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City Gas Distribution Dolat Report

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    DOLAT CAPITAL City Gas Distribution India Research C G D Coming out of the Woods…!!! Analyst: Priyank Chandra Tel : +9122 4096 9737 E-mail: [email protected] com January 04, 2013 DOLAT ` FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E 25,151 34,405 42,198 55,901 6,345 23,819 31,459 34,591 39,535 3,952 7,92CAPITAL Index Executive Summary Regulatory Development Gujarat Gas Company Indraprastha Gas CGD Sector 3 5 9 19 29 January 04, 2013 2 DOLAT CAPITAL Executive Summary City gas distribution (CGD), one of the rising sectors in the India energy pie, had seen an action packed CY12. In particular, the regulatory front played a key overhang on the sector and players’ valuations.

    Further, in the wake of regulatory issues being taken up at the Supreme Court level, the bidding for new areas took a back seat, and put to rest long term plans of government to promote CGD. We still ` FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E 25,151 34,405 42,198 55,901 6,345 23,819 31,459 34,591 39,535 3,952 7,92believe that City gas distribution (CGD) space is an attractive long term investment option in the oil & gas space. The dynamism is fuelled by aspects as: Demand potential: Driven by Gas economics in comparison to alternate fuels Expanding gas grid network Acceptance of high prices by end users Environment friendly nature of gas

    Rising supplies: Fuelled by RLNG supply (though dearer) Energy ` FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E 25,151 34,405 42,198 55,901 6,345 23,819 31,459 34,591 39,535 3,952 7,92majors looking to develop more LNG terminals Any new domestic finds would improve supply situation The two listed players in the CGD space, Indraprastha Gas (IGL) and Gujarat Gas Company (GGCL), are the pioneers of the segment in India. They will reap long term benefits of being the first movers. We are positive on the CGD space and like both IGL and GGCL as a structural play. Valuation Matrix

    Companies IGL Gujarat Gas* Net Sales EBITDA PAT EPS (`) ` FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E 25,151 34,405 42,198 55,901 6,345 23,819 31,459 34,591 39,535 3,952 7,925 4,169 8,979 10,209 3,064 5,258 5,851 2,739 3,765 2,927 4,206 3,281 4,849 21. 9 3,607 21. 4 26. 9 22. 8 30. 0 25. 6 34. 6 28. 1 * December Year Ending FY13 = CY12 Companies IGL Gujarat Gas* FY13 = CY12 Mkt Cap CMP Target Upside Rating P/E(x) (` bn) (`) (`) (%) FY12 FY13E FY14E FY15E ` ` ` 36 256 379 48 Buy 11. 7 9. 5 8. 5 7. 4 39 306 363 20 Buy 14. 3 13. 4 12. 0 10. RoE(%) FY12 FY13E FY14E FY15E 27. 4 27. 4 25. 2 24. 5 33. 9 36. 0 35. 7 33. 3 RoCE(%) FY12 FY13E FY14E FY15E 29. 5 29. 9 28. 6 28. 9 35. 0 35. 7 37. 0 35. 3 * December Year Ending January 04, 2013 3 DOLAT CAPITAL Key events which impacted the sector were: MoPNG asking PNGRB to look into fixing marketing margins charged by gas distribution companies PNGRB issuing order fixing the Network Tariff and Compression Charges for IGL and the same to be applicable to its customers The latter, is pending with the Supreme Court, after the High Court struck down the order issued by the PNGRB.

    In the interim, we learn from our interactions with the industry that the relevance of marketing margins at the regulatory front has taken a back seat. We expect this marketing margin matter to ultimately turn ` FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E 25,151 34,405 42,198 55,901 6,345 23,819 31,459 34,591 39,535 3,952 7,92 irrelevant in the scheme of things, implying players will be free to fix the same as per their P&L dynamics. Our View: We maintain our earlier view, based on the understanding of the PNGRB Act, that PNGRB does not have the rights to fix Network Tariff and Compression Charges to be charged to an end user by a CGD company.

    We still maintain this view. Marketing Margin fixation is unlikely because : If it comes, no fresh investments will come in the CGD space. Government still has ambitious plans for CGD space and if this has to move ahead there could be no capping of marketing margins. Should not be regulated as it can be determined by competition and alterna ` FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E 25,151 34,405 42,198 55,901 6,345 23,819 31,459 34,591 39,535 3,952 7,92tive fuel prices If there is no cap on marketing margins and PNGRB does not want to control the final selling price, the outcome of the PNGRB – IGL case would not have any impact on financials of CGD companies.

    January 04, 2013 4 DOLAT CAPITAL Regulatory Development: Since December 2011, there has been lot of Regulatory (PNGRB) developments that had weighed down the CGD sector and made investor ` FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E 25,151 34,405 42,198 55,901 6,345 23,819 31,459 34,591 39,535 3,952 7,92s weary. IGL and Gujarat Gas (listed companies) stock prices are down by more than 40%. Fresh investments – bidding for new areas are frozen. Industry participants feel that with the current stance of PNGRB, the industry is very likely to stagnate at current levels. Chronology of Events:

    Time Line December 26, 2011 Event Ministry of Petroleum asks PNGRB to initiate process for determining marketing margin charged by gas companies Dolat View This got initiated due to fertilizer ministry asking to look in the marketing margins charged by gas selling companies. CGD does not deal with fertilizer or power sector but got covered as they distribute gas Stakeholders become apprehensive as it could impact profitability. Bidders for CGD license in Round 1 and Round 2 were relying heavily on marketing margin to make profits.

    Will discourage entities from entering CGD space. This was done to ascertain type of data that entities will provide for calculating marketing margins PNGRB is not authorized to fix network tariff and compression charges for IGL’s own consumers. PNGRB is authorized to fix Network tariff for a third party – selling gas in an existing CGD network. Retrospective liability is not justified as IGL has not charged that amounts. Matter of time and IGL very likely to win the case Indicates that PNGRB would like to avoid the marketing margin issue.

    Lack of clarity between MoPNG and PNGRB. Data submitted by companies was too less for any meaningful calculation. Hangover would continue as PNGRB can approach Supreme Court. On expected lines bu ` FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E FY12 FY13E FY14E FY15E 25,151 34,405 42,198 55,901 6,345 23,819 31,459 34,591 39,535 3,952 7,92t this may take long time for a verdict We were told that PNGRB asked for an extension and wanted to submit some additional data. February 14, 2012 PNGRB issues 21 days notice seeking preliminary data from all entities PNGRB issues order for IGL fixing its Network tariff and compression charges & Imposes retrospective liability April 9, 2012 April 10, 2012 May 7, 2012

    IGL takes a stay on PNGRB order PNGRB refuses to entertain the marketing margin matter. Reason given – Gas as a product is not formally notified by Government Delhi Court says that PNGRB is not authorized to fix tariffs for IGL consumers PNGRB approaches Supreme Court Supreme Court gives next date of hearing – January 4, 2012. Hearing date gets postponed to March 18, 2012 June 1, 2012 July 27, 2012 November 21, 2012 December 19, 2012 January 04, 2013 5 DOLAT CAPITAL Build up of the Selling Price There are four major components that define the final selling price for the end consumer.

    Network Tariff:Network Tariff is the charge for utilizing the existing infrastructure of the authorized CGD operator. Compression Charge:Compression charge is levied on compression of natural gas and is applicable only on CNG segment. The authorized entities are expected to recover the huge investments made in the infrastructural development primarily through levying of network tariff and compression charges. The network tariff and compression charge is applicable to the new entities entering the CGD business in a city after the completion of marketing exclusivity period.

    Gas Cost: Denominated in US dollars and there is a constant increase in LNG proportion in sourcing mix. Marketing Margin: Not defined but is considered to be the difference between the final selling price and summation of Network Tariff, Compression Charge and Gas cost. PNGRB says it has the power to fix network tariff and compression charges that are charged by CGD entity to its consumers. We feel that PNGRB is not authorized to do so. Pass through component Marketing Margin is built as the CGD entity takes the risk of marketing the gas to retail consumers. January 04, 2013 6 DOLAT CAPITAL

    Marketing Margin – It’s the key to returns in CGD business Source: Industry, Dolat Research Based on the above there could be 3 possible outcomes for a CGD entity: Scenario – 1 PNGRB control – Network tariff, Compression Charge, Marketing Margin Inference – Sector become stagnant and no fresh investments. Listed companies (IGL and GGCL) stock prices would further fall. Dolat view – Likelihood of this scenario is negligible. Scenario – 2 PNGRB control – Network tariff, Compression Charge does not control – Marketing Margin, Final selling price Inference – Financials of CGD companies are not impacted.

