 33.8 31.6 16.6 14.6 12.0 4.3 3.6 3.0 8.9 7.7 6.3

Gujarat Gas 24.4 27.4 28.0 21.7 17.4 14.4 4.9 4.1 3.4 12.0 9.5 7.6

Exhibit 15: Comparative ValuationCompanyCompanyCompanyCompanyCompany M. CapM. CapM. CapM. CapM. Cap TTTTTargetargetargetargetarget RatingRatingRatingRatingRating EBITDEBITDEBITDEBITDEBITDA Margin (%)A Margin (%)A Margin (%)A Margin (%)A Margin (%) EPS (Rs)EPS (Rs)EPS (Rs)EPS (Rs)EPS (Rs) RoE (%)RoE (%)RoE (%)RoE (%)RoE (%)

(Rs cr) (Rs cr) (Rs cr) (Rs cr) (Rs cr) PPPPPrice (Rs)rice (Rs)rice (Rs)rice (Rs)rice (Rs) FY10FY10FY10FY10FY10 FY11FY11FY11FY11FY11 FY12FY12FY12FY12FY12 FY10FY10FY10FY10FY10 FY11FY11FY11FY11FY11 FY12FY12FY12FY12FY12 FY10FY10FY10FY10FY10 FY11FY11FY11FY11FY11 FY12FY12FY12FY12FY12

IGL 3,575 301 Buy 35.7 29.3 30.5 15.4 17.5 21.3 28.6 27.0 27.6

Gujarat Gas 3,786 306 Neutral 19.7 21.2 20.6 13.6 17.0 20.4 23.6 25.8 25.8

Source: Company, Angel Research; Note: Gujarat Gas No's are for CY09, CY10, CY11

June 22, 2010 12


Calculation of FCalculation of FCalculation of FCalculation of FCalculation of Fair Vair Vair Vair Vair Valuealuealuealuealue

PPPPParticularsarticularsarticularsarticularsarticulars FY2011EFY2011EFY2011EFY2011EFY2011E FY2012EFY2012EFY2012EFY2012EFY2012E

Discount rate (%) 11.5 11.5

PV of cashflows (FY09-20E) 1,815 2,138

TTTTTerminal value calculationserminal value calculationserminal value calculationserminal value calculationserminal value calculations

Growth to perpetuity(%) 2.0 2.0

FCF in 2020 542 542

Exit FCF multiple 10.7 10.7

Exit EV/EBDITA multiple 5.3 5.3

Add: Terminal value (PV) 5,821 5,821

PV of terminal value 2,068 2,320

% of company value 53.3 52.0

EV 3,882 4,458

Less: Net Debt (FY09E) 77 248

Equity valueEquity valueEquity valueEquity valueEquity value 3,806 3,806 3,806 3,806 3,806 4,210 4,210 4,210 4,210 4,210

Shares O/s 14 14

Equity value per share 272 301Source: Company, Angel Research

Target Price sensitivity with WACC and Terminal Growth Rate

11.3%11.3%11.3%11.3%11.3% 11.5%11.5%11.5%11.5%11.5% 11.8%11.8%11.8%11.8%11.8% 12.0%12.0%12.0%12.0%12.0% 12.3%12.3%12.3%12.3%12.3%

1.0%1.0%1.0%1.0%1.0% 287 283 280 277 274

1.5%1.5%1.5%1.5%1.5% 296 292 288 284 281

2.0%2.0%2.0%2.0%2.0% 305 301301301301301 296 292 289

2.5%2.5%2.5%2.5%2.5% 316 311 306 302 297

3.0%3.0%3.0%3.0%3.0% 328 322 317 312 307


Exhibit 16: DCFExhibit 16: DCFExhibit 16: DCFExhibit 16: DCFExhibit 16: DCF-based V-based V-based V-based V-based Valuationaluationaluationaluationaluation

P P P P Particulars ( Rs Cr)articulars ( Rs Cr)articulars ( Rs Cr)articulars ( Rs Cr)articulars ( Rs Cr) FY09 FY09 FY09 FY09 FY09 FY10E FY10E FY10E FY10E FY10E FY11E FY11E FY11E FY11E FY11E FY12E FY12E FY12E FY12E FY12E FY13E FY13E FY13E FY13E FY13E FY14E FY14E FY14E FY14E FY14E FY15E FY15E FY15E FY15E FY15E FY16E FY16E FY16E FY16E FY16E FY17E FY17E FY17E FY17E FY17E FY18E FY18E FY18E FY18E FY18E FY19E FY19E FY19E FY19E FY19E FY20E FY20E FY20E FY20E FY20E

