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Indraprastha Gas – Conflicting Reports

July 30, 2007

Citigroup Research reiterates a BUY on Indraprastha Gas Ltd while Merrill Lynch has retained a SELL on the stock. So what do you do when their are such conflicting recommendations ? I was watching Wizzards of Dalal Street – Prashant Jain and believe in his theory.

  • You have to model the company financials yourself.
  • Then see what are the influencing factors that will affect the company in the next few quarters
  • Once you have all the required data – Ask yourself what happens if this is the scenario or if that is the scenario and you have the answer in front of you. Mr. Jain took some bold decisions like exitting IT stocks before the Dot Com BUST in 2000 because his model told him something was not right and recommended a SELL

Here is what Citigroup has to say on Indraprastha Gas:
Steady CNG conversions driven by the rapid pace of private car conversions (c.3,000 per month), increasing PNG penetration, and geographical growth in newer areas (Greater Noida, Ghaziabad) would result in a 14% volume CAGR over FY07-10E. IGL’s 1QFY08 net income of Rs384m was ahead of expectations and up an impressive 39% yoy. Adjusting FY08E and FY09E earnings by +3% and -1% respectively after factoring in FY07. Any increase in prices of the gas will be passed on to consumers.

Target price of Rs160 for IGL is based on DCF. DCF is used because it captures the value of the projects over their lifetime. IGL’s near-term cash flow is affected by its aggressive expansion. Target P/CEPS of 8.2x FY09E is still at a small discount to current multiples of other gas utilities.

Merill Lynch Report:
The biggest risk to IGL is competition from likely new entrants like Reliance Industries (RIL). It as imminent. Competition from an aggressive player like RIL is a serious threat to IGL’s volumes as well as super-normal margins. If gas cost rises gradually as expected it will worsen IGL’s outlook. Merrill therefore maintains a Sell on IGL despite its encouraging 1Q result.

DalalStreet Research Analyst Views:
Merrill Report about selling this stock is purely based on RIL entering this segment. Reliance also entered the Telecom business under Mukesh Ambani but Bharti is till the PAN India leader. It is difficult to BUY Merrill’s argument on “if RIL” enters this business. We endorse Citi’s views.

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