    Investor sentiment would improve and new geographical areas will come up for CGD. Dolat View – likelihood of this scenario is low. Scenario – 3 PNGRB does not control – Network tariff, Compression Charge Marketing Margin, Final selling price Inference – Financials of CGD companies are not impacted. Strong case for re-rating of listed companies (IGL and GGCL). CGD space would see lot of investment activities. Dolat View – Likelihood of this scenario is high. January 04, 2013 7 DOLAT CAPITAL January 04, 2013 Int en tio na lly Le ft B lan k 8 Initiating Coverage Gujarat Gas Company India Research

    CMP: ` 306 BSE Sensex NSE Nifty Scrip Details Equity Face Value Market Cap 52 week High / Low Avg. Volume (no) BSE Code NSE Symbol Bloomberg Code Reuters Code ` 257mn ` 2/` 39bn USD 721mn ` 437 / 270 85283 523477 GUJRATGAS GGAS IN GGAS. BO 19,784 6,016 DOLAT CAPITAL Target Price: ` 363 Buy Gujarat Gas Company (GGCL) will exploit its incumbency advantage by riding the volume growth potential of key Gujarat industrial belts. Fuel economics of gas as a fuel across all segments, will provide long term demand sustainability. Availability of RLNG in the spot market will support volume growth.

    GSPC buying the stake of British Gas in Gujarat Gas would bring strategic long term advantages for Gujarat Gas growth prospects. GGCL will ride the CGD evolvement (CNG for automobile and PNG for households & commercial) with its extensive coverage of Surat, Bharuch and Ankleshwar. Pricing power will ensure long term sustainability of margins. We recommend a Buy with a DCF-based target price of ` 363. Investment Rationale GSPC buying stake of British Gas GSPC buying stake of British Gas (BG) in GGCL would ensure long term sustainable growth.

    GSPC, being a government company, would bring in faster approvals required for infrastructure expansion of GGCL. RLNG sourcing would change and the gas price would be marginally lower as compared to prices of RLNG which was supplied by BG trading arm. Pioneer in City Gas Distribution GGCL has been the pioneer in the city gas distribution space for 21 years and is at the forefront of promoting gas culture in Gujarat, India’s highest gas consuming state. It has to its credit development of over 3,700km of gas pipelines involved in retail delivery.

    With increased availability of RLNG gas, GGCL is well-set to capitalise on growth opportunities driven by usage of gas. Business Model: Maximising risk-adjusted growth GGCL’s business model is based on a cost plus basis. To its credit, GGCL has developed a franchise that sells energy saving solutions to industrial retail segment (81% of GGCL’s volumes). This segment reduces the gas price risk as the hike is passed on to end users, thereby protecting profitability. GGCL will also benefit from the natural exclusivity (industrial retail requiring less than 50,000 SCMD comes under the CGD purview of providing exclusivity).

    Other segments are CNG and PNG, which are seeing decent growth, considering the economic advantage over alternate fuels. These Shareholding Pattern as on Sept’12(%) Promoter MF/Banks/FIs FIIs Public / Others 65. 12 6. 25 17. 47 11. 47 GGAS relative to Sensex 120 110 100 90 80 70 60 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 GGAS Sensex Financials Year Net Sales CY11 23,819 CY12E 31,459 CY13E 34,591 CY14E 39,535 Figure in `. mn % Growth 31. 3 32. 1 10. 0 14. 3 EBIDTA 3,952 4,169 5,258 5,851 OPM % 16. 4 13. 1 15. 1 14. 7 PAT 2,739 2,927 3,281 3,607 NPM % 11. 9. 2 9. 4 9. 1 EPS (`) ` 21. 4 22. 8 25. 6 28. 1 % Growth 5. 9 6. 9 12. 1 9. 9 PER (x) 14. 3 13. 4 12. 0 10. 9 ROANW(%) ROACE (%) 33. 9 35. 0 36. 0 35. 7 35. 7 37. 0 33. 3 35. 3 January 04, 2013 Gujarat Gas Company 9 India Research DOLAT CAPITAL segments have also absorbed the regular price hikes by GGCL to negate rising input cost. Promising triggers of concurrent geographical expansion As a strategy, GGCL is not keen on unrelated geographic expansion. It is keen on exploring its existing territory in Gujarat better. GGCL has got the CGD license in its existing areas of operation.

    These regions offer significant demand and optimum utilisation of the existing pipeline network. The exclusivity in its existing areas of operation will enable GGCL to become the sole supplier of industrial segment (for less than 50,000 SCMD). GGCL has started expansion in areas – Bardoli in Surat and Jambusar in Bharuch. These two areas offer significant industrial potential. Changing revenue mix to improve profitability With impending competition from large scale GAS utilities like GAIL, GGCL has identified the bulk segment as a bad apple and withdrawn. This enabled it to cater the demand from other segments with higher margins.

    The change in revenue mix, wider/ deeper pipeline coverage, and increased exposure to the commercial segment will result in better profitability. CNG and PNG segment growth rates are considerably higher than the industrial segment. Valuation GGCL will ride on its existing coverage of key industrial regions as well as growth from the CNG and PNG segments. The capex will be through internal accruals only. The risk to our call remains the slow execution in infrastructure growth – that can restrict the volume growth. GGCL stock price has been impacted due to BG selling stake to GSPC and regulatory developments.

    On the business front, volume growth has stagnated. However, we believe that GSPC coming in would bring faster expansion – required for volume growth. Interaction with industry participants reinforces our opinion that regulatory concerns will improve in favour of CGD space. At CMP of ` 306, the stock trades at 12x CY13E and 10. 9x CY14E earnings. We recommend Buy rating, with a DCF-based target price of ` 363. 1 year forward PE Band January 04, 2013 Gujarat Gas Company 10 India Research DOLAT CAPITAL Pioneer in City Gas Distribution GGCL has pioneered the city gas distribution (CGD) space for 21 years.

    It has promoted the gas culture in Gujarat, India’s highest gas consuming state. It has now started operations in the heavily-industrialised Ankleshwar and Bharuch and expanded to Surat, India’s diamond and textile hub. The first CNG station in India was set up in Surat by GGCL. Gujarat is the second-most industrialised state of India with nearly 270 industrial clusters. It has been the primary origination and entry point for both domestic natural gas and imported LNG. Availability of gas has been the key driver of consumption as an industrial fuel along with CGD developments. Gujarat accounts for nearly 40% of India gas consumption.

    GGCL has developed over 3,700-km of pipeline network to provide retail access in Ankleshwar, Bharuch and Surat — located in southern Gujarat. The three cities offer huge potential for gas consumption as they are industrial centres. They also have significant potential for CGD development (CNG and PNG). Going forward, we feel the upcoming Delhi Mumbai Industrial Corridor (DMIC) project will augur well for GGCL. DMIC will be passing through GGCL areas of operation and increased industrial activities will result in higher gas volumes for GGCL. GGCL presence in DMIC (in Gujarat) Source : Company, Dolat Research

    January 04, 2013 Gujarat Gas Company 11 India Research DOLAT CAPITAL GGCL has evolved a CGD model which is considered a benchmark by gas regulator PNGRB. Increased availability of RLNG ensures smoother supply of gas, though at higher price. On the demand side, the industrial, CNG and PNG are gas hungry segments, driven by economic benefits of using gas as a fuel. We feel GGCL is ideally placed to capitalise on the potential with assured profitability. Business Model: Maximising risk-adjusted growth GGCL’s business model has evolved over a period of time and caters to industrial, commercial, CNG and PNG segment.

    Source : Company, Dolat Research GGCL operates in the highly industrialised belts of Ankleshwar, Bharuch and Surat. These have a large number of industries that require gas less than 50,000 SCMD of gas. Under PNGRB guidelines, supplies of less than 50,000 SCMD will be under the purview of CGD licence. This makes GGCL the sole supplier of gas to these industries. It has taken adequate steps to promote a gas culture by pushing development of combine heat & power solution and making consumers aware of the savings from gas usage. GGCL supplies nearly 19% of the total gas consumption to CNG and PNG (along with the commercial) segment.

