AUGUST 2016 - Elara Capital
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AUGUST 2016 Swarnendu Bhushan
swarnendu.bhushan@elaracapital.com
+91 22 6164 8504
Part I Part II Up, Up and Away, our initiating thematic on gas, dwelled on India’s The Sequel, is Part II of a hugely successful thematic. The report big fight against pollution and how the gas sector was an impending highlights newer dimensions of the sector and it has just got bigger. beneficiary of the same. Subsequent National Green Tribunal diktats We add two more investible opportunities in the space — Gujarat Gas and structural fall in global prices acted as key catalysts to our thesis and Mahanagar Gas — as part of this series. pumping up stock prices by 50-80% under one year. Elara Securities (India) Private Limited The Sequel 2
Gains in the pipeline
Urban sprawl chokes cities inter-city CNG transportation, an increase in CNG demand of 35%;
government aims development of 100 smart cities to boost CNG use
Emergence of the metropolitan city: 50% growth in cities with more than
1mn population during 2001-11 New emerging uses + low LNG prices = stock rerating
Bumper-to-bumper: 11% CAGR in road traffic during 1950-2011 (Source: Cogeneration, tri-generation: environment friendly and cheaper than
Planning Commission); average Indian travelled ~7,000km in 2010-11 vs only gasoil, suitable where availability of grid electricity is erratic
64km over 1950-51, resulting in 11% CAGR in road traffic; high passenger Gas geysers, 2W pilot: incremental demand of 0.1-0.5mmscmd expected in
traffic results in heavy pollution; 10 out of 20 most polluted cities globally are leading cities
Indian
Low LNG prices: addition of ~140mn tonnes pa of additional supply over
Rising pollution levels: 10 out of 20 most polluted cities globally are based total global trade of 245mn tonnes in 2015 likely to keep prices suppressed
in North India. Pan-India, only 2 out of 180 cities had low PM10, as per CPCB
Our top picks
India gears up for the challenge
Gujarat Gas (GUJGA IN, Buy, TP: INR 751, Upside: 22%): volume
Power, fertilizer demand-led opportunity: Out of unmet demand of growth of 10-15%, led by industrial demand and addition of new areas; low
100mmscmd from the power sector, only 32mmscmd is met. Fertilizers at spot LNG prices to help demand
42mmscmd to grow 30% by 2020
Indraprastha Gas (IGL IN, Buy, TP: INR 845, Upside: 25%): volume
Most of India not on the gas grid: Existing trunk pipeline network of growth of 7-8%; free cashflow of INR 5bn pa; working on several new
16,000km to expand by 70% in the next 4-5 years. Double LNG applications
consumption from 58mmscmd to 106mmscmd in the next 3-4 years
Mahanagar Gas (MAHGL IN, Buy, TP: INR 652, Upside: 21%): volume
National Green Tribunal sharpens fangs: post Judiciary taking up the growth of ~5-8% pa over FY16-18E; highest EBITDA/scm; further growth
initial cudgels against pollution, orders issues cross-country from adjoining areas of Mumbai and Raigad District
CNG bids: 60 cities in seven rounds to date. Emergence of private firms like Petronet LNG (PLNG IN, Buy, TP: INR 386, Upside: 23%): expansion-
Adani, Jay Madhok, Synergy, Bucon, Essel Gas and several PSU JVs led volume growth to boost EBITDA by 70% over FY16-18E; higher earnings
Green corridors & Smart cities: Eight green corridors identified to facilitate visibility post expansion in December 2016
Source: Wood Mackenzie, WHO , Industry, Elara Securities Research
Elara Securities (India) Private Limited The Sequel 3
Table of Content Past, present and future 5 Case for rerating 6 Mumbai – maximum city, bursting at the seams 10 India gears up to the challenge 11 Government wakes up 16 Green corridors – boost to volume 19 Smart cities – the new frontier 22 New applications, low LNG prices to help 24 Savings potential of Combined Heat & Power (CHP) 25 Two-wheelers on CNG 28 LNG for inland bunkering 30 Low LNG prices to help 32 Global peer valuation (Consensus) 34 Company Section Gujarat Gas – Set for Greener Pursuits 37 Indraprastha Gas – Time to Tank Up 48 Mahanagar gas – New Kid on the Block 58 Petronet LNG – Set to Take-off 68 Appendix 77 Elara Securities (India) Private Limited The Sequel 4
Past, present and future
180 Indraprastha Gas &
6-Jan-16
7-Apr-16
11-Dec-15
1-Jul-16
13-Jan-16
4-Sep-15
1-Oct-15
5-Dec-15
13-Oct-15
20-Nov-15
Petronet LNG outperform
160 the Nifty by ~50-70% since
April 1, 2015
140
IGL is currently trading at
120 15x FY18E P/E and Petronet
LNG is trading at 11.5x
FY18E P/E. Is the rally
100
over? Where do we go
from here?
80
We identify a host of new
60 applications and
Jan-16
Mar-16
Jul-15
Sep-15
Oct-15
Jul-16
May-15
Jun-15
Aug-15
Nov-15
Feb-16
May-16
Jun-16
Dec-15
Apr-15
Apr-16
avenues, may
which
not result in
IGL NIFTY Gujarat Gas Petronet GSPL GAIL
incremental rise
Sep 4, 2015: Elara thematic on natural gas, Up, Up & Away Jan 6, 2016: Noida administration directs industrial units to shift to in EPS in the next
Oct 1, 2015: Domestic gas price cut by ~USD 1/mmBtu natural gas by March 2016; challenged in court
12-18 months, but
Oct 13, 2015: SC announces cess on gasoil vehicles entering Delhi Jan 13, 2016: After restart of two nuclear reactors in Japan in 2015,
two more reactors ready to start would result in
Nov 20, 2015: Successful renegotiation of LT Rasgas contract
Apr 7, 2016: Indraprastha Gas opens 36 new CNG stations to cut rerating of the stocks
Dec 5, 2015: Delhi govt implements the odd-even experiment
queues
Dec 11, 2015: NGT announces further restriction on gasoil vehicles in
Jul 1, 2016: Mahanagar Gas lists, closes 25% higher than upper
Delhi
limit of pricing band
Source: Capitaline, Elara Securities Research
Elara Securities (India) Private Limited The Sequel 5
Case for rerating
Green CNG
Two Wheelers Assured supply
corridors
0.5mmscmd in of up to 110%
~35% increase in for CNG & PNG
Delhi alone
CNG consumption domestic
Promising new Structurally low
Rerating
applications LNG prices
Smart cities
Bunkering,
Faster
trucking
implementation
Thrust on
reducing
CHP/Tri-generation pollution
Source: Elara Securities Research
Elara Securities (India) Private Limited The Sequel 6
Increasing urbanization
50% growth in cities with > 1mn population Ballooning road traffic
60 40,000
CAGR of 11% during 1951-2021 results in
50 30,000 massive traffic
40
20,000
30
10,000
20
10 0
1950-51
1960-61
1970-71
1980-81
1990-91
2000-01
2010-11
2020-21
0
2001 2011
Number of cities with population more than 1mn
Source: Census 2011, Elara Securities Research Source: Planning Commission, Elara Securities Research
Growing urban population Urbanization choking India’s cities
32 Strong vehicular growth: Leading urban centres like Mumbai and Delhi
(% of total population)
31 witness a 6-8% CAGR during FY10-16
30 Sharp rise in distance travelled: Urban centres have expanded and
29 better roads have facilitated longer commutes, resulting in average
28 distance travelled increasing 110x in 50 years ending FY11 (Source:
27 Planning Commission)
26 Traffic to worsen: The Energy & Resources Institute estimates cars per
2001 2011 thousand to rise from 18 to 35 by 2025 in India; a few cities like Delhi
Urban population would have more than 300 cars per thousand
Source: Census 2011, Elara Securities Research Source: Census 2011, Planning Commission, Elara Securities Research
Elara Securities (India) Private Limited The Sequel 7
Industrial pollution worsens
43 critically polluted industrial clusters
No. of Industrial No. of Industrial No. of Industrial
State CEPI State CEPI State CEPI
clusters clusters/Areas clusters clusters/Areas clusters clusters/Areas
Andhra Vishakha patnam 52 Mangalore 68 Bhiwadi 71
2 Karnataka 2
Pradesh Patancheru-Bollaram 76 Bhadravati 45 Rajasthan 3 Jodhpur 78
Chhattisgarh 1 Korba 69 Kerala 1 Cochin, Greater 58 Pali 83
Nazafgarh drain Vellore 80
Madhya
basin (including Anand 1 Indore 79 Cuddalore 70
Delhi 1 73 Pradesh Tamil Nadu 4
Parvat, Naraina, Okhla Manali 77
and Wazirpur) Chandrapur 82
Coimbatore 53
Dombivali 72
Ankaleshwar 81 Ghaziabad 84
Maharashtra 5 Aurangabad 69
Vapi 85 Singrauli 83
Navi Mumbai 73
Ahmedabad 70 Noida 79
Gujarat 6 Tarapur 73 Uttar Pradesh 6
Vatva 83 Kanpur 72
Bhavnagar 63 Angul Talchar 73 Agra 69
Junagarh 53 Orissa 3 Ib Valley 60 Varanasi-Mirzapur 57
Faridabad 74 Jharsuguda 73 Haldia 62
Haryana 2
Panipat 81 Ludhiana 76 West Bengal 3 Howrah 61
Punjab 2
Jharkhand 1 Dhanbad 72 Mandi Gobind Garh 78 Asansole 56
Central Pollution Control Board: Develops Comprehensive Environmental Pollution Index (CEPI) to “capture various health dimensions of environment including air,
water and land” in industrial sectors in 2009. In partnership with State Pollution Control Boards, IIT Delhi and Ministry of Environment & Forests, it identifies 88 industrial
clusters for the study.
