Sell Indraprastha Gas; target of Rs 206

“A precipitous fall of 33% in the Indraprastha Gas (IGL) stock after the Petroleum and Natural Gas Regulatory Board’s (PNGRB) downward revision in tariff is regarded as exaggerated reaction by some sections of the market, citing several loopholes in the regulator’s order. We expect the overhang on IGL to continue until the final verdict from the Appellate Tribunal as well as the Delhi High Court. We retain our Sell rating on IGL with a downward revision in the target price by 43% to Rs206 from Rs363. Key upside risk to our TP would be leeway available to IGL for hiking the marketing margin and/or favourable ruling from the court.”

“The PNGRB’s order mandates network and compression tariff of Rs 3.5/scm compared to IGL’s submission of Rs 8.8/scm. There is growing consensus among investors that the difference of Rs5.3/scm may be treated as marketing margin, which would nullify the case against IGL having to refund the amount cumulating over the past four years. We believe IGL’s submission formed the basis of PNGRB’s tariff calculation and to deem excess amount charged as marketing margin post PNGRB’s verdict would dilute IGL’s case before the Appellate Tribunal. We believe IGL will toe the line on reduced network and compression tariff effective from PNGRB’s order date (the implementation will depend upon how soon the Appellate Tribunal gives its verdict).”

“IGL sold ~3.7bn scm of gas in the past four years, implying the company has to shell out Rs11-18bn (assuming Rs3-5/scm) as refund to its customers. While PNG consumers would be able to produce invoices for every purchase made, which can be offset against future consumption, the major task would be in passing on the refund benefits to CNG consumers. IGL’s management maintains that the refund from retrospective effect is unconstitutional. It said IGL will treat the refund amount as a contingent liability until the final verdict. A refund involves reversal of excise duty, income tax and value added tax, making the entire exercise very complex We have cut the gross spread margin for FY13E/14E to Rs5.5/scm compared to Rs8.0/scm earlier. We currently assume a marketing margin of Rs2/scm over and above PNGRB’s tariff of Rs3.5/scm. Lower gross spread would lead the company to post EBITDA/scm in the range of Rs3.0-3.1/scm from Rs5.0/scm currently. We trim our EPS estimates for FY13E/FY14E by 56%/53%, respectively, to Rs10.0/11.6 from Rs22.59/24.97,” says Nirmal Bang research report.