[T.S.R:16031] Indraprastha Gas-Nomura Puts A Target of Rs 440

Nomura India: Energy Natural Gas Will Form The Energy Backbone for India   IGL-Target Rs 440   IGL remains our preferred downstream gas play. It has key advantages of being in Delhi NCR (India's largest metro area) and supplying CNG (emerging fuel of choice). It passed on the entire above-100% APM price increase by raising CNG prices by 26% (CNG still remains, by far, the cheapest fuel). IGL retains the ability for further price increases, as evident in the hikes announced on 1 Oct 2010.   BUY Catalysts Discretionary CNG demand growth, a fast ramp-up in NCR towns, increased gas availability for ramping up industrial volumes are critical for future growth.   Anchor themes   Increased domestic gas availability provides growth opportunities in NCR towns and new industrial segments, an area untapped until now due to gas paucity. Easing regulatory chaos makes it conducive for the next wave of growth.  Advantage 'CNG' keeps increasing   Despite the sharp 26% increase in CNG prices (post the APM gas price increase), we expect CNG growth to continue unabated as it still remains, by far, the cheapest transportation fuel. CNG availability is likely to increase significantly with the addition of nearly 50 new outlets, where construction is complete and these await a few final clearances.   In recent months, key auto makers have unveiled plans to launch CNG versions of their popular models. This, in our view, could step-up discretionary demand for CNG vehicles.   Gas price hike – not a concern now Investors' concerns on the risk of future gas price hikes and IGL's ability to pass on these hikes have virtually vanished, in our view, because the bulk of Indian gas (APM and KG-D6) is now priced at US$4.2/mmbtu, and these prices are not expected to change significantly for the next four to five years, we believe. Also importantly, IGL retains the ability to marginally adjust prices for any small variations in gas cost – as reflected in its price hike of Rs0.25-0.40 per kg in Delhi/NCR from 1 October 2010.   Regulatory chaos easing – NCR expansion on fast track Concerns about IGL being authorised to lay network in Ghaziabad seem to be behind us now – it has stepped-up its expansion program and plans to spend around Rs5bn over the next five years in the city.   In our view, IGL is also likely to bid for three new cities (Jallandhar, Panipat and Ludhiana) for which bids are being invited, and it has already appointed consultants to conduct feasibility studies.   Maintain BUY and price target of Rs440 Our DCF based price target of Rs440 implies potential upside of 44%. Our PT implies an FY12F P/E of 19.3x, while the stock trades at 13.4x. IGL remains our preferred gas downstream play. Maintain BUY. Safe Harbor Statement: Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.   Nothing in this article is, or should be construed as, investment advice.

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