indraprastha gas igas.ns igl inbreport.myiris.com/nfasipl/indgas_20151215.pdf · the delhi govt’s...

Indraprastha Gas IGAS.NS IGL IN

EQUITY: OIL & GAS/CHEMICALS

Key winner of Delhi pollution focus

Growth to revive as judiciary/govt focus on pollution; margins to revive as gas prices decline Action: A key winner of emergent focus on Delhi pollution; more positive on long-term story; reiterate Buy

Global Markets Research 15 December 2015

Rating Remains BuyTarget Price Increased from 515 INR 600

Closing price 14 December 2015 INR 474

Potential upside +26.5%

Anchor themesWith strong judicial/government focus on controling air pollution in Delhi, gas volume growth for IGL is likely to revive soon. With gas prices likely to decline, we expect IGL's margins to improve.

Nomura vs consensusOur FY17F earnings estimates are in line with consensus. We are more positive on long-term growth prospects, and our TP is 17% ahead of consensus.

Research analysts

India Oil & Gas/Chemicals

Anil Sharma - NFASL [email protected] +91 22 4037 4338

Ravi Adukia, CFA - NFASL [email protected] +91 22 4037 4232

The genesis and growth of IGL has in large part been driven by judicial activism on pollution in Delhi. As pollution levels are worse this winter, there is emergency focus on it by the judiciary and state/central governments. We see IGL as a key winner of this focus, as volume can sharply revive.

As the Delhi High Court observed that “living in Delhi is like living in gas chamber”, and the Supreme Court (SC) asked for monitoring pollution levels in the court campus, the Delhi government has taken emergency measures (odd/even formula, more CNG buses, curbs on diesel vehicle entry, etc.).

Importantly, the central government is supportive and will help implement the Delhi govt’s measures. Also, it wants to make CNG the preferred fuel.

The National Green Tribunal has ordered drastic measures (temporary ban on diesel vehicle registration, asking government [and its entities] to stop purchasing diesel vehicles, phasing out older vehicles, etc.).

Taking a step further, the SC today asked the state/central govt. to come up with a solution to clean Delhi’s air. It has proposed: 1) a 3-month registration ban on diesel luxury cars/SUV (over 2000cc); 2) sharp increase in green tax on vehicles entering Delhi; and 3) phasing out trucks older than 10 years.

Margin also to revive as R-Gas/domestic gas prices decline Of late, while margins have been relatively weaker, they are likely to revive as gas costs are set to decline sharply.

Catalyst: more measure to curb pollution; excise duty cut on CNG Valuation: More positive on volume revival and LT growth Compared to anaemic 1-3% volume growth in the last 2 years (average 20% in the previous 5 years), we assume growth to revive to 8-9% from FY17F. After 3% decline in FY16F, we expect earnings to move up 22% in FY17F as volumes/margins revive. We roll over of our DCF valuations to Sept-17, and our TP rises to INR600 (from INR515).

Year-end 31 Mar FY15 FY16F FY17F FY18F

Currency (INR) Actual Old New Old New Old New

Revenue (mn) 36,699 38,402 37,759 41,914 37,704 42,584

Reported net profit (mn) 4,377 4,783 4,235 5,299 5,180 5,732

Normalised net profit (mn) 4,377 4,783 4,235 5,299 5,180 5,732

FD normalised EPS 31.27 34.17 30.25 37.85 37.00 40.95

FD norm. EPS growth (%) 21.5 8.3 -3.2 10.8 22.3 10.7

FD normalised P/E (x) 15.2 N/A 15.7 N/A 12.8 N/A 11.6

EV/EBITDA (x) 8.4 N/A 8.2 N/A 6.9 N/A 6.1

Price/book (x) 3.2 N/A 2.7 N/A 2.4 N/A 2.0

Dividend yield (%) 1.3 N/A 1.3 N/A 1.4 N/A 1.4

ROE (%) 22.7 20.9 18.8 19.7 19.8 18.8

Net debt/equity (%) net cash net cash net cash net cash net cash net cash

Source: Company data, Nomura estimates

Key company data: See next page for company data and detailed price/index chart.

