Indraprastha Gas reports in-line 4Q; SC decision key for re-rating, says Nomura

Moneylife Digital Team 24 May 2013

Price hikes of CNG and domestic PNG enabled blended EBITDA margins to remain resilient for Indraprastha Gas, says Nomura Equity Research in its Quick Note. A favourable Supreme Court decision on the PNGRB’s appeal against the Delhi High Court order is a must for restoring investor confidence again

Indraprastha Gas ( IGL) reported PAT (profit after tax) of Rs835 million (up 4% y-o-y, down 3% q-o-q), was in line with Nomura’s estimate of Rs841 million, but 4.5% below Bloomberg’s consensus estimates, said Nomura Equity Research in its Quick Note on the company’s performance. Similar to 3Q, volumes were expectedly weak. Price hikes (CNG - 4% in early January, 7% for domestic PNG in February) enabled blended EBITDA margins to remain resilient Rs5.5/scm (up 1% q-o-q, 5% y-o-y). Despite weak 2H, FY13 EPS at Rs25.3 increased 16% y-o-y.

Similar to 3Q, both CNG (down 1% q-o-q, up 4% y-o-y) and PNG (up 8% q-o-q, 14% y-o-y) were weak compared to historical trends. CNG weakness was due to reduced city bus consumption (several buses were grounded for mandatory checks; and new bus additions were delayed) and PNG growth was affected due to higher spot LNG prices leading to reduced competiveness with liquid fuels. The management indicated that double-digit growth rates are likely to resume from 1QFY14.

According to Nomura, a favourable Supreme Court decision (on the PNGRB’s appeal against the Delhi High Court order) is a must for restoring investor confidence again. The dispute is ongoing for over a year (tariff order 9 April 2012), and has seen fast track hearings in Supreme Court over last few weeks. The hearings are to commence from 16th July once court resumes after summer vacations. IGL has a strong case, and an early positive decision could lead to re-rating, said Nomura.

Nomura favours IGL for its secular city gas business in Delhi (India’s largest metro) and its ability to pass on costs (CNG prices up by around 90% over three years). With continued strong earnings growth (four-year CAGR 20%, 16% for FY13F) valuations, at 10.1x/9.1x FY14/15F P/E (EPS of Rs27.7 and Rs30.8, respectively), remain compelling, said Nomura. On expectations of an early decision by the Supreme Court, the stock had seen a decent run recently and was up 26% YTD until early May. However, with the hearing being postponed to July, the stock has seen correction of nearly 10% over the last two weeks. The recent correction provides investors with an opportunity to accumulate the shares, believes Nomura.