    This segment has been growing due to infrastructure expansion and enviable economics of gas usage. The Porter 5 Forces model signifies the inherent strength of GGCL’s business model. January 04, 2013 Gujarat Gas Company 12 India Research Porter 5 Forces Model DOLAT CAPITAL Source : Company, Dolat Research Promising triggers of concurrent geographical expansion As a strategy, GGCL prefers focusing on its existing geographic territory in Gujarat rather than exploring new ones. GGCL has an extensive coverage in Ankleshwar, Bharuch and Surat, developed over years.

    GGCL has got the formal licence in its existing areas of operation and has bid for Bhavnagar, which is in close proximity to GGCL’s existing areas of operation. Besides offering significant demand potential, this will result in better utilisation of pipelines for gas transportation. GGCL will be the sole supplier of gas to the industrial segment that consumes gas less than 50,000 SCMD. During CY09, volumes declined due to non availability of gas. Demand was there but with decline in domestic supplies, GGCL could not supply the gas to full potential. Market of spot RLNG was not conducive for CGD sector.

    Things changed and with improved availability of RLNG, GGCL volumes started moving up during CY10- CY11. Increase in global RLNG prices and INR depreciation, resulted in a sharp hike in RLNG prices. This is resulting in a volume loss again in CY12. GGCL has decided not to pursue customer segments which are not ready to pay the higher prices. This is being witnessed in the current year CY12. GGCL has started expanding infrastructure in uncovered areas to achieve volume growth. January 04, 2013 Gujarat Gas Company 13 India Research DOLAT CAPITAL Source : Dolat Research

    Changing revenue mix to improve profitability Impending competition in the bulk segment, coupled with low profitability, makes it a bad apple for GGCL, leaving it to focus on more profitable segments with considerable volume potentials. CNG segment has been growing double digits for GGCL and considering the usage economics we expect this segment to continue to grow strongly. At the current level of prices, CNG supplied by GGCL is cheaper by 45% in comparison to Petrol and 11% cheaper as compared to diesel. Source : Dolat Research In terms of profitability, industrial retail is far better than the bulk segment.

    GGCL’s decision to exit the bulk segment was due to the focus on profitability. It will divert volumes to more profitable segments of industrial retail, CNG and PNG (domestic & commercial). This change would boost profitability. January 04, 2013 Gujarat Gas Company 14 India Research Financial Analysis DOLAT CAPITAL Profitability margins would remain stable and absolute profitability remains strong With disruptions in domestic supplies and volume growth on rise, RLNG proportion will increase. As the incremental volume is catered by high cost RLNG, blended cost of GGCL is on a rise.

    Profitability margins would take a beating in CY12E due to delay in increasing the selling price to protect spreads. Going forward, we expect GGCL not to compromise on margins. We expect margins to remain stable. GGCL would be able to expand its absolute spreads on a per unit basis due to changing revenue mix. Source : Dolat Research GGCL’s ability to hike prices will result in operating and net profitability growing in absolute terms. We expect GGCL’s operating profitability to grow 14% CAGR in CY11-CY14E and net profit to grow 9. 6% CAGR in CY11-CY14E. Source : Dolat Research

    Revenue growth driven by volume, realisation GGCL will see volume CAGR of 7. 1% during CY12-CY14E driven by all the segments. Revenue growth will be driven by volumes as well as realisations. January 04, 2013 Gujarat Gas Company 15 India Research DOLAT CAPITAL Source : Dolat Research Valuation GGCL has undergone a structural change in the past couple of years. Earlier the issues were of gas supply, which are sorted due to availability of RLNG. Now the concern is for the volume growth, which would go away as GGCL expands its infrastructure in the uncovered areas of its licensed territories.

    We believe that GSPC coming in would bring faster expansion – required for volume growth. GGCL will ride on its existing coverage of key industrial regions as well as growth from the CNG and PNG segments. The capex will be through internal accruals only. GGCL stock price has been impacted due to BG selling stake to GSPC and regulatory developments. On the business front, volume growth has stagnated.. Interaction with industry participants reinforces our opinion that regulatory concerns will improve in favour of CGD space. At CMP of ` 306, the stock trades at 12x CY13E and 10. 9x CY14E earnings.

    We recommend Buy rating, with a DCF-based target price of ` 363. DCF Profit After Tax (PAT) Depreciation Interest (1-T) Gross Cash Inflow Capex Increase in Non Cash Working Capital Gross Cash Outflow Free Cash Flow Discount Factor PV of Free Cash Flow PV of Cumulative Free Cash Flow Assumed Terminal Year (n) Cash Flow at N+1 Growth Rate (in %) WACC (in %) Terminal Value Discounted Terminal Value Present Value of Firm till Terminal Year Total Discounted Value of Firm Current Debt of Firm & Pref Equity Present Value of Equity No of Equity Shares Fair Value of Equity Share (in `) January 04, 2013 Gujarat Gas Company CY13E CY14E CY15E CY16E CY17E ,281 751 136% 4,034 2,080 418 2,498 1,535 91% 1,397 1,397 3,607 865 136% 4,473 2,140 (314) 1,826 2,647 83% 2,190 3,587 3,955 984 136% 4,939 2,240 1,649 3,889 1,050 75% 790 4,377 4,604 1,115 136% 5,720 2,620 (142) 2,478 3,242 68% 2,219 6,596 5,154 1,256 136% 6,411 2,640 (631) 2,009 4,402 62% 2,741 9,337 2,017 4,534 3. 0% 9. 9% 65,361 40,701 9,337 50,038 3,514 46,524 128 363 16 India Research INCOME STATEMENT Particulars Net Sales Other Operational income Total Income Total Expenditure Raw Material Employee Expenses Other Expenses Other Income EBIDTA (Excl. Other Income) EBIDTA (Incl. Other Income) Interest Gross

    Profit Depreciation Profit Before Tax & EO Items Profit Before Tax Tax Net Profit BALANCE SHEET Particulars Dec11 Sources of Funds Equity Capital 257 Non Convertible Preference Shares 144 Stock Options 49 Other Reserves 7,346 Net Worth 7,795 Unsecured Loans 2,564 Loan Funds 2,564 Deferred Tax Liability 801 Total Capital Employed 11,160 Dec12E 257 144 49 8,010 8,459 3,064 3,064 600 12,123 Dec13E 257 144 49 9,478 9,927 3,514 3,514 500 13,941 Dec11 23,819 340 24,159 20,208 18,397 604 1,207 545 3,952 4,497 1 4,495 593 3,902 3,902 1,163 2,739 Dec12E 31,459 270 31,729 27,559 25,486 647 1,426 628 4,169 4,797 2 4,796 643 4,153 4,153 1,226 2,927 Dec13E 34,591 240 34,831 29,573 27,309 697 1,567 320 5,258 5,578 2 5,576 751 4,825 4,825 1,544 3,281 DOLAT CAPITAL mn Dec14E 39,535 240 39,775 33,923 31,378 795 1,750 320 5,851 6,171 2 6,169 865 5,305 5,305 1,698 3,607 CASH FLOW Particulars Profit before tax Depreciation & w. o. Net Interest Exp Direct taxes paid Chg. in Working Capital (Non Cash) Other (A) CF from Operating Activities Capex {Inc. / (Dec. ) in FA n WIP} Free Cash Flow Inc. / (Dec. ) in Investments (B) CF from Investing Activities Issue of Equity/ Preference Inc. /(Dec. ) in Debt Interest exp net Dividend Paid (Incl. Tax) (C) Cash Flow from Financing Net Change in Cash Opening Cash balances Closing Cash balances E-estimates IMPORTANT RATIOS Particulars Dec11 (A) Measures of Performance (%) Contribution Margin EBIDTA Margin (excl. O. I. ) 16. EBIDTA Margin (incl. O. I. ) 18. 6 Gross Profit Margin 18. 6 Tax/PBT 29. 8 Net Profit Margin 11. 3 (B) As Percentage of Net Sales Raw Material Employee Expenses Other Expenses 77. 2 2. 5 5. 1 Dec12E Dec13E Dec14E Dec11 3,902 593 1 (1,163) 177 36 3,546 (1,174) 2,372 486 (688) 11 490 (1) (3,314) (2,814) 44 49 93 Dec12E Dec13E Dec14E 4,153 4,825 5,305 643 751 865 2 2 2 (1,226) (1,544) (1,698) 1,676 (418) 314 (201) (100) (100) 5,046 3,516 4,688 (985) (2,080) (2,140) 4,061 1,436 2,548 (350) (300) (300) (1,335) (2,380) (2,440) 0 0 0 500 450 450 (2) (2) (2) (2,263) (1,813) (1,813) (1,765) (1,365) (1,365) 1,946 (229) 883 93 2,039 1,810 2,039 1,810 2,692