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Indraprastha Gas 15 December 2015

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Key data on Indraprastha Gas Relative performance chart

Source: Thomson Reuters, Nomura research

Notes:

Performance (%) 1M 3M 12MAbsolute (INR) 1.0 1.6 10.3 M cap (USDmn) 989.9Absolute (USD) -0.6 0.5 2.8 Free float (%) 50.0Rel to MSCI India 2.6 5.9 21.9 3-mth ADT (USDmn) 2.5 Income statement (INRmn) Year-end 31 Mar FY14 FY15 FY16F FY17F FY18FRevenue 39,174 36,699 37,759 37,704 42,584Cost of goods sold -26,813 -23,408 -23,587 -21,521 -24,643Gross profit 12,361 13,291 14,172 16,183 17,941SG&A -6,781 -6,959 -8,068 -9,003 -10,038Employee share expense 0 0 0 0 0Operating profit 5,581 6,333 6,104 7,180 7,903EBITDA 7,776 7,820 7,697 8,991 9,931Depreciation -2,195 -1,487 -1,593 -1,811 -2,028Amortisation 0 0 0 0 0EBIT 5,581 6,333 6,104 7,180 7,903Net interest expense -441 -298 -115 -85 -85Associates & JCEs 0 0 0 0 0Other income 259 456 428 637 738Earnings before tax 5,398 6,491 6,417 7,732 8,556Income tax -1,795 -2,113 -2,182 -2,552 -2,823Net profit after tax 3,603 4,377 4,235 5,180 5,732Minority interests 0 0 0 0 0Other items 0 0 0 0 0Preferred dividends 0 0 0 0 0Normalised NPAT 3,603 4,377 4,235 5,180 5,732Extraordinary items 0 0 0 0 0Reported NPAT 3,603 4,377 4,235 5,180 5,732Dividends -901 -1,011 -1,055 -1,143 -1,143Transfer to reserves 2,702 3,366 3,181 4,038 4,590Valuations and ratios

Reported P/E (x) 18.4 15.2 15.7 12.8 11.6Normalised P/E (x) 18.4 15.2 15.7 12.8 11.6FD normalised P/E (x) 18.4 15.2 15.7 12.8 11.6Dividend yield (%) 1.2 1.3 1.3 1.4 1.4Price/cashflow (x) 10.3 10.0 10.8 9.7 8.7Price/book (x) 3.8 3.2 2.7 2.4 2.0EV/EBITDA (x) 8.7 8.4 8.2 6.9 6.1EV/EBIT (x) 12.1 10.3 10.4 8.7 7.7Gross margin (%) 31.6 36.2 37.5 42.9 42.1EBITDA margin (%) 19.9 21.3 20.4 23.8 23.3EBIT margin (%) 14.2 17.3 16.2 19.0 18.6Net margin (%) 9.2 11.9 11.2 13.7 13.5Effective tax rate (%) 33.3 32.6 34.0 33.0 33.0Dividend payout (%) 25.0 23.1 24.9 22.1 19.9ROE (%) 22.1 22.7 18.8 19.8 18.8ROA (pretax %) 21.6 23.3 20.9 22.8 22.6Growth (%)

Revenue 16.4 -6.3 2.9 -0.1 12.9EBITDA 2.9 0.6 -1.6 16.8 10.5Normalised EPS 1.7 21.5 -3.2 22.3 10.7Normalised FDEPS 1.7 21.5 -3.2 22.3 10.7Source: Company data, Nomura estimates