Net SalesNet SalesNet SalesNet SalesNet Sales 853 853 853 853 853 1,078 1,078 1,078 1,078 1,078 1,606 1,606 1,606 1,606 1,606 1,979 1,979 1,979 1,979 1,979 2,216 2,216 2,216 2,216 2,216 2,452 2,452 2,452 2,452 2,452 2,703 2,703 2,703 2,703 2,703 2,959 2,959 2,959 2,959 2,959 3,219 3,219 3,219 3,219 3,219 3,483 3,483 3,483 3,483 3,483 3,753 3,753 3,753 3,753 3,753 4,028 4,028 4,028 4,028 4,028

EBITDA 300 387 472 606 666 726 786 846 907 967 1,028 1,088

EBITEBITEBITEBITEBIT 233 233 233 233 233 309 309 309 309 309 357 357 357 357 357 451 451 451 451 451 464 464 464 464 464 502 502 502 502 502 566 566 566 566 566 619 619 619 619 619 672 672 672 672 672 724 724 724 724 724 776 776 776 776 776 822 822 822 822 822

Tax rate (T) (%) 33.1 33.7 33.7 33.7 33.7 33.7 33.7 33.7 33.7 33.7 33.7 33.7

NOPAT {EBIT*(1-T)} 156 205 236 299 308 333 375 410 445 480 514 545

(+) Depreciation 67 77 115 155 201 224 220 227 235 243 252 266

(+) Change in NWC 18 (19) (44) (6) (8) (4) (6) (5) (5) (4) (3) (3)

Operating Cash FlowsOperating Cash FlowsOperating Cash FlowsOperating Cash FlowsOperating Cash Flows 241 241 241 241 241 263 263 263 263 263 308 308 308 308 308 448 448 448 448 448 501 501 501 501 501 552 552 552 552 552 590 590 590 590 590 633 633 633 633 633 676 676 676 676 676 719 719 719 719 719 763 763 763 763 763 808 808 808 808 808

(-) Capex 172 386 500 550 350 300 100 105 110 116 122 266

FCFFFCFFFCFFFCFFFCFF 69 69 69 69 69 (123) (123) (123) (123) (123) (192) (192) (192) (192) (192) (102) (102) (102) (102) (102) 151 151 151 151 151 252 252 252 252 252 490 490 490 490 490 528 528 528 528 528 566 566 566 566 566 603 603 603 603 603 641 641 641 641 641 542 542 542 542 542

PV of FPV of FPV of FPV of FPV of Free Cash Flowsree Cash Flowsree Cash Flowsree Cash Flowsree Cash Flows (172) (172) (172) (172) (172) (81) (81) (81) (81) (81) 107 107 107 107 107 159 159 159 159 159 276 276 276 276 276 265 265 265 265 265 253 253 253 253 253 240 240 240 240 240 228 228 228 228 228 172 172 172 172 172Source: Company, Angel Research

Calculation of Cost of CapitalCalculation of Cost of CapitalCalculation of Cost of CapitalCalculation of Cost of CapitalCalculation of Cost of Capital

Rf 7.5%

Risk premium 6.5%

Market rate of return (req return) 14.0%

Beta 0.48

Ke 10.6%

Stock risk premium 0.9%

WWWWWAAAAACCCCCCCCCC 11.5%11.5%11.5%11.5%11.5%Source: Company, Angel Research

June 22, 2010 13



Exhibit 20: One-Year Forward EV/EBITDA

Apr-

04

Dec-

04

Aug

-05

Apr-

06

Dec-

06

Aug

-07

Apr-

08

Dec-

08

Aug

-09

Apr-

10

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

3.5x 4.5x 5.5x 6.5x

EV

(Rs

cr)


Exhibit 19: One-Year Forward P/BV

-

50

100

150

200

250

300

350

2.0x 2.5x 3.0x 4.0x 4.0x

Share

Pri

ce(R

s)

Apr-

04

Dec-

04

Aug

-05

Apr-

06

Dec-

06

Aug

-07

Apr-

08

Dec-

08

Aug

-09

Apr-

10


Exhibit 18: Rolling and Median P/E


Exhibit 17: One-Year Forward P/E

7.0x 9.0x 11.0x 13.0x 15.0x

30

80

130

180

230

280

Apr-

04

Dec-

04

Aug

-05

Apr-

06

Dec-

06

Aug

-07

Apr-

08

Dec-

08

Aug

-09

Apr-

10

Share

Pric

e(R

s)