Critically polluted clusters: Declares 43 clusters critically polluted and 32 others severely polluted. The government has banned any development projects in
these critically polluted clusters. Action plans chalked out for corrective measures. Natural gas identified an important tool to reduce air pollution.
Source: Central Pollution Control Board, Elara Securities Research
Elara Securities (India) Private Limited The Sequel 8
India chokes up
10 cities in India make it to the top 20 most polluted cities Rising air pollution: too high a price
PM2.5(µg/m3) Dying too young: WHO study estimates 0.62mn premature deaths every
100 150 200 250 year in India in 2010
Zabol, Iran Smog blankets all-India: All 121 cities being monitored, with the
Gwalior, India exception of one, had PM2.5 above WHO acceptable limits
Allahabad, India Waiting to exhale: 10 most polluted cities have PM2.5 numbers that are
Riyadh, Saudi Arabia 11-18x WHO permissible limits. In Delhi alone, respiratory-related illnesses
Al Jubail, Saudi Arabia in 32% of children in Delhi, with reduced lung function in 43.5%
Patna, India
Raipur, India
Bamenda, Cameroon
Source: WHO, 2015, CSE, Elara Securities Research
Xingtai, China
Alarm bells: only 2 out of 180 cities
Baoding, China
in India had low PM10, as per CPCB India’s commitment to the World
Delhi, India
Ludhiana, India COP 21: As a part of Intended Nationally Determined Contribution, India
Dammam, Saudi Arabia commits to 33-35% reduction in energy intensity by 2030 over 2005 levels
Shijiazhuang, China Commits to increase forest cover: Additional carbon sink of 2.5-3bn
Kanpur, India tonnes of CO2 equivalent through additional forest & tree cover by 2030
Khanna, India
Non-fossil power: Aims to have 40% cumulative power installed capacity
Firozabad, India
Lucknow, India from non-fossil fuel based energy resources by 2030
Handan, China
Peshawar, Pakistan
Source: WHO 2016, Elara Securities Research
Elara Securities (India) Private Limited The Sequel 9
Mumbai – maximum city, bursting at the seams
50% population growth in Greater Mumbai in 20 years CNG penetration rises to 70% just in a decade
5,000
(BEST* Buses)
4,000
3,000
2,000
1,000
0
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
Diesel CNG
Source: Indian Institute of Human Settlement, Elara Securities Research Note: * Brihanmumbai Electricity Supply and Transport
Source: ITEA Conference, Oslo 2015, Elara Securities Research
Vehicular population grows 4.5x over 1992-2011 Busting at the seams
30 Stats get denser: Mumbai population of 12.50mn in 2011 is expected to
(mn) rise to 13.94mn by 2034. CGD companies would be direct beneficiaries
25
20 Traffic congestion to increase in the upcoming years: Vehicular
15 population grows 4.5x over 1992-2011. For example, the number of CNG
vehicles in Mumbai & adjoining areas grew at a CAGR of 14% over 2009-16.
10
Higher emphasis on greener fuels
5
Worsening air quality: According to the Central Pollution Board of India,
0
1961 1971 1981 1991 2001 2011 2015 Mumbai reported an average AQI Index value of 100 in February 2016 where
air was contaminated with pollutants (PM2.5 and PM10). In Mumbai alone,
Vehicles registered in Greater Mumbai
~3,000 tonnes of pollutants are spewed into the air daily, of which
Source: Indian Institute of Human Settlement, Elara Securities Research
52% are from automobiles, 2% domestic fuels and the rest industries
Elara Securities (India) Private Limited The Sequel 10India gears up to the challenge
Opportunity bonanza National Green Tribunal emerges as new champion
Power, fertilizer demand-led opportunity for natural gas: Out of Ban on older vehicles in Delhi: ban on gasoil vehicles older than 10
unmet demand of 100mmscmd from the power sector, only 32mmscmd is years and gasoline older than 15 years
met. Fertilizers at 42mmscmd to grow 30% by 2020E. Hence, current
consumption of ~127mmscmd is expected to rise to 190mmscmd May extend ban to other cities: six municipal areas in Kerala and 11
other heavily polluted cities under the radar
Much of India not on the gas grid: Existing trunk pipeline network of
16,000km to expand by 70% in the next 4-5 years; the government is Eco-sensitive zones: Ban on vehicles older than 15 years on the Manali-
helping via viability gap funding. New identified cities for CGD will result in Rohtang Highway and use of only CNG buses for tourism
unprecedented rise in urban pipeline network UP government: Considers introducing CNG buses in cities
Opportunity for LNG players: Domestic gas supply (excluding internal
consumption) for external sales is at 70mmscmd; ~45% of current
Source: NGT, Elara Securities Research
consumption is being met through LNG. Space exists to double LNG
consumption from 58mmscmd to 106mmscmd in the next 3-4 years. Government wakes up
Petronet LNG expands capacity 18.5mmscmd to meet demand
Launches Air Quality Index: Central Pollution Control Board defines
Judiciary led in the past monitoring parameters and acceptable limits
1998: SC mandates CNG for public transportation in New Delhi NAMP: National Air Quality Monitoring Programme executes monitoring of air
quality through 342 stations across 127 cities & towns in 26 states and 4 four
2001: Mumbai HC orders phasing out of transport vehicles older than 15
Union Territories
years and phasing out or conversion to CNG of transport vehicles older than 8
years COP 21: India commits to reduce emissions intensity by 33-35% by 2030
over 2005 levels; increase forest cover; 40% of total installed power capacity
2012: Gujarat HC orders vehicles (private & public) to be converted to CNG
to be non-fossil by 2030
2015: Karnataka HC orders public transport & three wheelers to run on CNG
Elara Securities (India) Private Limited The Sequel 11More join the party
Fertilizer second-biggest consumer after power Infra pipeline major draw
Gas consumption to rise by 14mmscmd: Current gas consumption by Huge demand for pipelines: Among awarded cities for CGD, 22 are non-
fertilizer sector is 42mmscmd. Revivals & conversion are expected to raise operational. IGL has developed a network of 10,000km of urban pipelines
consumption by the fertilizer sector from 42mmscmd to 56mmscmd while MGL & Gujarat Gas have 4,600km and 16,000km, respectively. As new
cities become operational, it would result in huge demand
Supply deficit: 30 urea units turn out ~23mn tonnes currently while
demand is likely to rise to 38mn tonnes by FY25E from 32mn tonnes in FY15 Case for more terminals: Only two fully functional LNG terminals exist with
total capacity of 15mn tonnes pa. Unavailability of domestic gas combined
Convert & revive: Government plans conversion of defunct fertilizer plants
with huge unmet demand as gas grid expands would result in demand for
of MFL, MCFL & SPIC to gas from naphtha. Additionally, revival of Sindri,
LNG terminals, far more than currently planned additions of 10mn tonne pa
Barauni and Gorakhpur fertilizer plants on the cards
Petrochem, CGD emerges as another growth area The spillover effect
Petrochem gas consumption to rise by 10mmscmd: The upcoming EPC contracts: Revival of Sindri, Gorakhpur & Barauni fertilizer plants spell
BCPL, Pata expansion and OPaL are expected to increase demand for gas by opportunity of INR 180bn. Most projects would go to Engineers India
10mmscmd from the petrochemicals industry (ENGR IN). Fertilizer firms like Madras Fertilizers (MDF IN),
Mangalore Chemicals & Fertilizers (MCF IN) & SPIC (SPET IN) are
Refineries’ unmet demand: We estimate current consumption of
direct beneficiaries
~10mmscmd will sustain despite new refining capacity due to RIL’s demand
coming off. There would be geographic shift, leading to pipeline demand. Pipelines: Suppliers Jindal Saw (JSAW IN), Welspun Corp (WLCO IN)
and Man Industries (MAN IN) would benefit from higher orders for urban
We expect 10-15% pa CGD growth: while the government forecast a
and trunk pipelines
demand CAGR of 19% to reach 51mmscmd by 2022
Kit manufacturers: Most CNG kits currently imported and retrofitted.