Cashflow statement (INRmn) Year-end 31 Mar FY14 FY15 FY16F FY17F FY18FEBITDA 7,776 7,820 7,697 8,991 9,931Change in working capital -454 -105 117 -162 -153Other operating cashflow -846 -1,077 -1,675 -2,006 -2,162Cashflow from operations 6,476 6,638 6,138 6,823 7,616Capital expenditure -2,493 -2,148 -3,000 -5,000 -5,000Free cashflow 3,982 4,490 3,138 1,823 2,616Reduction in investments 252 -1,735 0 0 0Net acquisitions -692 -1,805 0 0 0Dec in other LT assets 0 0 0 0 0Inc in other LT liabilities 754 886 314 327 336Adjustments 119 1,235 -237 -81 -9CF after investing acts 4,415 3,071 3,215 2,069 2,943Cash dividends -901 -901 -1,011 -1,055 -1,143Equity issue 0 0 0 0 0Debt issue -1,060 -2,072 -600 0 0Convertible debt issue 0 0 0 0 0Others -451 -297 0 0 0CF from financial acts -2,411 -3,270 -1,611 -1,055 -1,143Net cashflow 2,004 -199 1,604 1,014 1,800Beginning cash 510 2,514 2,315 3,919 4,933Ending cash 2,514 2,315 3,919 4,933 6,733Ending net debt 1,011 -861 -3,066 -4,080 -5,880 Balance sheet (INRmn) As at 31 Mar FY14 FY15 FY16F FY17F FY18FCash & equivalents 2,514 2,315 3,919 4,933 6,733Marketable securities 482 412 412 412 412Accounts receivable 2,196 2,352 2,283 2,278 2,570Inventories 371 409 400 399 450Other current assets 690 652 782 939 1,056Total current assets 6,253 6,139 7,796 8,960 11,220LT investments 692 2,497 2,497 2,497 2,497Fixed assets 21,576 22,099 23,506 26,695 29,667Goodwill 0 0 0 0 0Other intangible assets 0 0 0 0 0Other LT assets 0 0 0 0 0Total assets 28,520 30,735 33,799 38,152 43,384Short-term debt 313 0 0 0 0Accounts payable 2,296 2,185 2,306 2,203 2,505Other current liabilities 1,001 1,163 1,211 1,303 1,307Total current liabilities 3,609 3,348 3,517 3,505 3,811Long-term debt 3,212 1,453 853 853 853Convertible debt Other LT liabilities 4,067 4,953 5,267 5,594 5,930Total liabilities 10,889 9,754 9,637 9,953 10,595Minority interest 0 0 0 0 0Preferred stock 0 0 0 0 0Common stock 1,400 1,400 1,400 1,400 1,400Retained earnings 16,232 19,581 22,762 26,800 31,389Proposed dividends 0 0 0 0 0Other equity and reserves 0 0 0 0 0Total shareholders' equity 17,632 20,981 24,162 28,200 32,789Total equity & liabilities 28,520 30,735 33,799 38,152 43,384

Liquidity (x)Current ratio 1.73 1.83 2.22 2.56 2.94Interest cover 12.6 21.2 52.9 84.2 92.6LeverageNet debt/EBITDA (x) 0.13 net cash net cash net cash net cashNet debt/equity (%) 5.7 net cash net cash net cash net cash

Per shareReported EPS (INR) 25.73 31.27 30.25 37.00 40.95Norm EPS (INR) 25.73 31.27 30.25 37.00 40.95FD norm EPS (INR) 25.73 31.27 30.25 37.00 40.95BVPS (INR) 125.94 149.87 172.58 201.43 234.21DPS (INR) 5.50 6.00 6.00 6.50 6.50Activity (days)Days receivable 18.6 22.6 22.5 22.1 20.8Days inventory 5.2 6.1 6.3 6.8 6.3Days payable 32.4 34.9 34.8 38.2 34.9Cash cycle -8.6 -6.2 -6.1 -9.4 -7.8Source: Company data, Nomura estimates


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Key winner of Delhi pollution focus The air pollution levels in Delhi have been rising for the past many years, and have reached alarming levels.

• A 2014 World Health Organisation report had ranked New Delhi as world’s worst city for air pollution.

• Greenpeace has reported that Delhi’s air pollution is worse than that in Beijing, with Delhi’s PM2.5 levels several times higher than Beijing’s.

• A Global Burden of Disease had identified air pollution as the fifth leading cause of death in India, with 620,000 pre-mature deaths in 2010, up 6 times in 10 years.

• A recent study on Delhi's air pollution prepared by a team of IIT Kanpur has identified emissions from vehicles, thermal plants and biomass burning in neighbouring states as the "dominant factors" and has proposed a switch to Euro VI norms, among other radical measures, to combat the menace.