5.0

9.0

13.0

17.0

21.0

25.0

Apr-

04

Dec-

04

Aug

-05

Apr-

06

Dec-

06

Aug

-07

Apr-

08

Dec-

08

Aug

-09

Apr-

10

PE

multip

le

June 22, 2010 14



Exhibit 22: Relative Performance to Peers

100.0

200.0

300.0

400.0

500.0

Petronet LNG GAIL GGAS IGL

Apr-

05

Aug-0

5

Dec

-05

Apr-

06

Aug-0

6

Dec

-06

Apr-

07

Apr-

08

Aug-0

7

Aug-0

8

Dec

-07

Dec

-08

Apr-

09

Aug-0

9

Dec

-09

Dec

-10


Exhibit 21: Relative Performance to Sensex - Oil & Gas Induex

IGL SENSEX BSEOIL

-

50

100

150

200

250

300

350

400

450

Apr-

05

Jul-

05

Oct

-05

Jan

-06

Apr-

06

Jul-

06

Oct

-06

Jan

-07

Apr-

07

Jul-

07

Oct

-07

Jan

-08

Apr-

08

Jul-

08

Oct

-08

Jan

-09

Apr-

09

Jul-

09

Oct

-09

Jan

-10

Apr-

10

SENSEX

IGL

BSE OIL & GAS


Exhibit 24: Underperformance relative to Oil & Gas Index

BSEOIL IGL

(250)

(220)

(190)

(160)

(130)

(100)

(70)

(40)

(10)

20

50

Apr-

05

Oct

-05

Apr-

06

Oct

-06

Apr-

07

Oct

-07

Apr-

08

Oct

-08

Apr-

09

Oct

-09

Apr-

10


Exhibit 23: Underperformance Relative to Sensex

(150)

(125)

(100)

(75)

(50)

(25)

-

25

SENSEX IGL

Apr-

05

Oct

-05

Apr-

06

Oct

-06

Apr-

07

Oct

-07

Apr-

08

Oct

-08

Apr-

09

Oct

-09

Apr-

10

June 22, 2010 15


Company Background

IGL is in the retail gas distribution business supplying CNG to the Transport sector andpiped natural gas (PNG) to domestic and commercial sectors in the NCT region ofDelhi and NCR region. IGL was incorporated in December 1998 as a joint venture(JV) between two oil & gas majors - GAIL and BPCL (each holding 22.5% stake) andgovernment of NCT of Delhi (5% stake) to implement the city gas distribution (CGD)project in NCT. IGL currently has 193 CNG fuel stations operating in Delhi and NCR.It plans to add around 53 CNG stations in FY2011 and FY2012. It has a CNGcompression capacity of 3.64mn kg/day and currently fuels more than 3,40,000vehicles daily. In the PNG segment, IGL has provided PNG connections to over 1,82,000domestic and 357 commercial customers. Going forward, IGL plans to add around50,000 PNG customers every year. IGL is now expanding its network into the NCRtowns of Noida, Greater Noida and Ghaziabad.


Exhibit 25: IGL over the years

YYYYYearearearearear EventEventEventEventEvent

1997 GAIL started the Delhi City Gas Distribution Project - a CNG pilot projectto establish the viability of the venture and to resolve related technicaland safety issues.

1998 IGL was incorporated on December 23, 1998 under companies Act,1956.

1999 IGL started its operations in February, 1999 by taking over and executingDelhi City Gas Distribution Project in Delhi from GAIL(India) Ltd.

2000 Supreme court directive to convert entire city bus fleet (DTC and private)to CNG by March 31, 2001; Replacement of all pre-1990 autos andtaxis with new vehicles on clean fuels, etc.

2000 Entered into long-term supply contract with GAIL for supply of0.48 mmscmd APM Natural Gas

2001 MoPNG increased APM gas allocation to 0.98 mmscmd

2002 MoPNG increased APM gas allocation to 2.0 mmscmd to meet IGL'srequirement for NCT of Delhi

2003 Successful completion of IPO at Rs48 per share by Selling shareholders

2004 Marked a foray into NCR by setting up 2 CNG stations in Noida inDecember 2004.

2004-05 Secured 0.70mscmd APM gas from MoPNG for expanding its gasdistribution network in Noida including Greater Noida, Gurgaon andFaridabad.

2005-06 IGL formalized its agreement with GAIL for supply of 2 mmscmd; enteredinto agreement with BPCL for supply of RLNG on long-term basis.

2008-09 IGL requested for additional 1.0mmscmd APM gas to meet increasingdemand. Planned addition of 50 more CNG stations over next two yearsfrom 163 stations

2009-10 Received KG-D6 gas from RIL at EGoM approved price ofUS $4.2/mmbtu

2010-11 The company's gas cost more than doubled with the governmentincreasing APM gas price to US $4.2/mmbtu; however IGL has passedon the impact of higher gas cost by increasing CNG price in Delhi bywhopping 25.6% to Rs27.5/kg (from Rs21.9/kg earlier).