Market currently unorganized. As demand rises, new market opens up
Elara Securities (India) Private Limited The Sequel 12LNG consumption to double by 2020E
Gas availability to rise by ~50%
Domestic gas production is unlikely to
Dahej - Brownfield 5mn tonne pa
Jammu
&
ramp up beyond 100mmscmd by FY18E. Mundra - Greenfield 5mn tonne pa
Kashmir
As a result, supply gap to be bridged by Kochi - higher utilization due to BPCL's refinery expansion
Dabhol - breakwater facilitating full utilization of 5mn tonne pa
Himachal importing LNG 200
Pradesh
Punjab (mmscmd)
Uttaranchal 150
Haryana
Delhi
Sikkim
Arunachal
Pradesh 100
Rajasthan
Uttar Pradesh
Assam 50
Nagaland
Bihar
Meghalaya
Manipur 0
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
Jharkhand Tripura
West
Mundra Bengal Mizoram
5.0 Dahej Chhattisgarh
Gujarat Madhya Pradesh
H-Energy Digha
HPCL and SP – Chhara
5.0 6.0 Domestic gas LNG
Orissa IOC –Dhamra
Swan Energy – Jaffrabad 5.0
4.5 Hazira GAIL – Paradip
Source: Elara Securities Estimate
MPT- Mumbai 3.5
5.0
H-Energy - Jaigad Maharashtra Telangana Petronet LNG – Gangavaram
Domestic production a laggard: No meaningful increase in
8.0 5.0
VGS – Kakinada domestic gas production over the next two years
Dabhol Shell/GAIL – Kakinada 3.5
3.5
Goa Andhra LNG to bridge the gap: While Dahej would expand from
Pradesh
LNG Bharat – Nellore 37.0mmscmd to 55.5mmscmd from December 2016, GSPC’s
Karnataka 5.0 Existing
ONGC – Mangalore IOC –Ennore Mundra LNG terminal is expected to be commissioned in FY17.
5.0 5.0 Announced Kochi would see higher volume due to a pickup from BPCL’s
Tamil Nadu Under construction refinery expansion
Pondicherry
Kochi
5.0
Kerala
Disclaimer: Map not to scale
Source: Petronet LNG, Shell Hazira, GSPC LNG, GAIL, H -Energy, Elara Securities Research
Elara Securities (India) Private Limited The Sequel 13Large swathes of India still without gas
Only ~16,000km of pipelines: South India, large parts of Central India,
North India and Northwest India do not have access to gas network
Land acquisition hurdle: The Kochi-Mangalore-Bangalore pipeline is
currently facing land acquisition problems; as a result, Kochi LNG terminal is
just ~5% utilized
~11,000km of pipelines under construction: slow progress due to
unavailability of gas
Renewed boost from the fertilizer sector: The Jagdishpur-Haldia pipeline
to help revive Barauni, Sindri & Gorakhpur fertilizer plants is to be built in
three phases; Phase 1 scheduled to be completed by December 2018
Budgetary grants: The government has decided to extend budgetary
grants instead to GAIL & GSPL to meet shortfall in cost of setting up new
pipelines
Source: Petroleum Planning & Analysis Cell, Elara Securities Research
Elara Securities (India) Private Limited The Sequel 14Green tribunal & judiciary’s anti-pollution orders turn on the heat
1998: Supreme Court orders use of CNG for public
2015: NGT bans plying of gasoil & gasoline tourist Jammu transportation in Delhi
vehicles on the Manali-Rohtang highway; state & 2015: NGT orders restriction of registration of gasoil
deploying CNG & electric buses for tourism Kashmir
vehicles in Delhi
Himachal 2015-16: Supreme Court orders conversion of
Pradesh aggregators’ cabs to CNG; then relaxes to allow until
Punjab
Uttaranchal permits are valid
Haryana
Arunachal
Delhi Sikkim
2012: Gujarat HC orders private and passenger Pradesh
vehicles to be converted to CNG within a year
Uttar Pradesh Assam
Rajasthan
Bihar Nagaland
Meghalaya
Manipur
Jharkhand Tripura
West
Gujarat Madhya Pradesh Mizoram
Bengal
2016: NGT asks UP government to consider introducing
2001: Mumbai HC orders phasing out of transport CNG vehicles in congested cities
Chhattisgarh
vehicles older than 15 years and phasing out or Orissa
conversion to CNG of transport vehicles older Maharashtra
than 8 years
Telangana
Goa Andhra
2015: Karnataka HC orders the State government to run Pradesh
public transport buses in a time-bound manner Karnataka
2016: NGT bans light and heavy gasoil vehicles older than 10 Tamil
years in six major cities & ban on registration of gasoil Nadu Pondicherry
vehicle with capacity of more than 2,000cc except for public
transport & local authorities
Source: Elara Securities Research
Elara Securities (India) Private Limited The Sequel 15Government wakes up
CGD Bids Green CNG corridors
CGD penetration: Out of 27 cities awarded prior to formation of PNGRB*, Green Corridors: Identifies several highways where CNG stations can be set
26 are operational. From 33 cities awarded post formation of PNGRB, 11 are up to create CNG corridors; direct boost of 35% to CNG volume
operational. Regulator turns strict enforcer. Jay Madhok, which failed to
CGD bid rounds 1-7: Awarded 27 areas prior to formation of PNGRB*; all
meet terms for Ludhiana & Kutch East, forfeited bank guarantee & lost cities
except Kolkata are operational. Since 2009, 100 cities offered; 40 did not
Good potential even in mature cities: After achieving ~4.1mmscmd of receive any bids. 11 geographical areas among these operational
sales in Delhi, we expect 7-8% growth in the next two years, led by
Draft Marketing Guidelines, 2015: Envisages giving marketing rights
restrictions on gasoil vehicles and conversion of private vehicles to CNG.
of CNG to anyone eligible for selling gasoline, gasoil & ATF in addition
Government focused on PNG domestic to reduce access to subsidized LPG.