    Dec14E 257 144 49 11,271. 9 11,720. 9 3,964 3,963. 9 400 16,084. 7 13. 1 15. 1 15. 1 29. 5 9. 2 81. 0 2. 1 4. 5 0. 4 2,822 0. 1 30 3 146. 0 2. 5 (15. 3) (4,089) 22. 8 27. 8 15. 0 65. 7 34. 3 66. 0 36. 0 35. 7 39. 3 306 13. 4 39,245 1. 2 40,269 1. 3 9. 7 4. 6 4. 9 15. 1 16. 0 16. 0 32. 0 9. 4 78. 9 2. 0 4. 5 0. 4 2,789 0. 1 30 3 146. 0 2. 4 (18. 6) (3,671) 25. 6 31. 4 12. 0 46. 9 53. 1 77. 4 35. 7 37. 0 43. 5 306 12. 0 39,245 1. 1 40,949 1. 2 7. 8 4. 0 3. 9 14. 7 15. 5 15. 5 32. 0 9. 1 79. 4 2. 0 4. 4 0. 3 3,086 0. 1 30 3 146. 0 2. 4 (30. 6) (3,985) 28. 1 34. 9 12. 0 42. 7 57. 3 91. 4 33. 3 35. 3 41. 6 306 10. 9 39,245 1. 0 40,516 1. 0 6. 9 3. 3 3. 9

    Applications of Funds Gross Block 10,607 12,407 Less: Accumulated Depreciation 3,867 4,510 Net Block 6,740 7,897 Capital Work in Progress 1,535 720 Investments 5,206 5,556 Current Assets, Loans & Advances Inventories 158 215 1,839 2,586 Sundry Debtors Cash and Bank Balance 93 2,039 Loans and Advances 148 354 Other Current Assets 34 132 2,272 5,327 sub total Less : Current Liabilities & Provisions Current Liabilities 2,658 5,027 Provisions 1,934 2,349 sub total 4,592 7,377 Net Current Assets (2,320) (2,050) Total Assets E-estimates 11,159. 6 12,123 14,407 5,261 9,146 800 5,856 237 2,843 1,810 390 146 5,425 16,507 6,125. 6 10,381. 3 840 6,156 270. 8 3,249. 4 2,692. 5 428. 7 160. 2 6,801. 6 5,387 6,189. 5 1,899 1,904. 2 7,286 8,093. 7 (1,861) (1,292. 1) 13,941 16,084. 7 (C) Measures of Financial Status Debt / Equity (x) 0. Interest Coverage (x) 3,018 Average Cost Of Debt (%) 0. 1 Debtors Period (days) 28 Closing stock (days) 2 Inventory Turnover Ratio (x) 151. 2 Fixed Assets Turnover (x) 2. 2 Working Capital Turnover (x) (10. 3) Non Cash Working Capital (` Mn) (2,413) (D) Measures of Investment EPS (`) CEPS (`) DPS (`) Dividend Payout (%) Profit Ploughback (%) Book Value (`) RoANW (%) RoACE (%) RoAIC (%) (Excl Cash & Invest. ) (E) Valuation Ratios CMP (`) P/E (x) Market Cap. (` Mn. ) MCap/ Sales (x) EV (` Mn. ) EV/Sales (x) EV/EBDITA (x) P/BV (x) Dividend Yield (%) E-estimates 21. 4 26. 0 22. 0 103. 0 (3. 0) 60. 8 33. 9 35. 0 35. 2 306 14. 3 39,245 1. 6 41,716 1. 8 10. 6 5. 0 7. 2

    January 04, 2013 Gujarat Gas Company 17 India Research DOLAT CAPITAL January 04, 2013 Int en tio na lly Le ft B lan k Gujarat Gas Company 18 Initiating Coverage Indraprastha Gas India Research CMP: ` 256 BSE Sensex NSE Nifty Scrip Details Equity Face Value Market Cap 52 week High / Low Avg. Volume (no) BSE Code NSE Symbol Bloomberg Code Reuters Code ` 1400mn ` 10/` 36bn USD 658mn ` 394 / 170 194,643 532514 IGL IGL IN IGAS. BO 19,784 6,016 DOLAT CAPITAL Target Price: ` 379 Buy Indraprastha Gas’s (IGL) business model of playing the role of an enabler in the energy economy with adequate pricing power positions as one of the secular plays in the sector.

    Its role as a facilitator of green fuel culture and an exclusive supplier in the high-growth National Capital Region (NCR) has been proven over the last decade, however the size of the opportunity continues to be big enough for it to sustain growth in high teens next few years. The key strength for IGL comes from its ability to source gas, on the back of its promoter’s strength (GAIL). The aggressive geographical expansion has enhanced the network coverage and this shall be a key driver of its volume growth. Further, IGL’s ability to protect spreads despite an increase in gas costs ensures profit growth. Of late however, regulatory concerns have weighed down on the stock. We believe that these concerns may have been overdone.

    And clearing of these over the next few months shall trigger an instant re rating for the sector and IGL in particular. Notably, the regulatory issues have not impacted financial performance of IGL, and it continues to sustain volume and operating performance. We recently upgraded the stock to Dolat preferred picks. Shareholding Pattern as on Sept’12(%) Promoter MF/Banks/FIs FIIs Public / Others IGL relative to Sensex 110 100 90 80 70 60 50 40 45. 00 17. 50 16. 43 21. 04 Investment Rationale Regulatory Concerns: A case of overdone pessimism The Supreme Court is due to take up the hearing of the PNGRB – IGL case in Mar 2013. The matter under contest relates to the fixation of Network Tariff and Compression Charges.

    Based on our industry interactions, we believe IGL is on a strong footing, and therefore has fair probability of winning the case. The other issue that has been an overhang on the stock is the fear of cap on marketing margins. We observe in our channel checks that the CGD sector would be kept out of the purview of marketing margin. The regulator, PNGRB does not intend to control final selling prices. Hence, there would be no impact of profitability of IGL. NCR monopoly to continue: IGL is the exclusive supplier of CNG (for transport) and PNG (for household, commercial and industrial) in Dehil and the NCR. The company’s marketing exclusivity for Delhi region expired in December 2011.

    However, we believe that entry barriers for new players to establish presence in the region are very high, given the challenges to OPM % 25. 2 23. 0 21. 3 18. 3 PAT 3,064 3,765 4,206 4,849 NPM % 12. 2 10. 9 10. 0 8. 7 EPS (`) ` 21. 9 26. 9 30. 0 34. 6 % Growth 18. 0 22. 9 11. 7 15. 3 PER (x) 11. 7 9. 5 8. 5 7. 4 ROANW(%) ROACE (%) 27. 4 29. 5 27. 4 29. 9 25. 2 28. 6 24. 5 28. 9 Financials Year Net Sales FY12 25,151 FY13E 34,405 42,198 FY14E FY15E 55,901 Figure in `. mn % Growth 44. 2 36. 8 22. 6 32. 5 EBIDTA 6,345 7,925 8,979 10,209 January 04, 2013 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 IGL Sensex Indraprastha Gas 19 India Research DOLAT CAPITAL ensure gas supply. The remaining is RLNG.

    With no improvement in domestic supplies, we feel IGL’s monopoly will continue. Enviable user economics: The economics for CNG as transport fuel continues to offers unprecedented savings (around 56% against petrol and around 24% versus diesel). This is inspite of the regular price hikes (20% ytd) taken by IGL while for Petrol and Diesel, the price hikes have been 2. 4% and 14% respectively. In the household segment, PNG is cheaper by 6% at current heavily-subsidised LPG price levels. The latest cap on the number of cylinders (if six cylinders per household is retained) has made PNG more attractive. Any further increase in LPG price will further tilt the scale in favour of IGL.