June 22, 2010 16


Business Model

IGL as a CGD player is primarily engaged in the business of distribution of CNG (87%of FY2010 Net Sales). IGL's CNG users can be classified into mandatory anddiscretionary users. The mandatory users (compulsory users as mandated by law)include DTC and private buses, RTVs and Autos. Discretionary users of CNG includeprivate cars, which use CNG due to the low running cost. While initial phase ofconversion was driven by mandatory users, current conversions are driven bydiscretionary users.


Exhibit 26: Sales break-up

IGL is currently pricing its products at a discount to alternative fuels in both the CNGand PNG segments. In the CNG segment, IGL has priced its gas at a discount topetrol and diesel prices. CNG is priced at 57.3% discount to petrol and 40.6% todiesel. Similarly, in the domestic PNG segment the fuel price is indexed to theadministered retail selling price of domestic LPG (14.2 kg) cylinder in the NCT, asapplicable from time to time, taking into account the respective heating values ofnatural gas and LPG. In the small commercial users segment, PNG is indexed tocommercial LPG (19 kg) cylinder in the NCT of Delhi, as applicable from time to time,taking into account the respective heating values of natural gas and LPG. Largecommercial users (big hotels, etc) are the PNG users replacing LDO and commercialLPG. Thus, price in the segment is indexed to weighted average price of LDO andcommercial LPG in the NCT taking into account the respective heating values of naturalgas, LPG and LDO.

Gas sourcing is an important aspect of the CGD business. GAIL is the sole supplier ofAPM natural gas to IGL. The company has gas purchase agreement for 2.2mmscmdwith GAIL. Gas is received at various points of the Hazira-Bijaipur-Jagdishpur (HBJ)pipeline around Delhi. As the gas cost is denominated in Rupee terms, IGL is insulatedfrom exchange rate risks. The gas, which was available at subsidised APM prices ofaround US $1.8/mmbtu, is now aligned with RIL's KG-D6 price of US $4.2/mmbtu. Inthe previous fiscal, IGL entered into a gas sales and purchase agreement (GSPA) withRIL for supply of 0.31mmscmd of gas from the KG-D6 fields scalable to 0.5mmscmd.IGL is using RIL's gas for expanding its presence in the Delhi. IGL has also entered intoa gas transportation agreement (GTA) with Reliance Gas Transportation Infrastructure.

91.5 90.2 89.2 88.3 87.185.2 86.0

8.5 9.8 10.8 11.7 12.914.8 14.0

75

80

85

90

95

100

FY2006 FY2007 FY2008 FY2009E FY2010E FY2011E FY2012E

CNG Sales (% of Total) PNG Sales (% of Total)

(%)

Initial phase of conversion was drivenInitial phase of conversion was drivenInitial phase of conversion was drivenInitial phase of conversion was drivenInitial phase of conversion was drivenby mandatory users, current conversionsby mandatory users, current conversionsby mandatory users, current conversionsby mandatory users, current conversionsby mandatory users, current conversionsdriven by discretionary usersdriven by discretionary usersdriven by discretionary usersdriven by discretionary usersdriven by discretionary users

CNG and PNG selling price is currentlyCNG and PNG selling price is currentlyCNG and PNG selling price is currentlyCNG and PNG selling price is currentlyCNG and PNG selling price is currentlydetermined visdetermined visdetermined visdetermined visdetermined vis-à-vis relative prices of-à-vis relative prices of-à-vis relative prices of-à-vis relative prices of-à-vis relative prices ofalternative fuelsalternative fuelsalternative fuelsalternative fuelsalternative fuels

APM gas, which was available atAPM gas, which was available atAPM gas, which was available atAPM gas, which was available atAPM gas, which was available atsubsidised APM prices of around USsubsidised APM prices of around USsubsidised APM prices of around USsubsidised APM prices of around USsubsidised APM prices of around US$1.8/mmbtu, is now aligned with RIL's$1.8/mmbtu, is now aligned with RIL's$1.8/mmbtu, is now aligned with RIL's$1.8/mmbtu, is now aligned with RIL's$1.8/mmbtu, is now aligned with RIL'sKGKGKGKGKG-D6 price of US $4.2/mmbtu-D6 price of US $4.2/mmbtu-D6 price of US $4.2/mmbtu-D6 price of US $4.2/mmbtu-D6 price of US $4.2/mmbtu