to entities authorized by PNGRB or the Central government
Mumbai, with sales volume of 2.4mmscmd, expects high volume
growth led by higher penetration & likely regulatory changes
Promoting CGD Smart Cities
Deregulates auto fuels: Gasoline deregulated in 2010 and gasoil in 2014; Smart cities: The government aims to improve quality of life through
limits subsidized LPG to 12 pa per family; DBTL purges ghost accounts planned infrastructure development; identifies 100 cities for
implementation
Favourable domestic gas pricing: Domestic gas prices linked to
international hub prices; ~40% weightage to Henry Hub, results in CNG being Role of natural gas: Mandates natural gas for residential use; calls for
50-60% cheaper earmarking of open sites for setting up CNG stations across the city
CGD gets priority: The government assures up to 110% supply of domestic Newer applications: Centralized infrastructure could result in newer
gas for CNG & PNG domestic applications like chillers; already in use in GIFT city, Gujarat
Note: *Petroleum and Natural Gas Regulatory Board
Elara Securities (India) Private Limited The Sequel 16Domestic gas attractively priced
Domestic gas price drops Higher savings for vehicles
9.5 80%
(USD/mmBtu)
7.5
60%
5.5
40%
3.5
1.5 20%
Oct-10
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Jun-10
Feb-11
Jun-11
Feb-12
Jun-12
Feb-13
Jun-13
Feb-14
Jun-14
Feb-15
Jun-15
Feb-16
Jun-16
0%
Gasoline Gasoil Auto LPG
Henry Hub Domestic gas price Savings using CNG vs auto fuels
Source: Bloomberg, PPAC, Elara Securities Research Source: Elara Securities Research
CNG prices decline post confirmed allocation of domestic gas Savings for residential & commercial consumers
CNG price collapses due to firm allocation
30%
from government of domestic gas
60 (INR/kg) (INR/lit) 80 25%
45 70 20%
60
30 15%
50
15 40 10%
0 30 5%
Oct-10
Feb-11
Oct-11
Feb-12
Oct-12
Feb-13
Oct-13
Feb-14
Oct-14
Feb-15
Oct-15
Feb-16
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
0%
LPG - subsidised LPG - non-subsidised
CNG Diesel-RHS Petrol-RHS Savings using CNG vs cooking fuel
Source: PPAC, IGL, Elara Securities Research Source: Elara Securities Research
Elara Securities (India) Private Limited The Sequel 17CGD: 37 operational to date
1 Agartala 31 Kota 61 Tumkur
2 Upper Assam 32 Mathura 62 Haridwar
3 Firozabad (TTZ) 33 Sonepat 63 Dharwad
4 Agra 34 Dewas 64 Udhamsingh nagar
5 Hyderabad 35 Meerut 65 Saharanpur
56 75
6 Indore 36 Allahabad 66 Ahmedabad
47 37 72
46 76 65 7 Gwalior 37 Chandigarh 67 Ramabai Nagar
84 55 62
70 38 28 8 Ghandinagar 38 Ghaziabad 68 Ratnagiri
33 35 64
14 13 9 Mehsana 39 Jhansi 69 Amreli
73 27
85 32 10 Sabarkantha 40 Yanam 70 Bhatinda
4 3 67 2 11 Pune incld Pimpri-Chichwad 41 Asansol-Durgapur 71 Patan
19
7 12
39 12 Kanpur 42 Bhavnagar 72 Yamunanagar
81 31 36 13 Bareilly 43 Kutch East 73 Rewari
71 10 83 1 14 Delhi 44 Kutch West 74 North Goa
44 43 9 88 41
24 8 26 89 15 Mumbai 45 Jamnagar 75 Rupanagar
23 66 20 78 18
45 82 6 34
42 77 79 50 16 Vijaywada 46 Ludhiana 76 Fatehgarh Sahib
69 22 29 17 Thane & adjoining areas 47 Jalandhar 77 Dahej
53
54 25
21 18 Kolkata 48 Ernakulam 78 Dahod
17 80 19 Lucknow 49 Bengaluru 79 Dhar
15 52
11 51 20 Anand incld Kanjari & Vadtal 50 Raigarh 80 Ahmednagar
86 60 57 21 Valsad 51 Pune 81 Banaskantha
5 59 30
68
16 40 22 Hazira 52 Thane 82 Anand
74 58 23 Rajkot 53 Daman & Diu 83 Panchmahal
63
24 Surendranagar 54 Dadra & Nagar Haveli 84 Rohtak
87
61 25 Navsari 55 Panipat 85 Jaipur
49 26 Nadiad 56 Amritsar 86 Solapur
27 Khurja 57 East Godavari (excluding Kakinada) 87 Davanagere
28 Moradabad 58 Belgaum 88 Udaipur
48 Operational 29 Surat-Bharuch-Ankleshwar 59 Krishna 89 Bhopal
Not Operational 30 Kakinada 60 West Godavari (includes Rajahmundry)
Source: Petroleum & Natural Gas Regulatory Board, Elara Securities Research
Elara Securities (India) Private Limited The Sequel 18Green corridors – boost to volume
Target traffic between cities on national highways 2.8mmscmd of direct demand
Expanding beyond cities: Currently, non-availability of gas on India’s High average daily traffic (ADT): We estimate an ADT of 15,000-62,000
highways has curtailed the use of gas for inter-city traffic; CNG stations on on highways selected
highways would increase CNG use on highways and intra-city
Demand of 2.8mmscmd of CNG: Even if 20% of vehicles convert to CNG,
Existing fuel retail outlets offer cheaper infrastructure cost: ROs on direct demand on these highways alone could increase by 2.8mmscmd, which
highways are much more spacious than those within cities; offer sufficient is ~35% of total CNG usage in the country
space for CNG compressor and related infrastructure
Indirect impact: CNG use on highways also would boost conversion of
vehicles inside cities, and, result in indirect increase in CNG sales volume
within cities
Coverage likely to extend to national highways Need clarity on policy
Numerous stretches: Government has identified the following stretches- Need for definite regulation: Although draft marketing guidelines were
Delhi-Agra-Lucknow-Kanpur, Delhi-Jaipur, Delhi-Chandigarh, Delhi-Haridwar, published in March 2015, they have not taken the shape of regulation yet
Karanpur-Moradabad-Kashipur-Rudrapur, Vizag-Vijaywada, Allahabad-Kanpur-
Unanswered questions: Policy needs to be clear on authorization of entity,
Varanasi, Bengaluru-Mumbai-Pune
marketing exclusivity and allocation of natural gas
IGL & MGL biggest beneficiaries: Due to their geographical advantage,
IGL & MGL could see pickup in volume
Elara Securities (India) Private Limited The Sequel 19Delhi-Agra-Lucknow-Kanpur green corridor (1 out of 8)
Traffic Estimated vol
Companies
(ADT) (mmscmd)
Delhi: IGL
Agra: Green Gas
28,582 0.5
Kanpur: CUGL
Lucknow: Green Gas
161km
143km
Firozabad
105km
57km 47km
Auraiya
For more details on the
other seven green
corridors, please visit the
Appendix section
Source: Elara Securities Research
Elara Securities (India) Private Limited The Sequel 20Green corridors to boost CNG demand by ~35%
Green CNG corridors Operating companies Average daily Distance (km) Total vol Achievable vol
traffic (#) (mmscmd) (mmscmd)
Delhi-Agra-Kanpur-Lucknow Delhi: IGL; Agra: Green Gas; Kanpur: CUGL; 28,582 513 2.3 0.5
Lucknow: Green Gas
Karanpur-Moradabad-Kashipur- 20,708 144 0.5 0.1
Rudrapur
Vizag-Vijaywada Vizag: not authorized so far; Kovvur: BGL; 28,496 300 1.3 0.3
Vijaywada: BGL
Delhi-Jaipur Delhi: IGL; Jaipur; Round 7 61,871 278 2.7 0.5
Delhi-Chandigarh Delhi: IGL; Chandigarh: IOCL-Adani 46,533 244 1.8 0.4
Delhi-Haridwar Delhi: IGL; Haridwar: GAIL/BPCL 16,540 223 0.6 0.1
Allahabad-Kanpur-Varanasi Allahabad: IOCL-Adani; Kanpur: CUGL; 15,133 223 0.5 0.1
Varanasi: Not allocated
Bengaluru-Mumbai-Pune Mumbai: MGL; Pune: MNGL; Bengaluru: GAIL 27,912 980 4.3 0.9
Gas
Total consumption 2.8
Source: Elara Securities Research
Additional volume inside
cities due to same vehicles