    For the commercial segment, gas continues to be the best option. In the industrial segment, PNG is cheaper as compared to liquid fuels. However, it is marginally costlier as compared to solid fuel. Visible growth with pricing power: IGL has doubled its gross block in two years (FY10-12). The aggressive expansion is expected to continue and IGL will reap long-term benefits. The infrastructure expansion is across CNG stations and pipeline networks for the PNG segment. We expect IGL to clock a volume CAGR of 14. 6% over FY12 to FY15E. IGL has shown the ability to maintain gross spreads, despite hikes in gas cost, by consistently raising selling price.

    This shows the IGL business model’s resilience. Valuation IGL’s ability to maintain gross spreads in absolute terms, coupled with decent volume growth, will drive revenue and profit growth. We believe that current market price is factoring extreme negatives of regulatory hurdles. We feel that risk reward is highly in favour of IGL. At CMP the stock trades at 9. 5x FY13E and 8. 5x FY14E earnings. We recommend Buy with a DCF based price target of ` 379. 1 year forward PE Band January 04, 2013 Indraprastha Gas 20 India Research Regulatory Concerns Overdone DOLAT CAPITAL Regulatory hurdles for IGL have emerged on 2 fronts – Network Tariff & Compression Charges and Marketing Margin.

    Chronology of Events: December 26, 2011 Government asks PNGRB to look in the marketing margin charged by Gas distribution companies PNGRB issues an order to IGL fixing the Network Tariff and Compression Charges. IGL takes a stay on PNGRB order from Delhi High Court PNGRB refers the marketing margin issue back to Oil Ministry. Reason given – Gas is not a notified product IGL wins the case in Delhi High Court. Delhi High court says that PNGRB does not have any power to fix tatriffs for IGL’s own consumers. PNGRB moves to Supreme Court IGL has submitted the data for tariff (Network and Compression) approval to PNGRB. These were not accepted by PNGRB and were reduced significantly by PNGRB.

    Proposed by IGL Compression Charges ` / Kg ` / SCM Network Tariff `/ MMBTU ` / SCM Total (` / SCM) * Dolat Estimates 6. 66 4. 93 PNGRB 2. 75 2. 04 Actual by IGL* 4. 50 3. 33 April 9, 2012 April 10, 2012 May 8, 2012 June 1, 2012 July 27, 2012 104. 05 3. 51 8. 44 38. 58 1. 30 3. 34 66. 75 2. 25 5. 58 Network Tariff and Compression Charge: As per the PNGRB Act, the regulator is authorized to fix network tariff payable to IGL by any gas distribution company which enters the Delhi region. This is based on the use of IGL’s infrastructure to move gas. The important aspect of this is that network tariffs can be fixed by the regulator for third party.

    However, IGL stance has been that since it procures and sells gas directly to its customers, therefore there is no applicability of third party here as it owns the client. Marketing Margin: We believe, based on our interaction with the industry participants, that city gas distribution (CGD) companies shall be excluded from the purview of marketing margins. We expect this clarification to emerge over the next few months. Our view is further corroborated from the following aspects of the sector: January 04, 2013 Indraprastha Gas 21 India Research DOLAT CAPITAL Gas input costs are not fixed. Incremental volume is catered by high cost imported RLNG.

    CGD companies cannot be assured of a confirmed off-take (like Power) with a fixed margin and hence they carry the risk of marketing the gas to retail consumers. Due to availability of alternate fuels, market forces should determine the marketing margin that can be charged by IGL. NCR monopoly to continue IGL supplies natural gas in the national capital region (NCR) for transport, industrial and household purposes. Its business model in NCR has been a benchmark for the rest of the country to promote green fuel culture. It has been instrumental in shifting public transport to CNG from conventional fuels. ‘Porter 5 Forces’ model signifies the inherent strength of IGL’s business model. Porter’s 5 Forces Model

    IGL has maintained profitability, aided by volume growth and access to gas at APM rates. The dominant market position, entry barriers, favourable business prospects, secure gas tie ups and strong parentage will ensure steady growth for IGL. We feel that IGL’s monopoly in NCR will remain though the marketing exclusivity period for Delhi has ended in December 2011. January 04, 2013 Indraprastha Gas 22 India Research DOLAT CAPITAL Enviable user economics Apart from controlling pollution, the use of CNG offers unprecedented savings on fuel consumption. The regulatory compulsion of public transport being on CNG envisages long-term demand sustainability.

    The Delhi Transport Corporation (DTC), which runs buses in NCR, is IGL’s biggest customer. The tie up with DTC has been at an institutional level and IGL has created CNG filling stations at DTC depots to facilitate easy filling of CNG for DTC buses. The fuel cost of four wheelers is a major cost component of running them. The economics and negligible maintenance of shifting to CNG act as a strong trigger for conversion of private vehicles to CNG. NCR has the highest population of four wheelers in India, thereby presenting a big revenue opportunity. High prices of conventional fuels and easy availability of CNG with new CNG stations coming up would drive the shift. Source : Dolat Research

    Rationalisation of LPG subsidies : Opportunity for PNG In the PNG segment for households, PNG is cheaper as compared to LPG, which is heavily subsidised. Considering the under recovery in LPG cylinders, the government may revise prices upwards. The capping of the number of cylinders has increased the demand for PNG. LPG Cylinder Cost (in `. ) Weight of LPG( in Kg) Cost per unit (Rs / Kg) PNG for Household Cost (in Rs. /SCM) Comparable factor of PNG with LPG on energy equivalence (1 SCM / Kg) Comparable Cost (in Rs / Kg) % Savings on every unit Source : Dolat Research 410. 5 14. 2 28. 9 22 0. 81 27. 2 6. 0 January 04, 2013 Indraprastha Gas 23 India Research DOLAT CAPITAL In the commercial and industrial segment, PNG is preferred due to cost economics and ease of usage.

    At current prices, PNG is cheaper as compared to liquid fuels. However, it is marginally costlier when compared to solid fuels. This segment is catered by high cost RLNG. We expect RLNG prices to go down from the current levels by March. IGL has a flexible pricing for industrial segment we expect that benefit of decline in RLNG prices would be passed on to the industrial consumers. This would propel the volume growth in the industrial segment. Visible Growth with Pricing Power IGL is extensively upgrading its infrastructure. It has doubled its gross block in two years FY10-12. We expect capex intensity for another 3 years and IGL will reap the benefits in the long term. Source : Dolat Research

    The expansion will come in the form of: Capacity augmentation at existing CNG stations: This will reduce filling time and waiting time. Increase in pipeline network: IGL is expanding its pipeline network across NCR to reach new residential areas for the PNG segment. It is also spreading out to new sites for CNG stations. This is aimed at capturing upcoming residential areas and covering untapped domestic segment. CNG station: IGL is aggressively adding CNG stations to cater to burgeoning CNG demand. The CNG station break up for IGL as on March 31, 2012 is as below: Station Category Online Daughter Daughter Booster Total IGL 110 0 3 113 DTC / UPSRTC 50 0 0 50 OMC 67 1 77 145 Total 227 1 80 308

    January 04, 2013 Indraprastha Gas 24 India Research Category Steel Pipeline MDPE Pipeline Total FY08 195 1272 1467 FY09 231 1700 1931 DOLAT CAPITAL FY10 299 2330 2629 FY11 421 4420 4841 FY12 CAGR (in %) 574 6479 7053 31. 0 50. 2 48. 1 The PNG network growth for IGL is as below: The company has consumed its allocated quota of APM gas and is going strong in terms of volume growth. It has nearly 2. 6 MMSCMD of APM gas and the remaining volume is catered to by high-cost RLNG. In the absence of any increase in domestic gas supplies, IGL will be resorting to RLNG to support volume growth. We expect IGL’s volumes to grow at 14. 6% CAGR over FY12 to FY15E.