June 22, 2010 17


Profit & Loss Statement Rs crore

Y/E MarchY/E MarchY/E MarchY/E MarchY/E March FY2007FY2007FY2007FY2007FY2007 FY2008FY2008FY2008FY2008FY2008 FY2009FY2009FY2009FY2009FY2009 FY2010FY2010FY2010FY2010FY2010 FY2011EFY2011EFY2011EFY2011EFY2011E FY2012EFY2012EFY2012EFY2012EFY2012E

Gross sales 706 810 962 1,213 1,804 2,225

Less: Excise duty 92 104 109 135 198 246

Net Sales 614 706 853 1,078 1,606 1,979

Other operating income - - - 6 6 6

TTTTTotal operating incomeotal operating incomeotal operating incomeotal operating incomeotal operating income 614 614 614 614 614 706 706 706 706 706 853 853 853 853 853 1,084 1,084 1,084 1,084 1,084 1,612 1,612 1,612 1,612 1,612 1,985 1,985 1,985 1,985 1,985

% chg 15.0 20.8 27.1 48.7 23.1

Total Expenditure 359 406 553 697 1,140 1,379

Purchase of gas 268 303 411 495 888 1,076

Staff expenditure 14 15 24 31 38 46

Other operating expenditure 77 88 118 172 213 256

EBITDEBITDEBITDEBITDEBITDAAAAA 255 255 255 255 255 300 300 300 300 300 300 300 300 300 300 387 387 387 387 387 472 472 472 472 472 606 606 606 606 606

% chg 17.6 0.0 28.8 22.0 28.5

(% of Net Sales) 41.6 42.5 35.2 35.7 29.3 30.5

Depreciation and amortisation 60 63 67 77 115 155

EBITEBITEBITEBITEBIT 195 195 195 195 195 237 237 237 237 237 233 233 233 233 233 309 309 309 309 309 357 357 357 357 357 451 451 451 451 451

% chg 21.5 (2.0) 32.8 15.4 26.6

(% of Net Sales) 31.8 33.6 27.3 28.7 22.2 22.8

Interest & other Charges - - - - 12 28

Other Income 10 23 26 15 24 26

(% of PBT) 5.0 9.0 10.1 4.7 6.5 5.7

Share in profit of Associates - - - - - -

Recurring PBTRecurring PBTRecurring PBTRecurring PBTRecurring PBT 206 206 206 206 206 261 261 261 261 261 259 259 259 259 259 324 324 324 324 324 369 369 369 369 369 449 449 449 449 449

% chg 26.9 (0.8) 25.3 13.6 21.9

Extraordinary Expense/(Inc.) - - - - - -

PBT (reported)PBT (reported)PBT (reported)PBT (reported)PBT (reported) 206 206 206 206 206 261 261 261 261 261 259 259 259 259 259 324 324 324 324 324 369 369 369 369 369 449 449 449 449 449

Tax 68 86 86 109 124 151

(% of PBT) 32.9 33.1 33.4 33.6 33.7 33.7

PPPPPAAAAAT (reported)T (reported)T (reported)T (reported)T (reported) 138 138 138 138 138 174 174 174 174 174 172 172 172 172 172 215 215 215 215 215 244 244 244 244 244 298 298 298 298 298

Add: Share of earnings of asso.Add: Share of earnings of asso.Add: Share of earnings of asso.Add: Share of earnings of asso.Add: Share of earnings of asso. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Less: Minority interest (MI) - - - - - -

Prior period items - - - - - -

PPPPPAAAAAT after MI (reported)T after MI (reported)T after MI (reported)T after MI (reported)T after MI (reported) 138 138 138 138 138 174 174 174 174 174 172 172 172 172 172 215 215 215 215 215 244 244 244 244 244 298 298 298 298 298

ADJADJADJADJADJ. P. P. P. P. PAAAAATTTTT 138 138 138 138 138 174 174 174 174 174 172 172 172 172 172 215 215 215 215 215 244 244 244 244 244 298 298 298 298 298

% chg 26.5 (1.1) 24.9 13.4 21.9

(% of Net Sales) 22.5 24.7 20.2 20.0 15.2 15.0

Basic EPS (Rs)Basic EPS (Rs)Basic EPS (Rs)Basic EPS (Rs)Basic EPS (Rs) 9.9 9.9 9.9 9.9 9.9 12.5 12.5 12.5 12.5 12.5 12.3 12.3 12.3 12.3 12.3 15.4 15.4 15.4 15.4 15.4 17.5 17.5 17.5 17.5 17.5 21.3 21.3 21.3 21.3 21.3