Elara Securities (India) Private Limited The Sequel 21Smart cities – the new frontier
The concept CGD & Smart cities mission
Smart City: Aims at “promoting cities that provide core infrastructure and Common utility corridor to aid infrastructure development: Gas
give a decent quality of life to its citizen, a clean and sustainable pipelines can be laid along with other underground utilities like water,
environment and application of Smart Solutions” electrical cables, optical fibre cables; common geographical information
system for all utilities
Mandatory convergence: With Atal Mission for Rejuvenation & Urban
Transformation, Swachh Bharat Mission, National Heritage City Development PNG domestic: mandatory piped gas network in the upcoming and new
& Augmentation Yojana, Digital India, Skill development, Housing for all, residential colonies & apartments
construction of museums, & other programs connected to social infrastructure
CNG stations: Earmarking open plots for setting up CNG stations in Smart
City gas network: Ensures uninterrupted supply of eco-friendly cooking cities for equitable availability of CNG throughout the city
fuel- PNG domestic and cleaner transportation fuel in form of CNG
The roadmap towards “Smart” Potential
Faster & cheaper implementation: Actual digging & ground refill cost is
States nominate cities
INR 4,000-5,000/m while various approvals take the cost to INR 14,000-
Cities prepare proposals for 15,000/m. Common utility corridor would help faster implementation & higher
development
Step 1:
penetration of PNG domestic
Centre selects cities for Smart City
Challenge
Boost to CNG volume: Emphasis on mass transportation and cleaner
environment would result in higher penetration of CNG
Cities selected get funding of INR 5bn 33 cities on their way to
from the Centre and the right to levy a become "Smart" Newer applications: Possible use for expanding non-kitchen residential use
Step 2:
slew of taxation on citizens for funding
Centre aims development of like district cooling systems, gas gensets for ensuring 24x7 power supply, co-
development plan
100 "Smart" cities by 2020 generation plants and backup for solar power plants
Elara Securities (India) Private Limited The Sequel 22Smart cities
Dharamshala
Ludhiana Chandigarh
New Delhi Municipal Council
Faridabad
Jaipur
Lucknow Guwahati
Bhagalpur
Imphal
Udaipur
Bhopal Agartala
Jabalpur Ranchi
Ahmedabad
Indore New Town Kolkata
Surat
Raipur
Bhubaneshwar
Pune Greater Warangal
Solapur Visakhapatnam
Kakinada
Panaji Belagavi
Davanegere
Chennai
Port Blair
Coimbatore
Operational CGD
Kochi
Not awarded for CGD
Awarded for CGD, Not operational
Source: Ministry of Urban Development, Elara Securities Research
Elara Securities (India) Private Limited The Sequel 23New applications, low LNG prices to help
Cogeneration & tri-generation plants 2W, gas geysers, marine applications, LNG trucking
Huge potential: Finds use in several small and medium scale industries like Two-wheelers: Trial runs are being conducted currently in Delhi. We
sugar, paper, urban waste treatment, chemicals, fertilizers, textiles, hospitals, estimate a demand of 0.5mmscmd in Delhi alone
hotels, large residential projects, food processing, malt & brewery industries
Gas geysers: CGD companies are looking to promote use of gas for geysers
Erratic power and low LNG prices to help: More economical than gasoil;
Miscellaneous applications: Although in the nascent stage, the
CHP* had lost its charm due to the decline in domestic gas production and
government is mulling the use of LNG for marine applications as well as in
increased dependence on high-cost LNG. However, a structural decline in LNG
LNG-run trucks
prices to help pickup in CHP
District cooling systems New applications, low LNG prices to rerate stocks
The concept: Uses chilled water production and distribution from a central Low LNG prices: Global supply to rise by 140mn tonne pa in the next few
source for facilitating air conditioning; does not use any CFC; may be years. Global demand of 245mn tonnes in 2015 to decline as Japan and
electricity- or gas-driven Korea, accounting for ~50% of total trade, restart their nuclear reactors
Savings potential: 35% lower than conventional air-cooled, air conditioners Industrial applications: As economy starts to revive, low LNG prices would
and 20% lower than individual water-cooled, air-conditioning systems result in pickup of demand from the industrial segment. We have already
seen IGL’s PNG industrial demand stabilizing at 0.44mmscmd despite low fuel
GIFT City, Ahmadabad: Gujarat International Finance Tec-City is the first
oil prices
project in India which is using gas-based district cooling system
Although newer applications would take time and may not impact earnings
significantly until FY18 as the roadmap starts clearing, we expect stocks to
rerate
Note: *CHP stands for Cogeneration of Heat & Power
Elara Securities (India) Private Limited The Sequel 24Savings potential of combined heat & power (CHP)
147 units against 100 units for CHP
Loss: 61
Efficiency: 33%
Fuel to power Power Electrical
plant: 91 plant 30
CHP fuel:
100
Combined
heat & CHP fuel
power
Boiler Thermal
Boiler 45
fuel: 56
Efficiency: 80%
Loss: 25
Loss: 11
Source: US Environmental Protection Agency, Elara Securities Research
Elara Securities (India) Private Limited The Sequel 25DLF City
Cogeneration plant at DLF City, Gurugram
100MW gas-based captive power plant: Uses gas instead of gasoil for
providing uninterrupted power supply
Vapor absorption machines: Waste heat from engines and turbines is
converted into chilled water for providing air conditioning
Savings potential: Costs ~40% lower than gasoil, no CFCs and higher
efficiency as conventional systems have ~30% transmission losses
Source: DLF, Elara Securities Research
Elara Securities (India) Private Limited The Sequel 26GIFT City – India’s first & only district cooling system
DCS system at GIFT City
Capacity: Centralized air conditioning
designed for cooling load of 2,70,000TR.
Uses gas based chillers, no CFCs
Benefits: Reduces noise and vibration, low
energy costs, low maintenance cost,
efficiency through economies of scale
Source: GIFT, Elara Securities Research
Elara Securities (India) Private Limited The Sequel 27Two-wheelers on CNG
Pilot program launched Trial runs: Government has given 50 bikes fitted with CNG kits to Domino’s
Pizza for trial runs
Supply chain: CNG kits are approved by Automotive Research Association
of India and are being manufactured by Ituk Manufacturing
Configuration: The CNG kit comprises two cylinders each with capacity of
1kg of CNG and support running of upto 120km on a single fill
Benefits: CNG Honda Activa cost is INR 65,000-75,000. Running cost is
expected to be INR 0.61/km vs INR 1.3/km for gasoline
Huge scope: 4.7mn two-wheelers in Delhi alone in 2012. We estimate
demand of 0.5mmscmd if 20% of these convert.
