Natural Gas Sector Report

NATURAL GAS SECTOR
The stage is set, let the flow begin
December, 2010
Aggressive expansion to ensure

seamless transmission of increased
supply
Continuous development in policy &
reforms reducing sector concerns
Do the sharp run up in stock prices

signal 'Game Over' for the sector?
No. We believe that this is just the
beginning...
Top picks: GSPL, GGCL, Petronet

LNG
ISIEmergingMarketsPDF us-eyintranet from 125.21.171.18 on 2011-02-24 08:09:17 EST. DownloadPDF.
Dhaval Joshi
Research Analyst
INDUSTRY REPORT dhaval.joshi@emkayglobal.com
+91 22 6612 1282
Downloaded by us-eyintranet from 125.21.171.18 at 2011-02-24 08:09:17 EST. ISI Emerging Markets.
Natural Gas Sector
Contents
Sector
Synopsis .................................................................................................................................................................... 3
Investment rationale .................................................................................................................................................... 4
Valuation .................................................................................................................................................................... 6
Indian natural gas market ....................................................................................................................................... 7
Supply to increase at 14% CAGR from 162.7mmscmd to 275.9mmscmd in FY14E ................................................. 7
Demand to increase at 8.8% CAGR from 222.8mmscmd in FY10 to 311.6mmscmd in FY14E .................................. 9
Fuel cost comparison ........................................................................................................................................... 10
Doubling the pipeline infrastructure by FY14E: New demand from new areas .......................................................... 11
Natural Gas Pipelines in India ............................................................................................................................... 13

Pricing of natural gas plays a major role in determining future demand ................................................................... 13
Valuation Summary .............................................................................................................................................. 15
Sharp run up compared to Sensex ........................................................................................................................ 15

International Peer comparison .............................................................................................................................. 16
Summary table ......................................................................................................................................................... 17
Industry Annexure ..................................................................................................................................................... 20
Companies
Gas Authority India Ltd. ............................................................................................................................................. 23
Gujarat State Petronet Ltd. ........................................................................................................................................ 32
Indraprastha Gas Ltd. ................................................................................................................................................ 41
Gujarat Gas Ltd. ....................................................................................................................................................... 49
Petronet LNG Ltd. ..................................................................................................................................................... 58
Emkay Research 22 December, 2010 2
Natural Gas Sector
Synopsis
The natural gas transmission sector is gearing up for a long and sustained growth
trajectory as impediments/roadblocks hampering its growth in the past are cleared.
Increased natural gas supply from the KG D6 basin, higher supply of RLNG at reasonable
rates, infrastructure in place to ensure seamless supply, emerging clarity on
transmission tariff and strong demand from user industries (power, fertilizer, CGD etc)
create a conducive environment for transmission and distribution players to clock
steady growth.
We initiate coverage on the Natural Gas sector- specifically transmission and

distribution companies with a long term bullish view. With most of the concerns on the
sector being addressed, we expect a sharp improvement in the fundamentals of
companies under our coverage. We expect our natural gas universe to register
revenue, EBIDTA and PAT CAGR of 17.4%, 13.3% and 11.1% over FY10-FY12E respectively.
We initiate coverage on GSPL, GGCL and Petronet LNG with a BUY rating and GAIL and
IGL with an ACCUMULATE rating. While we prefer the business model of GAIL and IGL,
the sharp run up in its prices offer limited scope for upsides from current levels.
Valuation table
Year end March Rating CMP Target Potential P/E P/BV EV/EBIDTA ROE
(Rs) Price upside (x) (x) (x) (%)
Company (%) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E
GAIL ACCUMULATE 505 565 11.9 16.1 15.4 2.7 2.4 10.0 9.5 18.1 16.6
GSPL BUY 116 151 30.2 14.8 14.6 2.9 2.5 7.2 6.5 21.0 18.1
Indraprastha gas ACCUMULATE 338 382 13.0 15.9 14.9 3.9 3.3 8.3 7.7 26.6 23.9
Gujarat Gas BUY 398 481 20.9 17.8 16.3 4.1 3.4 9.5 8.4 23.2 20.9
Petronet LNG BUY 128 156 21.9 15.6 12.2 3.2 2.6 9.8 7.1 21.8 23.5
Average 16.1 14.7 3.3 2.8 9.0 7.8 22.1 20.6
Source: Company, Emkay Research
Financial snapshot
Revenue EBIDTA APAT