FFFFFully Diluted EPS (Rs)ully Diluted EPS (Rs)ully Diluted EPS (Rs)ully Diluted EPS (Rs)ully Diluted EPS (Rs) 9.9 9.9 9.9 9.9 9.9 12.5 12.5 12.5 12.5 12.5 12.3 12.3 12.3 12.3 12.3 15.4 15.4 15.4 15.4 15.4 17.5 17.5 17.5 17.5 17.5 21.3 21.3 21.3 21.3 21.3

% chg 26.5 (1.1) 24.9 13.4 21.9

June 22, 2010 18


Balance Sheet Rs crore

Y/E MarchY/E MarchY/E MarchY/E MarchY/E March FY2007FY2007FY2007FY2007FY2007 FY2008FY2008FY2008FY2008FY2008 FY2009FY2009FY2009FY2009FY2009 FY2010EFY2010EFY2010EFY2010EFY2010E FY2011EFY2011EFY2011EFY2011EFY2011E FY2012EFY2012EFY2012EFY2012EFY2012E

SOURCES OF FUNDSSOURCES OF FUNDSSOURCES OF FUNDSSOURCES OF FUNDSSOURCES OF FUNDS

Equity Share Capital 140 140 140 140 140 140

Preference Capital - - - - - -

Reserves& Surplus 328 436 543 685 844 1,037

Shareholders FShareholders FShareholders FShareholders FShareholders Fundsundsundsundsunds 468 468 468 468 468 576 576 576 576 576 683 683 683 683 683 825 825 825 825 825 984 984 984 984 984 1,177 1,177 1,177 1,177 1,177

Minority Interest - - - - - -

Total Loans - - - - 150 350

Net Deferred Tax Liability 30 24 21 17 13 13

Deposits from customers 5 7 27 48 73 98

TTTTTotal Liabilitiesotal Liabilitiesotal Liabilitiesotal Liabilitiesotal Liabilities 503 503 503 503 503 607 607 607 607 607 731 731 731 731 731 890 890 890 890 890 1,219 1,219 1,219 1,219 1,219 1,637 1,637 1,637 1,637 1,637

APPLICAAPPLICAAPPLICAAPPLICAAPPLICATION OF FUNDSTION OF FUNDSTION OF FUNDSTION OF FUNDSTION OF FUNDS

Gross Block 613 668 817 1,105 1,535 2,060

Less: Acc. Depreciation 250 310 378 455 570 725

Net Block 363 358 439 650 965 1,335

Capital Work-in-Progress 31 59 82 180 250 275

Goodwill - - - - - -

InvestmentsInvestmentsInvestmentsInvestmentsInvestments 128 128 128 128 128 109 109 109 109 109 104 104 104 104 104 35 35 35 35 35 35 35 35 35 35 35 35 35 35 35

Current Assets 106 228 259 217 259 328

Cash 40 140 146 85 73 102

Loans & Advances 25 41 55 59 88 109

Other 40 47 58 73 97 117

Current liabilities 125 146 154 192 289 335

Net Current AssetsNet Current AssetsNet Current AssetsNet Current AssetsNet Current Assets (19) (19) (19) (19) (19) 82 82 82 82 82 106 106 106 106 106 25 25 25 25 25 (31) (31) (31) (31) (31) (8) (8) (8) (8) (8)

Mis. Exp. not written off - - - - - -

TTTTTotal Assetsotal Assetsotal Assetsotal Assetsotal Assets 503 503 503 503 503 607 607 607 607 607 731 731 731 731 731 890 890 890 890 890 1,219 1,219 1,219 1,219 1,219 1,637 1,637 1,637 1,637 1,637

June 22, 2010 19


Cash Flow Statement Rs crore


Profit before tax 206 261 259 324 369 449

Depreciation 60 63 67 77 115 155

Deposits accepted during the year 1 1 20 21 25 25

Change in Working Capital 29 (2) (18) 19 44 6

Less: Other income (10) (23) (26) (15) (24) (26)

Direct taxes paid (73) (93) (89) (113) (129) (151)

Cash Flow from OperationsCash Flow from OperationsCash Flow from OperationsCash Flow from OperationsCash Flow from Operations 213 213 213 213 213 207 207 207 207 207 212 212 212 212 212 314 314 314 314 314 400 400 400 400 400 458 458 458 458 458

(Inc.)/ Dec. in Fixed Assets (58) (83) (172) (386) (500) (550)