Source: Ministry of Petroleum & Natural Gas, Elara Securities Research
Estimated CNG demand from two-wheelers in Delhi (2012)
Distance travelled/yr (km) 9,125
Mileage (km/kg) 60
Gas consumed by one bike/yr (kg) 152
Gas consumed by one bike/yr (scm) 198
Total number of bikes in Delhi (mn) 4.7
Conversion into CNG (%) 20
CNG bikes (mn) 0.9
Total gas consumed in Delhi (mmscmd) 0.5
Source: Elara Securities Research
Source: Ministry of Petroleum & Natural Gas, Elara Securities Research
Elara Securities (India) Private Limited The Sequel 28Huge potential
Demand potential in leading cities
Avg distance travelled per day (km) 25
Distance travelled/yr (km) 9,125
Mileage (km/kg) 60
Gas consumed by one bike/yr (kg) 152
Gas consumed by one bike/yr (scm) 198
Delhi Mumbai Pune Ahmedabad Bengaluru
Total number of bikes (mn) (data as on March 2012) 4.7 1.1 1.7 1.2 2.9
Conversion into CNG (%) 20 20 20 20 20
CNG bikes (mn) 0.9 0.2 0.3 0.2 0.6
Total gas consumed (mmscmd) 0.5 0.1 0.2 0.1 0.3
Source: Journal of Power Sources, RTO data, Elara Securities Estimate
Elara Securities (India) Private Limited The Sequel 29LNG for inland bunkering LNG bunkering in China India also plans to open LNG bunkering stations Source: China Classification Society, Elara Securities Research Source: Elara Securities Research Elara Securities (India) Private Limited The Sequel 30
LNG trucking
China has already started LNG bunkering since 2014 India could use LNG trucks on Eastern and Western highways
LNG trucking in China: China has a vast network of ~2,500 LNG
refuelling stations. ~100,000 trucks use LNG in China currently and the
number is expected to grow to 350,000 in two years
Source: ENN Energy, Elara Securities Research Source: Elara Securities Research
Elara Securities (India) Private Limited The Sequel 31Low LNG prices to help
Addition of 140mn tonnes of liquefaction capacity LNG prices decline due to increase in supply
Australia to lead: With LNG exports of 29.4mn tonnes in 2015, Australia 23
(USD/mmBtu)
emerges as the second-largest exporter globally. With 53.8mn tonnes pa 18
of liquefaction capacity under construction, it would become the largest
13 Fuel oil becomes
exporter by 2020 After remaining at ~USD expensive to LNG
8 15/mmBtu, LNG prices drop
US not far behind: A total of 62mn tonnes pa of liquefaction capacity is
to ~USD 5/mmBtu
under construction in the US while Russia (16.5mn tonnes pa), Malaysia 3
May-13
May-14
May-15
May-16
Jan-13
Mar-13
Jan-14
Mar-14
Jan-15
Mar-15
Jan-16
Mar-16
Jul-13
Sep-13
Jul-14
Sep-14
Jul-15
Sep-15
Nov-13
Nov-14
Nov-15
(6.3mn tonnes pa), Indonesia (0.5mn tonnes pa) and Cameroon (2.4mn
tonnes pa) account for the rest
Spot LNG Fuel Oil
Source: International Gas Union, Elara Securities Research Source: Platts, Elara Securities Research
Largest importers restart nuclear reactors
Japan starts three nuclear reactors: Japan has already started
Sendai-1 & 2 nuclear reactors. Takahama 3 & 4 reactors restarted but
shut due to technical glitch. Ikata-3 is likely to start commercial operations
by August 2016. It is estimated that Japan’s current consumption of
~88mn tonnes pa would decline to ~62mn tonne pa by 2030.
South Korea adding nuclear capacity: Eight nuclear reactors, each
with a capacity of 1,400MW, are under various stages of construction
Source: NRA, Reuters, Elara Securities Research
Elara Securities (India) Private Limited The Sequel 32Key risks to our call
Crude prices have been very volatile. They currently hover at ~USD 45/bbl. With crude prices remaining low, it can dis-incentivize customers
to either not convert to natural gas or switch back to alternate fuels, in absence of regulatory enforcement.
The Dahej 5mn tonne pa expansion is expected to be completed by December 2016. GSPC LNG 5mmtpa Mundra terminal is expected to be
commissioned by mid-2017. With domestic supply not expected to increase in the near term, any delay in these two could be a setback to
India’s gas story.
Several CGD players like Jay Madhok have not been making progress in CGD areas awarded. PNGRB has been revoking such awards. Any
delay in auctioning, awarding and implementation would prevent CGD from being established across the country.
Currently spot LNG prices hover at ~USD 5-6/mmBtu. We believe they would remain structurally low for long time to come. If for any
reason, LNG prices rise, then LNG consumption in industries may not be economical.
Elara Securities (India) Private Limited The Sequel 33Global peer valuation (Consensus)
EV/EBITDA (x) P/BV (x) P/E (x)
FY17E / CY16E FY18E / CY17E FY17E / CY16E FY18E / CY17E FY17E / CY16E FY18E / CY17E
Indraprastha Gas 10.1 9.4 3.4 3.0 18.6 16.8
Gujarat State Petronet 7.4 7.2 1.7 1.5 11.2 10.2
Gail India 8.8 7.6 1.3 1.2 13.8 11.2
Petronet LNG 11.1 8.2 3.3 2.8 20.0 14.2
Gujarat Gas 7.4 7.2 1.7 1.5 11.2 10.2
Mahanagar Gas 9.4 8.7 3.0 2.7 15.5 14.2
China Gas Holdings 11.7 10.5 2.9 2.4 14.5 12.8
Hong Kong & China Gas 21.1 20.0 3.1 3.0 24.5 24.1
Towngas China 11.0 10.5 0.8 0.8 9.2 9.0
China Resources Gas Group 8.6 7.8 2.3 2.0 13.6 12.1
Enn Energy Holdings 7.6 7.1 2.1 1.8 11.7 10.8
Tokyo Gas 7.3 6.6 0.9 0.9 20.9 17.0
Osaka Gas 6.5 7.2 0.9 0.9 15.1 17.1
Toho Gas 9.1 10.2 1.6 1.6 25.3 28.0
Korea Gas 11.3 10.6 0.4 0.4 10.6 8.8
Kyungdong City Gas
Sempra Energy 10.9 9.6 2.0 1.9 20.7 17.6
New Jersey Resources 13.8 11.3 2.7 2.2 20.3 19.1
Piedmont Natural Gas 14.7 12.6 2.8 2.5 28.8 25.2
Snam Spa 11.8 11.6 2.3 2.2 16.1 15.7
Atmos Energy 10.6 9.7 2.2 2.1 22.0 20.6
Enagas SA 12.3 12.6 2.5 2.5 15.3 15.1
Duke Energy 10.2 9.8 1.4 1.4 17.7 16.9
Cms Energy 9.8 9.3 2.7 2.5 20.1 18.7
Centerpoint Energy 8.3 7.8 2.8 2.7 18.7 17.7
Source: Bloomberg, Elara Securities Estimate
Elara Securities (India) Private Limited The Sequel 34Valuation matrix – P/E vs EPS CAGR
India gas firms offer attractive valuation vs global peers, PE & EPS CAGR (FY18/CY17)
25
20
• Emphasis on greener fuels would result in a
IGL
higherer EPS CAGR for India firms during
FY16-18E than global peers
Gujarat Gas Petronet LNG
P/E (x)
15
• India companies available at lower P/E of
14x than global peers at 19x
GAIL
Mahanagar Gas • Structural reforms, low domestic & spot
10 GSPL LNG prices and high latent demand
position India firms in a structurally long-
term bull cycle
5
(10) (5) 0 5 10 15 20 25 30 35 40
EPS CAGR (%)
Source: Bloomberg, Elara Securities Estimate
Elara Securities (India) Private Limited The Sequel 35Valuation matrix – P/BV vs ROE
India gas companies are available at reasonable valuation vs global peers PBV (x) and ROE (%) (FY18/CY17)
3.5
Indian companies available at
attractive relative valuation
compared to peers globally Gujarat Gas
3.0
IGL Petronet
LNG
2.5
2.0
P/BV (x)
1.5 GSPL
GAIL
1.0 Mahanagar Gas
0.5
0.0
0 5 10 15 20 25 30
ROE (%)
Source: Bloomberg, Elara Securities Estimate
Elara Securities (India) Private Limited The Sequel 36GUJARAT GAS – SET FOR GREENER PURSUITS
GGAS IN Mcap: USD 1.3bn Buy
Gujarat Gas
TP: INR 751 CMP: INR 616 Upside: 22%
Investment summary
Promising new areas: The company has won Amreli, Ahmedabad rural, Dahod, Panchmahal and Dahej recently. The regions are contiguous and would be operational
soon with low capex. We expect peak potential of 1.0-1.5mmscmd from Ahmedabad rural, 1.0mmscmd from Dahej & 0.3-0.4mmscmd from each of other three.
Demand stabilization from Morbi: Morbi has seen fresh FDI in vitrified tiles. GGAS has signed contracts with ~25 new customers, which would add 0.2mmscmd near
term. Current consumption stands at 2.0mmscmd and most consumers are running at 50-55%. As ceramic demand rises and utilization increases, we expect demand rise.