    To counter the constant increase in blended gas cost, IGL has been raising selling prices across segments to maintain absolute gross spreads. Acceptance of the regular price hikes shows the economic advantage of even expensive gas. Increasing proportion of RLNG in gas mix Source : Dolat Research As the incremental volume growth is catered to by high-cost RLNG, blended cost of gas will increase constantly. To maintain absolute profitability on a per unit basis, IGL will have to hike prices regularly. Its strategy has been to maintain or increase gross spreads consistently. Source : Dolat Research January 04, 2013 Indraprastha Gas 25 India Research

    Financial Analysis DOLAT CAPITAL Profitability margins to decline but absolute profitability remains strong Rising input cost has put pressure on operating and net margins. As the incremental volume is catered by high cost RLNG, blended cost of IGL is on a rise. Though IGL would be able to protect its absolute spreads on a per unit basis, margins would remain on a decline trajectory. Source : Dolat Research IGL’s ability to hike prices will result in operating and net profitability growing in absolute terms. We expect IGL’s operating profitability to grow 17. 2% CAGR in FY12-FY15E and net profit to grow 16. 5% CAGR in FY12-15E. Source : Dolat Research

    Revenue growth driven by volume, realisation IGL will see volume CAGR of 14. 6% during FY12-15E driven by the industrial segment. PNG, which comprises households and commercial & industrial, will be the high growth segment. It is expected to grow at 24. 5% CAGR during FY12-15E. The CNG segment is expected to grow 11. 2% CAGR during FY12-15E. Revenue growth will be driven by volumes as well as realisations. January 04, 2013 Indraprastha Gas 26 India Research DOLAT CAPITAL Source : Dolat Research Valuation IGL has undergone a structural change in the past couple of years. The strength of the business model was never tested till rising input cost forced it to revise prices regularly. Pricing power resilience, aggressive ursuit of growth, promotion of new usages of gas and strong demand and supply sides will culminate in cash generation for the foreseeable future. Regulatory hurdles during FY13 have beaten down the stock significantly. Case is with Supreme Court and regulatory overhang would remain till the decision of Supreme Court comes. Regarding marketing margin issue, we believe that it would not be implemented on CGD sector. With PNGRB not interested to control the final selling price, we feel that spreads of IGL are not under threat. We believe that current market price is factoring extreme negatives of regulatory hurdles. We feel that risk reward is highly in favour of IGL. At CMP the stock trades at 9. 5x FY13E and 8. 5x FY14E earnings. We recommend Buy with a DCF based price target of ` 379.

    DCF Profit After Tax (PAT) Depreciation Interest (1-T) Gross Cash Inflow Capex Increase in Non Cash Working Capital Gross Cash Outflow Free Cash Flow Discount Factor PV of Free Cash Flow PV of Cumulative Free Cash Flow Assumed Terminal Year (n) Cash Flow at N+1 Growth Rate (in %) WACC (in %) Terminal Value Discounted Terminal Value Present Value of Firm till Terminal Year Total Discounted Value of Firm Current Debt of Firm & Pref Equity Present Value of Equity No of Equity Shares Fair Value of Equity Share (in `) January 04, 2013 Indraprastha Gas FY13E FY14E FY15E FY16E FY17E 3,765 1,847 387 5,999 1,397 (75) 1,323 4,676 91% 4,251 4,251 4,206 2,148 411 6,765 5,400 (112) 5,288 1,477 83% 1,221 5,472 4,849 2,489 377 7,715 5,184 (704) 4,480 3,235 75% 2,431 7,903 5,978 2,843 343 9,163 5,616 567 6,183 2,980 68% 2,036 9,939 6,787 3,198 309 10,293 5,400 (112) 5,288 5,005 62% 3,109 13,048 2017 5,155 3. 0% 10. 0% 73,725 45,793 13,048 58,841 5,818 53,022 140 379 27 India Research INCOME STATEMENT Particulars Net Sales Other Operational income Total Income Total Expenditure Raw Material Employee Expenses Other Expenses Other Income EBIDTA (Excl. Other Income) EBIDTA (Incl. Other Income) Interest Gross

    Profit Depreciation Profit Before Tax & EO Items Profit Before Tax Tax Net Profit BALANCE SHEET Particulars Sources of Funds Equity Capital Other Reserves Net Worth Secured Loans Unsecured Loans Loan Funds Deferred Tax Liability Total Capital Employed Mar12 1,400 10,889 12,289 3,375 2,443 5,818 627 18,735 Mar13E 1,400 13,841 15,241 3,425 3,143 6,568 692 22,501 Mar14E 1,400 16,745 18,145 3,675 3,543 7,218 300 25,663 Mar15E 1,400 19,967 21,367 2,675 3,943 6,618 300 28,285 Mar12 25,151 36 25,187 18,842 15,392 437 929 67 6,345 6,412 479 5,933 1,432 4,501 4,501 1,437 3,064 Mar13E 34,405 21 34,426 26,501 22,485 506 3,510 94 7,925 8,019 575 7,445 1,847 5,597 5,597 1,832 3,765 Mar14E 42,198 22 42,220 33,241 28,430 591 4,220 60 8,979 9,039 614 8,425 2,148 6,277 6,277 2,072 4,206 ` mn Mar15E 55,901 22 55,923 45,714 40,292 671 4,752 80 10,209 10,289 563 9,726 2,489 7,237 7,237 2,388 4,849 CASH FLOW DOLAT CAPITAL Particulars Mar12 Mar13E Mar14E Mar15E Profit before tax 4,501 5,597 6,277 7,237 Depreciation & w. o. 1,432 1,847 2,148 2,489 Net Interest Exp 479 575 614 563 Direct taxes paid (984) (1,832) (2,072) (2,388) Chg. in Working Capital (54) 75 112 704 Other (14) 65 (392) 0 (A) CF from Operating Activities 5,361 6,327 6,687 8,605 Capex (6,117) (1,397) (5,400) (5,184) (756) 4,929 1,287 3,421 Free Cash Flow Inc. / (Dec. ) in Investments 760 (100) (100) (100) Other 61 (B) CF from Investing Activities (5,296) (1,497) (5,500) (5,284) Inc. /(Dec. ) in Debt 1,947 750 650 (600) Interest exp net (484) (575) (614) (563) Dividend Paid (Incl.

    Tax) (814) (814) (1,302) (1,627) Other (979) 650 (1,618) (1,265) (2,790) (C) Cash Flow from Financing Net Change in Cash 715 3,212 (78) 531 Opening Cash & Cash Equivalents 585 1,299 4,511 4,433 Closing Cash & Cash Equivalents 1,299 4,511 4,433 4,964 E-estimates IMPORTANT RATIOS Particulars Mar12 (A) Measures of Performance (%) Contribution Margin EBIDTA Margin (excl. O. I. ) 25. 2 EBIDTA Margin (incl. O. I. ) 25. 5 Interest / Sales 1. 9 Gross Profit Margin 23. 6 Tax/PBT 31. 9 Net Profit Margin 12. 2 (B) As Percentage of Net Sales Excise Duty % of Gross Sales Raw Material Employee Expenses Other Expenses 9. 9 61. 2 1. 7 3. 7 Mar13E Mar14E Mar15E Applications of Funds Gross Block 22,673 27,473 Less: Accumulated