(Inc.)/ Dec. in Investments (85) 19 5 69 - -

Other income 10 23 26 15 24 26

Cash Flow from InvestingCash Flow from InvestingCash Flow from InvestingCash Flow from InvestingCash Flow from Investing (133) (133) (133) (133) (133) (41) (41) (41) (41) (41) (141) (141) (141) (141) (141) (302) (302) (302) (302) (302) (476) (476) (476) (476) (476) (524) (524) (524) (524) (524)

Issue of Equity - - - - - -

Inc./(Dec.) in loans - - - - 150 200

Dividend Paid (Incl. Tax) (40) (49) (66) (74) (86) (105)

Others (10) (18) 0 - - -

Cash Flow from FCash Flow from FCash Flow from FCash Flow from FCash Flow from Financinginancinginancinginancinginancing (50) (50) (50) (50) (50) (67) (67) (67) (67) (67) (65) (65) (65) (65) (65) (74) (74) (74) (74) (74) 64 64 64 64 64 95 95 95 95 95

Inc./(Dec.) in Cash 29 99 6 (61) (12) 29

Opening Cash balancesOpening Cash balancesOpening Cash balancesOpening Cash balancesOpening Cash balances 11 11 11 11 11 40 40 40 40 40 140 140 140 140 140 146 146 146 146 146 85 85 85 85 85 73 73 73 73 73

Closing Cash balancesClosing Cash balancesClosing Cash balancesClosing Cash balancesClosing Cash balances 40 40 40 40 40 140 140 140 140 140 146 146 146 146 146 85 85 85 85 85 73 73 73 73 73 102 102 102 102 102

June 22, 2010 20


Key Ratios


VVVVValuation Ratio (x)aluation Ratio (x)aluation Ratio (x)aluation Ratio (x)aluation Ratio (x)

P/E (on FDEPS) 25.9 20.5 20.7 16.6 14.6 12.0

P/CEPS 18.1 15.1 14.9 12.2 9.9 7.9

P/BV 7.6 6.2 5.2 4.3 3.6 3.0

Dividend yield (%) 1.2 1.6 1.6 1.8 2.1 2.5

EV/Sales 5.5 4.7 3.9 3.2 2.2 1.9

EV/EBITDA 13.4 11.1 11.1 8.9 7.7 6.3

EV/Total Assets 6.8 5.5 4.5 3.9 3.0 2.3

PPPPPer Share Data (Rs)er Share Data (Rs)er Share Data (Rs)er Share Data (Rs)er Share Data (Rs)

EPS (Basic) 9.9 12.5 12.3 15.4 17.5 21.3

EPS (fully diluted) 9.9 12.5 12.3 15.4 17.5 21.3

Cash EPS 14.1 16.9 17.1 20.9 25.7 32.3

DPS 3.0 4.0 4.0 4.5 5.2 6.4

Book Value 33.4 41.2 48.8 58.9 70.3 84.1

Dupont Analysis (%)Dupont Analysis (%)Dupont Analysis (%)Dupont Analysis (%)Dupont Analysis (%)

EBIT margin 31.8 33.6 27.3 28.7 22.2 22.8

Tax retention ratio 67.2 67.0 66.9 66.3 66.3 66.3

Asset turnover (x) 1.8 2.0 2.0 1.7 1.7 1.5

ROIC (Post-tax) 37.5 45.9 37.1 32.9 25.2 23.0

Cost of Debt (Post Tax) - - - - - -

Leverage (x) - - - - - -

Operating ROE 37.5 45.9 37.1 32.9 25.2 23.0

Returns (%)Returns (%)Returns (%)Returns (%)Returns (%)

ROCE (Pre-tax) 42.4 42.8 34.8 38.1 33.8 31.6

Angel ROIC (Pre-tax) 61.2 78.7 66.6 62.5 49.1 43.3

ROE 32.6 33.4 27.4 28.6 27.0 27.6

TTTTTurnover ratios (x)urnover ratios (x)urnover ratios (x)urnover ratios (x)urnover ratios (x)

Asset Turnover (Gross Block) 1.1 1.1 1.1 1.1 1.2 1.1

Inventory / Sales (days) 11.7 11.3 10.0 9.1 8.5 9.2

Receivables (days) 11.2 10.7 11.7 12.2 10.0 9.7

Payables (days) 66.2 67.9 53.1 53.8 54.6 64.1

WC cycle (ex-cash) (days) (26.8) (30.4) (21.1) (16.9) (18.5) (19.6)

Solvency ratios (x)Solvency ratios (x)Solvency ratios (x)Solvency ratios (x)Solvency ratios (x)

Net debt to equity (0.4) (0.4) (0.4) (0.1) 0.0 0.2

Net debt to EBITDA (0.7) (0.8) (0.8) (0.3) 0.1 0.4

Interest Coverage (EBIT/Interest) - - - - - 16.1

Indraprastha Gas

Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)

Ratings (Returns) :

Disclaimer

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investmentdecision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should makesuch investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companiesreferred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits andrisks of such an investment.