Rising pollution levels are being regularly reported and highlighted in media for the past several years. With levels worsening this year, the issue has seen emergency focus of the judiciary and the government this year.

• After the Delhi High Court observed that “living in Delhi is like living in a gas chamber”, the Supreme Court (SC) asked for monitoring of air pollution in the court campus, and the local Aam Aadmi Party (AAP) government has announced several drastic measures.

• Importantly, the central government has also supported the measures taken by the Delhi government. This will ensure that Delhi Police (under control of the central government) will help implement the measures being taken by Delhi government.

• In addition, the petroleum minister has said that IGL, along with the oil marketing companies (OMCs), are working to open 200 new CNG outlets within the next few months. Also, all-out efforts will be made to make CNG the preferred fuel.

• The National Green Tribunal (NGT) has also recently ordered several measures to curb pollution, including temporary ban on diesel vehicle registration, stopping the purchase of diesel vehicles by local/central government and their agencies, and phasing out of diesel vehicles that are over 10 years old.

• Taking a step further, the SC today (15-Dec-2015) has asked the state/central government to come up with a solution to clean Delhi’s air. While the detailed SC proposal is not available yet, as per CNBC, the SC has also proposed: 1) a 3-month registration ban on diesel luxury cars/SUV (over 2000cc); 2) sharp increase in green tax on vehicles entering Delhi; and 3) phasing out trucks older than 10-years.

• Earlier in October, in an important ruling, the Delhi High Court had asked taxi aggregators like Uber and Ola to compulsorily phase out diesel vehicles by 1 March 2016.

Key measure announced by Delhi government: • To permit only odd/even numbered vehicles on alternate days for a fortnight from 1

January 2016.

• To engage additional 4,000 CNG buses from 1 January to augment the existing fleet of CNG buses (currently about 20,000).

• In addition, the transport department will also use 2,000 school buses.

• Auto-rickshaws will be allowed to double shift.

• More restrictions on trucks entering Delhi, with stricter penalties.

• Delhi government will now implement Euro-VI norms from 1-Jan-2017 (two years earlier than the previous plan to implement the norms from 1-Jan-2019).

Key decisions/directives of National Green Tribunal (NGT) • The NGT has asked the government to finalise a scheme to ensure compulsory

scrapping of diesel vehicles that are over 10 years old. For making the scheme successful, the government may give benefits to owners (in registration, scrapping or other incentives).


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• It has asked the government to seriously consider if any new diesel vehicle should be registered in Delhi. As an interim measure, it has directed that no new diesel vehicles (in addition to those over 10 years old) would be registered till the next date of hearing.

• It has asked the government to report as to how many industries and commercial places are operating on generator sets as a primary or an alternative source of energy and whether such generator sets’ emissions are within the prescribed limit and have been designed as per specific prescribed standards or not.

Central government encouraging city gas distributors (CGD) sector; may give preferred fuel status to CNG; removal of excise duty on CNG a likely possibility In our 19-Aug-2014 report, Government’s focus on CGDs augurs well, we had highlighted that the central government’s focus is on city gas development. It has been encouraging piped gas usage, and has ensured that 100% domestic gas is available for CNG/domestic piped gas demand.

Recently, as concerns of pollution in Delhi have escalated, and the petroleum minister has said that:

• IGL and oil marketing companies are working to open 200 additional outlets in Delhi within the next few months. Similarly new CNG stations will be opened in the National Capital Region (NCR) areas.

(Currently IGL has about 325 outlets, of which nearly 145 are on OMCs’ premises. While opening 200 outlets in the next few months looks aggressive, we think IGL could open 50-60 outlets over the next one year. As OMCs have a total of 400 outlets in Delhi, we think the figure of 200 can be achieved over the next 2-3 years, if CNG demand improves. Also, we highlight that, with likely declining demand for diesel refuelling due to likely reduction in diesel vehicles, OMCs in our view would be keen to add IGL’s CNG dispensing facilities at their premises.)

• Efforts will be made to make a CNG the preferred fuel (In our view, the government can positively consider doing away with the current 14% excise duty on CNG, or reducing it. Also, it could provide fiscal benefit/subsidy on CNG conversion. Also, in our view, if the odd/even number scheme is planned for the longer term, the government may possibly exempt the less-polluting CNG vehicles from this scheme).