New applications to drive growth: Earlier, the company had witnessed good demand from the CHP segment in the Surat-Ankaleshwar-Bharuch industrial belt. However,
with improvement in power availability and rise in LNG prices, there is no demand currently. The Thane industrial area faces erratic power supply and could add demand
from the CHP segment. GIFT City also has installed a district cooling system. The start of GIFT city and similar such applications would again lift demand.
Good volume growth likely: Morbi has demand potential of 5.0-6.0mmscmd. As oil prices rise, industrial production increases and regulatory enforcement picks up, 10-
15% volume growth is easily achievable, aided by volume from new areas.
Valuation
We expect an EPS CAGR of ~88% over FY16-18E, aided by volume growth and availability of cheaper domestic gas for CNG. We recommend Buy with a TP of INR 751 based on
19x FY18E EPS of INR 40.4.
Key risk
Sustained low crude oil prices, an increase in LNG prices and poor industrial pickup are key downside risks
Key Financials
YE Revenue YoY EBITDA EBITDA Adj PAT YoY Fully DEPS ROE ROCE P/E EV/EBITDA
March (INR mn) (%) (INR mn) margin (%) (INR mn) (%) (INR) (%) (%) (x) (x)
FY15 90,063 15.5 11,062 12.3 4,436 1,460.3 32.2 22.3 17.2 19.1 9.1
FY16 61,059 (32.2) 7,249 11.9 1,529 (65.5) 11.1 7.3 7.6 55.5 14.0
FY17E 56,497 (7.5) 9,380 16.6 3,424 123.9 24.9 14.3 10.6 24.8 10.8
FY18E 64,422 14.0 12,456 19.3 5,561 62.4 40.4 19.2 14.4 15.2 8.1
Note: pricing as on 12 August 2016; Source: Company, Elara Securities Estimate
Elara Securities (India) Private Limited The Sequel 38Painting Gujarat green
Growing across Gujarat and nearby areas
Banas
With recently won Amreli, Ahmedabad rural, Dahej, Dahod and Panchmahal,
Kantha Gujarat Gas has more than three-quarters of the state under
coverage
Sabar
Patan Kantha Outside Gujarat, it has presence at Dadra & Nagar Haveli and Thane,
Mahesana which are contiguous. This would result in lower cost and fast penetration in
Arvalli
Kutch new areas
Mahisagar
Gandhinagar
Kutch East, which was earlier awarded to Jay Madhok, has been revoked
Ahmadabad Kheda
Panch Mahal Dahod and presents a good opportunity as and when it comes up for bidding
Morvi Surendranagar
Anand
Jamnagar Chhota
Devbhumi Vadodara Udaipur
Dwarka Botad
Rajkot
Bharuch
Porbandar Amreli Narmada
Junagarh Bhavnagar
Surat
Tapi
Gir
Somnath
Navsari The
Dangs
Gujarat Gas Ahmadabad Daman
Valsad
Other CGDs rural under
Gujarat Gas
EOI Submitted and Urban Dadra &
under Adani Nagar Haveli
No bidding yet Gas
Source: Company, Elara Securities Research Thane
Elara Securities (India) Private Limited The Sequel 39Large access to industries
Gujarat: most industrialized state
Banas
Leader in sectors such as chemicals, petrochemicals, dairy,
Kantha pharmaceuticals, cement & ceramics, gems & jewellery, textiles and
engineering
Patan Sabar Contributes quarter of total goods exported from the country
Kantha
Mahesana
Arvalli Ranks first in total area under SEZ in India
Kutch Mahisagar
Gandhinagar Longest coastline of 1,600km in the country
Ahmedabad Kheda
Surendranagar Panch Mahal Dahod
Morvi
Anand
Jamnagar Chhota
Devbhumi Vadodara Udaipur
Dwarka Rajkot Botad
Bharuch
Porbandar Amreli Narmada
Bhavnagar
Junagarh Surat
Tapi
Gir
Somnath
Navsari The
Dangs
Daman Valsad
Dadra &
Nagar Haveli
Source: Company, Elara Securities Research
Elara Securities (India) Private Limited The Sequel 40Delhi-Mumbai Industrial Corridor
DMIC to offer long-term growth
opportunity
62% of state is covered within the
influence area
Five nodes identified for
development around dedicated freight
corridor
Ahmedabad-Dholera investment
region
Vadodara-Ankaleshwar industrial
Vadodara-Ankleshwar area
Ahmedabad Dholera Industrial Area Bharuch-Dahej investment region
Investment region
Surat-Navsari industrial Area
Bharuch-Dahej Valsad-Umbergaon industrial area
Industrial Area
The regions have the potential for
Surat-Navsari
engineering, ceramics, chemicals, pharma,
Industrial Area
gems & jewellery, textiles and automobile
industries
Valsad-Umbergaon
Industrial Area
Source: DMIC Development Corporation, Elara Securities Research
Elara Securities (India) Private Limited The Sequel 41Lifting of moratorium would increase demand
Gujarat has six industrial areas classified as critically polluted
In the study conducted in 2009, Ankleshwar, Vapi, Ahmedabad, Vatva,
Bhavnagar and Junagarh were declared as critically polluted
Development projects were banned and action plan was chalked out for
reducing pollution
Natural gas to the rescue: at the core at reducing air pollution
Ahmedabad
Vatva
Ankaleshwar
Junagarh Bhavnagar
Vapi
Source: CPCB, Elara Securities Research
Elara Securities (India) Private Limited The Sequel 42Volume growth to return
PNG volume growth High growth in industrial demand expected
Over FY12-14 due to high RLNG prices, industrial consumers have Prices touch highs of INR 42/scm in FY14 from the lows of INR 26/scm in FY12.