Angel Securities Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make investmentdecisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this document arethose of the analyst, and the company may or may not subscribe to all the views expressed within.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and tradingvolume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamentals.

The information in this document has been printed on the basis of publicly available information, internal data and other reliable sourcesbelieved to be true, and is for general guidance only. Angel Securities Limited has not independently verified all the information containedwithin this document. Accordingly, we cannot testify, nor make any representation or warranty, express or implied, to the accuracy, contentsor data contained within this document. While Angel Securities Limited endeavours to update on a reasonable basis the informationdiscussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so.

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Angel Securities Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or otheradvisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past.

Neither Angel Securities Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or inconnection with the use of this information.

Note: Please refer to the important `Stock Holding Disclosure' report on the Angel website (Research Section).

Disclosure of Interest StatementDisclosure of Interest StatementDisclosure of Interest StatementDisclosure of Interest StatementDisclosure of Interest Statement IGLIGLIGLIGLIGL

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Note: We have not considered any Exposure below Rs 1 lakh for Angel, its Group companies and Directors.

Indraprastha Gas

Address: Acme Plaza, ‘A’ Wing, 3rd Floor, M.V. Road, Opp. Sangam Cinema, Andheri (E), Mumbai - 400 059.Tel : (022) 3952 4568 / 4040 3800

Angel Broking Ltd: BSE Sebi Regn No : INB 010996539 / CDSL Regn No: IN - DP - CDSL - 234 - 2004 / PMS Regn Code: PM/INP000001546 Angel Securities Ltd:BSE: INB010994639/INF010994639 NSE: INB230994635/INF230994635 Membership numbers: BSE 028/NSE:09946Angel Capital & Debt Market Ltd: INB 231279838 / NSE FNO: INF 231279838 / NSE Member code -12798 Angel Commodities Broking (P) Ltd: MCX Member ID: 12685 / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID 00220 / FMC Regn No: NCDEX / TCM / CORP / 0302

Research Team

Fundamental:

Sarabjit Kour Nangra VP-Research, Pharmaceutical [email protected]

Vaibhav Agrawal VP-Research, Banking [email protected]

Vaishali Jajoo Automobile [email protected]

Shailesh Kanani Infrastructure, Real Estate [email protected]

Anand Shah FMCG , Media [email protected]

Deepak Pareek Oil & Gas [email protected]

Puneet Bambha Capital Goods, Engineering [email protected]

Sushant Dalmia Pharmaceutical [email protected]

Rupesh Sankhe Cement, Power [email protected]

Param Desai Real Estate, Logistics, Shipping [email protected]

Sageraj Bariya Fertiliser, Mid-cap [email protected]

Viraj Nadkarni Retail, Hotels, Mid-cap [email protected]

Paresh Jain Metals & Mining [email protected]

Amit Rane Banking [email protected]

Jai Sharda Mid-cap [email protected]

Sharan Lillaney Mid-cap [email protected]

Amit Vora Research Associate (Oil & Gas) [email protected]

V Srinivasan Research Associate (Cement, Power) [email protected]

Aniruddha Mate Research Associate (Infra, Real Estate) [email protected]

Mihir Salot Research Associate (Logistics, Shipping) [email protected]

Chitrangda Kapur Research Associate (FMCG, Media) [email protected]

Vibha Salvi Research Associate (IT, Telecom) [email protected]

Pooja Jain Research Associate (Metals & Mining) [email protected]

Technicals:

Shardul Kulkarni Sr. Technical Analyst [email protected]

Mileen Vasudeo Technical Analyst [email protected]

Derivatives:

Siddarth Bhamre Head - Derivatives [email protected]

Jaya Agarwal Derivative Analyst [email protected]

Institutional Sales Team:

Mayuresh Joshi VP - Institutional Sales [email protected]

Abhimanyu Sofat AVP - Institutional Sales [email protected]

Nitesh Jalan Sr. Manager [email protected]

Pranav Modi Sr. Manager [email protected]

Sandeep Jangir Sr. Manager [email protected]

Ganesh Iyer Sr. Manager [email protected]

Jay Harsora Sr. Dealer [email protected]

Meenakshi Chavan Dealer [email protected]

Gaurang Tisani Dealer [email protected]

Production Team:

Bharathi Shetty Research Editor [email protected]

Bharat Patil Production [email protected]

Dilip Patel Production [email protected]

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