    Depreciation 6,877 8,724 Net Block 15,796 18,748 Capital Work in Progress 3,787 384 Investments 984 1,084 Current Assets, Loans & Advances Inventories 374 566 Sundry Debtors 1,298 1,885 Cash and Bank Balance 320 4,511 Loans and Advances 575 675 Other Current Assets 95 100 sub total 2,661 7,737 Less : Current Liabilities & Provisions Current Liabilities 3,623 4,638 Provisions 870 814 sub total 4,493 5,452 Net Current Assets (1,832) 2,285 Total Assets E-estimates 18,735 22,501 23. 0 23. 3 1. 7 21. 6 32. 7 10. 9 9. 7 65. 4 1. 5 10. 2 0. 4 14. 0 9. 3 20 6 60. 8 1. 3 15. 1 (2,226) 26. 9 40. 1 5. 0 18. 6 81. 4 108. 9 27. 4 29. 9 33. 9 256 9. 5 35,840 1. 0 37,897 1. 1 4. 8 2. 4 2. 0 21. 3 21. 4 1. 5 20. 0 33. 0 10. 0 9. 4 67. 4 1. 4 10. 0 0. 4 14. 7 8. 9 22 7 52. 1 1. 3 20. 1 (2,338) 30. 0 45. 4 8. 0 26. 6 73. 4 129. 6 25. 2 28. 6 35. 1 256 8. 5 35,840 0. 8 38,625 0. 9 4. 3 2. 0 3. 1 8. 3 18. 4 1. 0 17. 4 33. 0 8. 7 9. 1 72. 1 1. 2 8. 5 0. 3 18. 3 8. 1 22 7 52. 1 1. 5 29. 1 (3,042) 34. 6 52. 4 10. 0 28. 9 71. 1 152. 6 24. 5 28. 9 35. 0 256 7. 4 35,840 0. 6 37,494 0. 7 3. 7 1. 7 3. 9 32,857 10,872 21,984 400 1,184 809 2,543 4,433 775 120 8,680 5,284 1,302 6,586 2,095 25,663 38,057 13,361 24,695 384 1,284 1,072 3,369 4,964 875 140 10,420 6,871 1,627 8,498 1,922 28,285 (C) Measures of Financial Status Debt / Equity (x) 0. 5 Interest Coverage (x) 13. 4 Average Cost Of Debt (%) 9. 2 Debtors Period (days) 19 Closing stock (days) 5 Inventory Turnover Ratio (x) 67. 3 Fixed Assets Turnover (x) 1. 1 Working Capital Turnover (x) (13. ) Non Cash Working Capital (` Mn) (2,152) (D) Measures of Investment EPS (`) CEPS (`) DPS (`) Dividend Payout (%) Profit Ploughback (%) Book Value (`) RoANW (%) RoACE (%) RoAIC (%) (Excl Cash & Invest. ) (E) Valuation Ratios CMP (`) P/E (x) Market Cap. (` Mn. ) MCap/ Sales (x) EV (` Mn. ) EV/Sales (x) EV/EBDITA (x) P/BV (x) Dividend Yield (%) E-estimates 21. 9 32. 1 5. 0 22. 8 77. 2 87. 8 27. 4 29. 5 29. 9 256 11. 7 35,840 1. 4 41,338 1. 6 6. 5 2. 9 2. 0 January 04, 2013 Indraprastha Gas 28 DOLAT CAPITAL City Gas Distribution (CGD) – last Part in the Gas value chain – Distribution The acceptance of the high priced Re-gasified Liquefied Natural Gas (RLNG) has brought a new dynamism to the CGD space, especially in the absence of any increase in domestic gas supplies.

    The expanding pipeline infrastructure, favourable economics of gas and a growing concern over pollution makes a sound investment case in CGD space provided the strategy to deal with supply side issues and regulatory risks is in place. Network Basics CGD represents the last mile in the gas value chain and gas is supplied at low / medium pressure to Residential, commercial consumers and small industrial consumers (Piped Natural gas [PNG]) Transportation segment as vehicle fuels (Compressed Natural gas [GNG]) CGD network involves movement of small volumes of gas through small diameter medium to low pressure distribution pipelines by a local distribution company to a large number of retail consumers. It is an integrated network of steel, poly ethylene (PE) and medium density polyethylene (MDPE) pipelines along with CNG dispensing stations.

    Source: Industry, Dolat Research January 04, 2013 29 DOLAT CAPITAL CGD Evolution in India The gas retail business in India started as early as 1880 when Calcutta Gas Company and Bombay Gas Company commenced operations in Kolkata and Mumbai respectively. The sector remained dormant for a very long time. The formation of Gujarat Gas Company (GGCL), Mahanagar Gas (MGL) and Indraprastha Gas (IGL), which began operations in the late 1980 to mid 1990, gave thrust to the CGD sector. Year 1880 – 1900 1962 1972 1982 -86 1989 -91 1992 1998 2003 2006 2007 City / State Company & Areas Coal gas supplied in Kolkata and Mumbai Assam Gas Company (AGCL) established Vadodara Municipal Corp. ommences supply of coal gas Systems tested by ONGC and AGCL in Assam and Tripura GGCL launches PNG supply for industrial consumers GAIL did a pilot study in Delhi, Mumbai and Vadodara Supreme Court directive to expand CNG network Supreme Court directs to introduce clean fuels in 11 cities other than Delhi and Mumbai CGD network operational in multiple locations Formation of PNGRB CGD becomes a reality and platform being made for massive growth Gains Momentum Structured Development CGD Development Phase Few initiatives, largely dormant phase Source: Industry, Dolat Research Existing CGD Network in India as on October 2012 CGD Entity Gujarat Gas Company Ltd. GSPC Gas Adani Gas Ltd. Sabarmati Gas Ltd. Vadodara Mahanagar Seva Sadan Assam Gas Company Ltd.

    Great Eastern Energy Corp. Ltd. Siti Energy Indraprastha gas Ltd. Mahanagar Gas Ltd. Maharashtra Natural Gas Ltd. Central U. P. Gas Ltd. Green Gas Ltd. GAIL HPCL* Bhagyanagar Gas Ltd. Tripura Gas Ltd. Avantika Gas Ltd. Haryana City Gas GAIL gas Ltd. Sanwariya Gas Charotar Gas Source: Industry, Dolat Research Year of Incorporation 1980 2005 2004 2006 1972 1965 1996 2006 1998 1995 2006 2005 2005 2006 2003 1990 2006 2000 2008 1999 Operating Areas Surat, Bharuch and Ankleshwar Across all regions of Gujarat, covering Saurashtra, central, north and south Ahmedabad, Faridabad, Vadodara Gandhinagar, Mehsana, Sabarkantha Vadodara Duliajan and nearby areas

    Asansol, Kulti and Durgapur Moradabad Delhi, NOIDA, Greater NOIDA and Ghaziabad Mumbai, Thane, Mira Bhayandar and Navi Mumbai Pune Kanpur, Bareilly Agra, Lucknow and Taj Trapezium zone Vadodara Ahmedabad Hyderabad, Vijaywada, Rajahmundry and Kakinada Agartala Indore, Ujjain and Gwalior Gurgaon Dewas, Kota, Sonepat and Meerut Mathura Anand/Kheda 30 January 04, 2013 DOLAT CAPITAL CGD Project Cost: On an average, a CGD project for a mid tier city could be developed with an investment of around Rs 4 bn. The main costs for a CGD project are the pipeline network, which is nearly 60% of the total cost and the land cost required for City Gate stations and CNG stations within the city.

    Competitive Bidding for New Licenses The regulations put a process for selection of a CGD entity for a new city on the basis of competitive bidding. Over and above the qualifying technical and certain financial criteria, the bidders are evaluated on certain predefined parameters. These parameters have also undergone some change due to some malpractices witnessed in the earlier rounds of bidding. The revised parameters are as below: Source: Industry, Dolat Research Network Exclusivity PNGRB has provided Network Exclusivity on the infrastructure for the winning bidder. The network tariff charged by the owner for the use of infrastructure by other players is a biddable parameter.

    The regulations provided exclusivity of infrastructure over its economic life of 25 years (economic life has been taken as 25 years for determining network exclusivity, the actual economic life of the infrastructure could be more than 25 years). Marketing Exclusivity The regulations provide for marketing exclusivity of 5 years and 3 years for new and existing players respectively. Beyond this period, the pipeline January 04, 2013 31 DOLAT CAPITAL infrastructure will become a common carrier and open access has to be given to third parties on payment of network tariff. Gas Consumption Parameters PNGRB has defined the gas consumption levels of consumers to ensure that a CGD player does not have to face any competition from bulk suppliers.

    This was done with a clear objective that consumers up to a certain level of gas consumption would be catered by CGD licensee of that area irrespective of the price differential. S. No. Gas Consumption Levels 1 Gas consumption less than 50,000 SCM per day 2 Consumption over 50,000 SCM, but less than 100,000 SCM per day 3 Consumption over 100,000 SCM per day CGD Source: Industry, Dolat Research Guidelines To be under CGD network Either through CGD network or separate pipeline To be through a separate pipeline not covered under network Service Obligations The regulator has specified certain minimum levels of service obligations and service standards on matters relating to safety, addressing consumer complaints, quality of natural gas supplied, issue of new connections, billing and emergency response. Gas Supply:

    CGD has been accorded a high priority status for allocating gas from domestic supplies. The decline in the KG D6 gas production has been a dampener for the country. However, considering the case of 3 major CGD players of India, viz. IGL, GGCL and MGL, the CGD users have shown willingness to accept high cost gas in form of imported RLNG. RLNG is readily available and all the above mentioned CGD companies are catering to their incremental volume growth through RLNG. The only risk to this is the prices of RLNG moving upwards sharply from the current levels. However, the upcoming global capacity for RLNG and decline in US imports would keep RLNG prices under check.

