Event update: Indraprastha Gas (Outperformer) - IGL gets Court nod to takeover Gurgaon operations from Haryana City Gas

EVENT – Finally, Gurgaon to come under IGL control

In an order (link here - ), the Supreme Court has given its nod to a mutually agreed solution between Haryana City Gas (HCGL) and Indraprastha Gas (IGL). Under the same, IGL will take over supply of gas in the entire Gurgaon District from incumbent HCGL. Compensation to be paid for the same is to be decided by an independent valuation to be done by Deloitte, Haskins & Sells no later than Nov 30, 2018.

Impact – Material growth opens up for IGL

• The immediate impact is to move 0.6 (estimated) gas sales being done by HCGL in Gurgaon to IGL. Of this 0.5 mmscmd was already being shown in IGL’s books as third party sales. However instead of the nominal Rs2/scm fees on the same, IGL can start making a normalised EBITDA of Rs6/scm on these volumes. This can add an incremental Rs816m to IGL EBITDA in FY20E (current base est Rs12.2bn) or 7%.
• More importantly, one chief contention of both the Haryana Govt and IGL in the on-going case has been the relatively limited penetration achieved by HCGL in Gurgaon. Previous guidance by IGL suggests a potential of 1.2-1.5mmscmd from this District, which is a material increment on the current base of 5.2 mmscmd (excluding  3^rd party sales) for the company
• While detailed HCGL financials are not available with us, assuming a Rs3/scm PAT margin and 0.6 mmscmd volumes, Gurgaon operations may command an Equity value of Rs11-11.6bn (assuming 17-18x FY20E PAT). Even assuming IGL takes 40% leverage to finance this, this implies Rs390-400mn of interest cost, which is very manageable given IGL’s Balance Sheet (NIL Debt, Cash of Rs5.6bn as of FY18)

VIEW: a new avenue of growth

Investors were disappointed with the low number of districts won by IGL in the 9^th Bid round (1 standalone, 3 by Associate company) so this acquisition of an established CGD will be a welcome positive. With the relatively low penetration dony by HCGL and the growth in both Residential & Commercial units in the Districts, we see IGL’s volume visibility extending comfortably till FY25E via this move. We await details of volumes/financials of HCGL and the final consideration to be paid by IGL and will revert with revised estimates post that. Reiterate Outperformer