We are more positive on volume; both CNG and piped gas demand should revive

With intense focus on Delhi’s pollution, and curbs on polluting diesel vehicles, we are more positive on CNG volume revival. CNG volume growth had slowed down to just 2-4% over the past 2 years, versus average of 14.4% over the previous five years. We now assume volume growth of 8-9% for CNG from FY17F, and think there are upsides to our assumptions.

Due to the much higher RasGas price, industrial gas demand has significantly slowed down over the past two years. As Petronet LNG’s RasGas contract is to be modified soon, we expect long-term RasGas price to decline by a sharp 45% from 1-Jan-2016. With the sharp price decline, coupled with stricter environment penalties on industries using alternate fuel, we expect industrial demand also to revive soon.

http://go.nomuranow.com/research/globalresearchportal/getpub.aspx?pid=695391&appname=Email&cid=eDRBT1JaeVlLS2s90


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Fig. 1: CNG: compared to c.3% average volume growth over last 3yrs, we assume 9% avg. growth over next 3 years


Fig. 2: PNG: compared to c.3% average volume growth over last 3yrs, we assume 9% avg. growth over next 3 years


With decline in domestic and imported gas price, we expect margins to revive

IGL has historically has shown great ability to maintain margins, with realised average per unit EBITDA margins remaining around INR5-5.50/scm over last several years. However, realised per unit EBITDA margins have been marginally moving towards the lower end of the long-term range in recent few quarters (Fig. 3).

This, in our view, is due to the weaker demand environment, reduced advantage of imported LNG vs. liquid fuels, and also continued currency depreciation. As demand environment was weak, and feedstock gas prices were expected to decline, IGL took some compromise on its margins.

We expect IGL’s feedstock prices to decline: • After 18% reduction in domestic gas prices to USD4.2/mmbtu from 1-Oct-2015, we

expect prices to further decline by 14% to USD3.6/mmbtu from 1-April-2016 (Fig. 7).

• With RasGas contract modification likely from 1-Jan-2016, we expect imported RasGas prices to decline by nearly 45% to ~USD7/mmbtu (Fig. 6).

While IGL will certainly pass on part of the price reduction to customers, we think gas price reduction will provide an opportunity for IGL to increase its margins.

In our view, marginal increase in margins should not be difficult for the following reasons: • For CNG, the price advantage relative to liquid fuels continues to be high. At current

prices, we estimate CNG’s advantage is 55% vs. petrol and 35% vs. diesel. Also, with the government wanting to give preferred fuel status to CNG, and imposing stricter norms for on liquid fuels (particularly diesel), the consumer preference will increasingly shift towards CNG (Fig. 4 and 5).

• IGL’s CNG price continues to remain amongst the lowest in the country and has declined nearly 26% from the peak as domestic gas availability has increased to 100% for CNG (Fig. 8 and 9).

• After the likely reduction in RasGas prices from 1-Jan-2016, we expect RasGas LT gas to compete well with liquid fuels. Also, the increased pollution focus will encourage industrial users to switch to gas. With improving demand and competitive gas price, we think IGL’s ability to raise margins will increase.

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Fig. 3: IGL – EBITDA margins trend Per unit margins, which have declined in last few quarters, are likely to revive on lower gas prices


Fig. 4: CNG’s advantage vs. petrol


Fig. 5: CNG’s advantage vs. diesel


Fig. 6: Under revised terms, we expect R-Gas DES price to decline sharply from USD12.5 to USD7/mmbtu


Fig. 7: After 18% decline in domestic gas prices from 1 Oct, we expect another 15% decline from 1 April 2016

Source: Petroleum Planning & Analysis Cell, Nomura estimates

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Fig. 8: CNG prices in Delhi have declined 26% from peak