    Any increase in the domestic supplies in the coming years would be an added advantage for CGD companies to fuel growth as well as profitability. Gas Pricing There are several gas prices prevailing in the country. The gas priced under Administered Price Mechanism (APM) is for the gas produced from blocks that were awarded by the government on a nomination basis to ONGC and OIL. The price of the gas produced from the fields operated by private companies or joint ventures of public and private companies is approved by the government. For the gas produced from the NELP blocks, the contractor who develops and produces from the field can propose a selling price of gas.

    However, the formula or basis for that price has to be approved by the government. January 04, 2013 32 DOLAT CAPITAL For the imported RLNG, which is the other source of gas apart from domestic supplies, the price is not regulated. This is the only segment in the gas market that can reflect the short term demand and supply scenario of India. In May 2010, the government increased the APM price of gas by 135% from USD 1. 79 per MMBTU to USD 4. 2 per MMBTU bringing it par with KG D6 prices. This substantial increase in the APM price in one go is an indication of the government’s intent to make the gas market viable for investors. It also eliminated the subsidy and brings in a level playing field for various consumers of gas.

    Impact on CGD: When the APM prices were increased and CGD companies had to resort to higher cost RLNG in absence of domestic gas supplies, the biggest concern was the ability of CGD companies to maintain their profitability and would any prices hikes be accepted by the end users. The enviable economics of gas usage as compared to alternate fuels and ease of usage enabled CGD companies to pass on the hike in the gas input cost. The acceptance of the price hikes showcases the resilience in the business model of CGD companies. The price hikes has become a normal business phenomenon and we feel that all the CGD companies are working with a strategy to maintain their gross spreads on absolute terms. January 04, 2013 33 DOLAT CAPITAL India Position on Global CGD Scenario

    India needs to compare the CGD developments in the country with the progress made by other countries and take lessons on what has driven the progress of CGD business in the world. US and UK are the benchmarks for the CGD business. Regulation Low Moderate Envisaged Positin High All the major countries are clustered around the same position in Global CGD Matrix and are trying to benchmark to US and UK for maturation US UK High High Malaysia D e m a Moterate n d Pakistan India Japan S u p Moterate p l India should concentrate on y regulatory/infrastructural development first. China South Koriea Turkey Low Low Low Moderate Infrastructure High Source: Industry, Dolat Research January 04, 2013 34 DOLAT CAPITAL

    Gap Areas and Issues pertaining to the CGD business in India Gap Areas Areas of Concern Impact Regulatory Loopholes • Role Ambiguity • Delay in granting authorising powers • Slowness in conducting the CGD bidding rounds • Increasing number of NOC clashes • Lack of clarity on policy and guidelines among players Project financing Concerns • Financial risks owing to bidding in the scenario of uncertainty of gas sourcing and trunk pipeline connectivity • Problems in equity pooling for project execution • Issues in getting finance for small and new player in the business • Promotes unfair business practices • Undue pressure on recovery of costs • De-incentivises the new entrants in the market • Acts as a deterrent to new entrants in the market • Promotes unethical business practices • Promotes unachievable business proposals in the sector Strong Moderate Zero Tariff Bids Meager Overbidding Meager

    Marketing Exclusivity • Highly Capital intensive projects with low monopoly gas marketing period of only five years • Insufficient return on investment • Against the idea of promoting small players for long-term in the CGD business Gas Allocation Principles • Low priority allocation • Less domestic gas availability • Increase reliance on R-LNG to meet energy requirements • High Input costs ultimately increases the gas price for the end consumers • Negative effect on the growth of exploration activities is speculated to result in less domestic gas availability Moderate Strong Gas Price Pooling Meager CGD Bidding Rounds • Targets underachieved • Slow coverage of cities under CGD leads to slow spread of clean fuel to end users across the country Source: Industry, Dolat Research Moderate January 04, 2013 35 DOLAT CAPITAL Major Risk Factors of CGD business in India Risk factors Gas Availability and Allocation Risk Major Areas of concern • Diminishing domestic natural gas availability • Low priority accorded to CGD sector in Gas Allocation Policy • Core sector allocation not available for nchor consumer segments of CGD sector – Industrial and Commercial • Huge investments required in the initial years when CGD is typically a low volume and low margin business • Underlying uncertainty of gas sourcing will make the funding difficult • Unrealistic bidding will affect the investment recovery model • Investing in high-interest rates time period will affect the working capital, pricing of fuels, profitability and re-investments • Build-up of gas volumes sales is not easy in the high margin customers of industrial and commercial • A lot of inertia from customers is expected in the segment of PNG and CNG • Attaining the optimal customer portfolio is a challenge • Pre-mature competition may act as a barrier to reach the desired penetration level • Legal disputes and delays threatening the authority of PNGRB • Amendments in the regulations may impact the CGD landscape • Any changes in the CGD bidding parameters also reflect a major risk • Pricing is highly subject to regulatory risk as regulatory changes may impact the CGD pricing Risk impact Moderate to high Financial Risk Moderate Marketing Risk High Regulatory Risk High Risk Matrix of CGD business Impact Gas Sourcing High Operational Marketing Regulatory Gas Availability/Allocation Pricing/Taxation Moderate Financial Project Management Legal/Statutory Business Model Low Synchronised efforts required from CGD operators, Regulator and Government to reduce the impact and frequency of the risks Low Source: Industry, Dolat Research Moderate High

    Frequency 36 January 04, 2013 DOLAT CAPITAL January 04, 2013 Int en tio na lly Le ft B lan k 37 DOLAT CAPITAL BUY ACCUMULATE REDUCE SELL Analyst Amit Khurana, CFA Amit Purohit Bhavin Shah Mayur Milak Nehal Shah Priyank Chandra Rahul Jain Ram Modi Prachi Save Sector/Industry/Coverage Director – Research Consumer Pharma & Agro Chem Auto & Auto Ancillary Midcaps Oil & Gas IT Services Metals & Mining Derivative Analyst Upside above 20% Upside above 5% and up to 20% Upside of upto 5% or downside of upto 15% Downside of more than 15% E-mail [email protected] com [email protected] com [email protected] com [email protected] com [email protected] om [email protected] com [email protected] com [email protected] com [email protected] com Tel. +91-22-4096 9700 91-22-40969745 91-22-40969724 91-22-40969731 91-22-40969749 91-22-40969753 91-22-40969737 91-22-40969754 91-22-40969756 91-22-40969733 Associates Dhaval S. Shah Pranav Joshi Sector/Industry/Coverage Engineering & Capital Goods Financials E-mail [email protected] com [email protected] com Tel. +91-22-4096 9700 91-22-40969726 91-22-40969706 Equity Sales/Dealing Purvag Shah Vikram Babulkar Janakiram Karra Kapil Yadav Parthiv Dalal Jatin Padharia Chirag Makati Aadil R. Sethna P. Sridhar Chandrakant Ware Jitendra Tolani

    Designation Principal Director – Institutional Sales Director – Institutional Sales AVP – Institutional Sales AVP – Institutional Sales Institutional Sales – FII AVP – Sales Trading Head of Derivatives Head Dealing – Equities Sales Trader Sales Trader E-mail Tel. +91-22-4096 9797 91-22-40969747 91-22-40969746 91-22-40969712 91-22-40969735 91-22-40969705 91-22-40969748 91-22-40969702 91-22-40969708 91-22-40969728 91-22-40969707 91-22-40969734 [email protected] com [email protected] com [email protected] com [email protected] com [email protected] com [email protected] com [email protected] com [email protected] com [email protected] com [email protected] com [email protected] com Dolat Dolat Capital Market Pvt. Ltd. 0, Rajabahadur Mansion, 1st Floor, Ambalal Doshi Marg, Fort, Mumbai – 400 001 This report contains a compilation of publicly available information, internally developed data and other sources believed to be reliable. While all reasonable care has been taken to ensure that the facts stated are accurate and the opinion given are fair and reasonable, we do not take any responsibility for inaccuracy or omission of any information and will not be liable for any loss or damage of any kind suffered by use of or reliance placed upon this information. For Pvt. Circulation & Research Purpose only. Our Research reports are also available on Reuters, Thomson Publishers and Bloomberg (DCML )

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