FY16 again saw low fuel oil prices and poor industrial demand
shifted to alternate fuels, which are expected to come back with softening
5.5
in spot LNG prices (mmscmd)
We expect a pickup in industrial activity as the economy bottoms out, 5.0
driving consumption of natural gas
4.5
Environmental concerns discouraging the use of alternate polluting fuels,
such as fuel oil 4.0
Morbi currently uses ~2.0mmscmd of gas with most units running at 50- FY14 FY15 FY16 FY17E FY18E
Industrial / commercial
55% utilization. Higher utilization would almost double demand
Source: Company, Elara Securities Estimate
New gas could add a total of ~3.5mmscmd of sales
CNG volume growth Huge potential for CNG volume growth
Demand growth expected from possible regulatory restrictions
The company currently has a total of 230 CNG outlets and plans to add 25
1.0
CNG stations in FY17 (mmscmd)
0.9
CNG penetration is very low at ~10% in Gujarat while Delhi & Mumbai 0.8
have a higher penetration of ~20% 0.7
0.6
0.5
0.4
FY14 FY15 FY16 FY17E FY18E
CNG
Source: Gujarat Gas, Elara Securities Research Source: Company, Elara Securities Estimate
Elara Securities (India) Private Limited The Sequel 43PAT to almost double during FY16-18E
Volume growth of 10-15% over FY16-18E EBITDA/scm to improve
7.5 5.0
(mmscmd) (INR) FY14 takes a hit due to high LNG prices
7.0 4.5
4.0
6.5
3.5
6.0
3.0
5.5 2.5
5.0 2.0
FY14 FY15 FY16 FY17E FY18E FY14 FY15 FY16 FY17E FY18E
Total vol EBITDA/scm
Source: Company, Elara Securities Estimate Source: Company, Elara Securities Estimate
EBITDA CAGR of 30% over FY16-18E PAT to almost double over FY16-18E
1,502 6,000
(INR mn) (INR mn)
5,000
1,002 4,000
3,000
502 2,000
1,000
2 0
FY14 FY15 FY16 FY17E FY18E FY14 FY15 FY16 FY17E FY18E
EBITDA PAT
Source: Company, Elara Securities Estimate Source: Company, Elara Securities Estimate
Elara Securities (India) Private Limited The Sequel 44Gujarat Gas: valuation
One-year forward P/E of Gujarat Gas One-year forward P/BV of Gujarat Gas
700 800
(INR) 22x
(INR) 4.0x
600 20x
700
18x
500 3.5x
16x
600
400 14x
3.0x
500
300 2.5x
200 400
22-Jan-16
4-Mar-16
25-Mar-16
6-May-16
29-Jul-16
18-Sep-15
30-Oct-15
20-Nov-15
1-Jan-16
12-Feb-16
27-May-16
9-Oct-15
11-Dec-15
17-Jun-16
8-Jul-16
15-Apr-16
8-Jul-16
1-Jan-16
4-Mar-16
27-May-16
17-Jun-16
9-Oct-15
11-Dec-15
22-Jan-16
25-Mar-16
15-Apr-16
6-May-16
18-Sep-15
30-Oct-15
20-Nov-15
12-Feb-16
29-Jul-16
CMP CMP
Source: Company, Bloomberg, Elara Securities Estimate Source: Company, Bloomberg, Elara Securities Estimate
Key assumptions Valuation (FY18E)
FY14 FY15 FY16 FY17E FY18E Target P/E (x) 18.6
Volume (mmscmd) 5.9 6.7 5.6 6.2 7.1 EPS (INR) 40.4
EBITDA/scm (INR) 2.7 4.5 3.5 4.2 4.8 Target Price (INR) 751
Source: Company, Elara Securities Estimate Source: Elara Securities Estimate
Elara Securities (India) Private Limited The Sequel 45Gujarat Gas: key financials
Income Statement (INR mn) FY15 FY16 FY17E FY18E Cash Flow Statement (INR mn) FY15 FY16 FY17E FY18E
Net operating income 90,063 61,059 56,497 64,422 Operating Cash Flow 8,162 (7,387) 6,609 9,496
Capex (3,382) (5,440) (6,506) (6,500)
EBITDA 11,062 7,249 9,380 12,456
Free Cash Flow 4,780 (12,827) 103 2,996
Depreciation 2,377 2,457 2,888 3,124 Investing Cash Flow (5,963) 3,930 (6,506) (6,500)
EBIT 8,685 4,792 6,492 9,332 Financing Cash Flow (1,938) 1,757 (483) (3,064)
Interest cost 3,332 2,460 2,229 1,998 Net Change in Cash 262 (1,700) (380) (68)
Other income 1,071 447 847 966 Opening Cash 2,116 2,378 678 298
Closing Cash 2,377 678 298 231
PBT 6,415 2,522 5,111 8,301
Ratio Analysis FY15 FY16 FY17E FY18E
Exceptional items 10 256 0 0 Income statement ratios (%)
Less: taxation 1,979 993 1,687 2,739 Revenue growth 15.5 (32.2) (7.5) 14.0
Effective tax rate (%) 30.8 39.4 33.0 33.0 EBITDA growth 92.7 (34.5) 29.4 32.8
PAT 4,436 1,529 3,424 5,561 Adj PAT growth 1,460.3 (65.5) 123.9 62.4
EBITDAM 12.3 11.9 16.6 19.3
Balance Sheet (INR mn) FY15 FY16 FY17E FY18E
Adj net margin 4.9 2.5 6.1 8.6
Equity Capital 1,377 1,377 1,377 1,377 Return & liquidity ratios
Reserves 18,532 19,651 22,592 27,590 Interest Coverage Ratio (x) 2.6 1.9 2.9 4.7
Total Borrowings 14,908 17,076 17,076 14,576 Net debt/Equity (x) 0.2 0.8 0.7 0.5
Deferred Taxes 3,528 4,103 4,103 4,103 ROE (%) 22.3 7.3 14.3 19.2
ROCE (%) 17.2 7.6 10.6 14.4
Others 5,614 6,100 6,661 7,586
Per share data & valuation ratios
Total Liabilities 43,959 48,306 51,808 55,230 Adj EPS (INR) 32.2 11.1 24.9 40.4
Fixed assets 48,441 51,423 55,041 58,417 Adj EPS growth (%) 1,460.3 (65.5) 123.9 62.4
Investments 10,990 1,620 1,620 1,620 BVPS (INR) 145 153 174 210
Current Assets 9,495 7,706 7,608 8,001 DPS (INR) 5.0 2.5 3.0 3.5
P/E (x) 19.1 55.5 24.8 15.2
Less: Current Liabilities 24,967 12,443 12,462 12,808
EV/EBITDA (x) 9.1 14.0 10.8 8.1
Net Working Capital (15,472) (4,737) (4,853) (4,807) P/BV (x) 4.3 4.0 3.5 2.9
Total Assets 43,959 48,306 51,808 55,230 Dividend Yield (%) 0.8 0.4 0.5 0.6
Note: pricing as on 12 August 2016; Source: Company, Elara Securities Estimate
Elara Securities (India) Private Limited The Sequel 46Coverage History
700
1
650 3
600 6
2
4
550
5
500
450
400
Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16
Not Covered Covered
Date Rating Target Price Closing Price
1 15-Sep-2015 Buy INR 910 INR 646
2 5-Nov-2015 Buy INR 704 INR 556
3 1-Jan-2016 Accumulate INR 704 INR 627
4 8-Feb-2016 Accumulate INR 623 INR 544
5 17-May-2016 Accumulate INR 590 INR 518
6 12-Aug-2016 Buy INR 751 INR 616
Elara Securities (India) Private Limited The Sequel 47INDRAPRASTHA GAS – TIME TO TANK UP
IGL IN Mcap: USD 1.4bn Buy
Indraprastha Gas
TP: INR 845 CMP: INR 676 Upside: 25%
Investment summary
Volume CAGR of 7-8% over FY16-18E: We expect CNG volume CAGR of 7-8% over FY15-18E, with a pickup in conversion to CNG among private cars, taxis and auto
rickshaws. Addition of buses would result in a ~10% rise in CNG volume growth. Also, with the addition of ~120,000 PNG domestic consumers annually over the next three
years and an arrest in decline of PNG industrial volume due to benign spot LNG prices, we expect overall volume growth of 7-8% over FY16-18E. Recently awarded Rewari
offers a peak potential of ~2mmscmd.
New applications to drive volume in medium term: The company is looking at new applications like CHPs, VAMs & two-wheelers. We estimate two-wheelers may
consume 0.5mmscmd of CNG. While it is difficult to gauge demand growth from these applications, we believe it will result in higher rerating of the stock.
Favorable economics: low domestic prices and rise in auto fuels have led to savings of up to 65% over liquid fuels. We expect EBITDA/scm to rise to INR 5.7-5.8 over
FY17-18E, with rise in demand and better pricing power in the industrial segment.
Robust free cashflow: With CGD infrastructure laid across most of Delhi, IGL’s high capex phase is over and will generate free cash flow of INR 15bn over FY16-18E.
Valuation
In line with global peers, we increase target multiple of IGL from 15x to 19x to accommodate for volume growth that would subsequently come from new applications and put
further emphasis on curbing pollution. We recommend Buy with a target price of INR 845 on 19x FY18E consolidated EPS of INR 45.7.
Key risks
Possible decline in price of alternate fuels resulting in poor pickup in industrial sales. North Delhi Municipal Corporation has demanded way leave facility charge.
Key Financials
YE Revenue YoY EBITDA EBITDA Adj PAT YoY Fully DEPS ROE ROCE P/E EV/EBITDA
March (INR mn) (%) (INR mn) margin (%) (INR mn) (%) (INR) (%) (%) (x) (x)
FY15 36,810 (6.1) 7,930 21.5 4,377 21.5 31.3 20.9 18.0 21.6 11.4
FY16 36,858 0.1 7,717 20.9 4,162 (4.9) 29.7 17.2 15.3 22.7 11.7
FY17E 40,901 11.0 8,923 21.8 5,066 21.7 36.2 18.1 15.6 18.7 10.1
FY18E 43,742 6.9 9,753 22.3 5,784 14.2 41.3 17.8 14.8 16.4 9.2
Note: pricing as on 12 August 2016; Source: Company, Elara Securities Estimate
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