Source: Company data, Nomura research

Fig. 9: CNG prices in Delhi are lowest in the country

Company Area of operations CNG price

(INR/kg)Vs Delhi

Bhagyanagar Gas Hyderabad 52.5 41%

Central UP Gas Unnao 52.4 41%

Central UP Gas Kanpur 51.0 37%

Central UP Gas Bareilly 51.0 37%

Bhagyanagar Gas Vijayawada 50.5 36%

Adani Gas Ahmadabad, Vadodara 45.7 23%

Gujarat Gas Surat, Bharuch, Ankleshwar 45.7 23%

GSPC Gas Gujarat 45.7 23%

Mahanagar Gas Thane 42.7 15%

IGL NCR 42.6 15%

Adani Gas Faridabad 42.0 13%

Mahanagar Gas Mumbai 41.9 13%

IGL Delhi 37.2 0%

Source: Company data, Nomura research

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Earnings revisions We incorporate the 1HFY16F results into our estimates. We also fine-tune our volumes, EBITDA margins, and other assumptions. On these changes, our FY16F estimates reduce 11% and our FY17F estimates are largely unchanged.

We are now more optimistic on longer-term volume growth. For CNG, we now assume volume growth of 8-9% for FY17-19F. For piped natural gas, we assume volume growth of 9-10%. We estimate overall volume growth of 8-9%.

Fig. 10: Changes to our key assumptions FY11 FY12 FY13 FY14 FY15 FY16F FY17F FY18F

Volumes (mmscmd)

CNG 2.2 2.6 2.8 2.8 2.9 3.0 3.3 3.6

PNG 0.5 0.8 0.9 1.0 0.9 1.0 1.1 1.2

Total 2.7 3.3 3.7 3.8 3.8 4.0 4.4 4.8

y-y growth % 28% 22% 10% 3% 1% 5% 9% 9%

Revision% -2% -1% 1%

Volumes (% break-down)

CNG 82% 77% 75% 74% 76% 75% 75% 75%

PNG 18% 23% 25% 26% 24% 25% 25% 25%

Blended Revenue (INR/scm) 17.5 20.6 25.2 28.3 26.1 25.6 23.4 24.2

Blended EBITDA (INR/scm) 4.95 5.17 5.65 5.62 5.55 5.21 5.59 5.65

Revision% -7% 0% 5%


Maintain Buy with a revised TP of INR600

We continue to use DCF valuation for IGL, but roll over valuations to September 2017 (earlier March 2017). We assume a WACC of 11% (unchanged) and terminal growth of 2.5% (unchanged). Cash flows are discounted back to September 2017.

Our DCF-based target price increase is driven by our optimistic long-term outlook and the roll-over. Our TP increases to INR600 (from INR515 earlier).

We continue to like IGL as a key stock to play the city gas distribution theme in India. It owns and operates the city gas business in Delhi (India’s largest metro), and has a 50% stake in CGD licensees in emerging and high-growth cities such as Pune and Kanpur. Historically, IGL has shown strong ability to sustain it’s per unit margins. Valuations at FY17F/18F P/E of 12.8x/11.6x (FY17F EPS: INR37.0, FY18F EPS: INR41.0) appear undemanding to us. Our valuations for IGL’s stakes in MNGL/CUGL are conservative, and we see further 6% upside.

Fig. 11: IGL: DCF valuation


INR mn FY14 FY15 FY16F FY17F FY18F FY19F FY20F FY21F FY22F FY23F FY24F FY25F FY26F FY27F

Total Volume (mmscmd) 3.8 3.8 4.0 4.4 4.8 5.2 5.7 6.0 6.4 6.7 7.1 7.5 7.9 8.4

CNG (mmscmd) 2.8 2.9 3.0 3.3 3.6 3.9 4.2 4.5 4.8 5.0 5.3 5.5 5.8 6.1

PNG (mmscmd) 1.0 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 2.0 2.1 2.3

EBITDA (INR/scm) 5.6 5.6 5.2 5.6 5.6 5.7 5.7 5.5 5.3 5.2 5.0 4.9 4.7 4.6

EBITDA 7,776 7,820 7,697 8,991 9,931 10,856 11,707 12,073 12,447 12,747 13,056 13,372 13,698 14,032

EBIT 5,581 6,333 6,104 7,180 7,903 8,659 9,389 9,666 9,950 10,160 10,378 10,605 10,840 11,085

FCFF 3,427 3,610 2,621 1,622 2,323 3,999 5,608 7,384 7,664 7,895 8,131 8,373 8,620 8,874

Discounted FCFF - - 1,622 2,090 3,237 4,085 4,839 4,519 4,189 3,882 3,596 3,332 3,086

DCF Summary (INR mn) Sep-17

WACC 11%

Discounted free cash flow 40,563

Terminal valuation 38,587

Enterprise Value 79,150

Net Debt / (Cash + investments) (6,481)

Implied Mcap 85,632

Target price 600

Nomura draprastha Gas 15 December 2015 | In

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Fig. 12: IGL - One-year-forward P/E band

Source: Bloomberg, Nomura research

Fig. 13: IGL - One-year-forward P/B band

Source: Bloomberg, Nomura research

Valuation methodology We continue to use DCF methodology to value IGL, assuming a WACC of 11% and a terminal growth rate of 2.5%. Cash flows are discounted back to September 2017. This derives a target price of INR600. The benchmark index for this stock is MSCI India.

Risks Lower-than-expected pick-up in CNG and PNG volumes, lower margins and higher operating costs are key risks.

Our valuation for CGD stakes is conservative, and implies 6% upside to our TP

We currently value IGL’s 50% stakes in MNGL (Maharashtra Natural Gas Limited) and CUGL (Central UP Gas Limited) at an investment value of INR2.5bn (INR18/share). If we use 12x average FY17-18F P/E multiples (similar to the current trading multiple of IGL), our valuation increases to INR51/share. This implies nearly 6% upside to our current TP for IGL.

Fig. 14: Our valuation of MNGL / CUGL stakes conservative – can add 6% to our TP INRmn MNGL CUGL Total

FY15 PAT 541 275 816

Last 3yrs PAT CAGR 63% 9%

Next 3yrs PAT CAGR assumption 20% 8%

FY17-18F avg. PAT 853 333 1,187

IGL share of PAT (50%) 427 167 593

Target FY17F P/E multiple (x) 12 12

Equity value 5,120 2,000 7,120

INR/share of IGL

Equity value 37 14 51

Our current valuation (at investment) 13 5 18

Upside 24 9 33

% of TP 4% 2% 6%


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Appendix A-1

Analyst Certification

We, Anil Sharma and Ravikumar Adukia, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies.

Materially mentioned issuers Issuer Ticker Price Price date Stock rating Sector rating Disclosures Indraprastha Gas IGL IN INR 474 14-Dec-2015 Buy N/A

Indraprastha Gas (IGL IN) INR 474 (14-Dec-2015) Rating and target price chart (three year history)

Buy (Sector rating: N/A)

Date Rating Target price Closing price 13-Feb-15 515.00 427.40 19-Aug-14 450.00 360.20 11-Feb-14 340.00 262.10 11-Feb-13 355.00 258.85

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology We use a DCF methodology to value IGL, assuming a WACC of 11% and a terminal growth rate of 2.5%. Cash flows are discounted back to Sept-17. This derives a target price of INR600. The benchmark index for this stock is MSCI India. Risks that may impede the achievement of the target price Key risks include a lower than expected pick-up in CNG / PNG volumes, lower EBITDA margins etc.

Important Disclosures Online availability of research and conflict-of-interest disclosures Nomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne. Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for help. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to

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Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America, and Japan and Asia ex-Japan from 21 October 2013 The rating system is a relative system, indicating expected performance against a specific benchmark identified for each individual stock, subject to limited management discretion. An analyst’s target price is an assessment of the current intrinsic fair value of the stock based on an appropriate valuation methodology determined by the analyst. Valuation methodologies include, but are not limited to, discounted cash flow analysis, expected return on equity and multiple analysis. Analysts may also indicate expected absolute upside/downside relative to the stated target price, defined as (target price - current price)/current price. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. Benchmarks are as follows: United States/Europe/Asia ex-Japan: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology; Japan: Russell/Nomura Large Cap. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Sectors that are labelled as 'Not rated' or shown as 'N/A' are not assigned ratings. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Japan/Asia ex-Japan: Sector ratings are not assigned. Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan prior to 21 October 2013 STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. 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