FY10 FY11E FY12E FY10 FY11E FY12E FY10 FY11E FY12E
GAIL 270353 342281 380790 53728 61056 69720 33279 35800 39881
Growth % 9.6 26.6 11.3 23.3 13.6 14.2 17.7 7.6 11.4
GSPL 10008 10491 11698 9413 9781 10941 4137 4046 4396
Growth % 105.3 4.8 11.5 121.8 3.9 11.9 235.4 -2.2 8.7
IGL 10838 17289 19783 3865 4878 5506 2155 2600 2935
Growth % 26.5 59.5 14.4 27.0 26.2 12.9 24.9 20.7 12.9
GGCL 14197 18171 20196 2795 3965 4706 1742 2434 2880
Growth % 9.1 28.0 11.1 18.8 41.8 18.7 8.4 39.7 18.3
Petronet LNG 106491 118833 135766 8465 10717 12708 4045 5080 6140
Growth % 26.3 11.6 14.2 -6.1 26.6 18.6 -22.0 25.6 20.9
Natural Gas Sector
Investment rationale
Demand growth at 8.8% CAGR to far outpace supply

We expect demand to grow at 8.8% CAGR from 222.8mmscmd in FY10 to 311.6mmscmd
in FY14E, primarily due to the expected commissioning of certain power plants, re-opening
of some closed fertilizer units and continued investments in City Gas Distribution (CGD).
Despite the increased supply from the KG D6 basin, demand is far likely to exceed supply.
We expect imported LNG to plug this gap. LNG prices are also expected to be low in the
future backed by lower demand from US and Europe and capacity additions, which will
work in favour of Petronet LNG and other companies importing spot cargos at a reasonable
rate.
Supply to increase by 14%, largely driven by KG D6 supply

We expect supply to grow at a 14% CAGR from 162.7mmscmd in FY10 to 275.9mmscmd
in FY14E, primarily due to the expected increase in domestic gas supply from KG D6,
other small fields of ONGC, OIL and GSPC. Also, commissioning of LNG terminals like
Dabhol, Kochi etc would play a crucial role in catering to unmet demand. By FY12E, supply
mix is likely to shift from PSU to private players, majorly RIL KG D6. However, we expect
supply deficit to continue in the future also and this can only be met by imported LNG.
Doubling the pipeline infrastructure by FY14E

In order to ensure seamless transmission of increased gas supply to meet the demand
requirements of end users, GAIL and GSPL have planned aggressive capacity expansions,
which would result in doubling their pipeline capacity. GAIL is expanding its network from
~6,800 km in FY10 to ~14,000km by FY14E., GSPL also, has plans to expand its network
from ~1,600km in FY10 to ~2,500km by FY14E within Gujarat. This will improve the capacity
of pipeline infrastructure ahead of the new commencement of domestic natural gas
supply.
Continuous development in policy & reforms reducing sector

concerns
Over the last six months, we have seen several key regulatory measures in the natural
gas space that are likely to promote growth and alleviate concerns. Regulatory actions
such as A) De-regulation of auto fuel prices B) Hike in the APM gas prices, C) Clarity on
PNGRB's notification of section 16 and D) Clarity on transmission tariff etc. have greatly
boosted investor sentiment in the sector.
n De-regulation of auto fuel prices: De-regulation of auto fuel prices came into effect
from 25 Jun'10. The sharp rise in petrol, diesel, LPG and SKO have resulted in CNG/
PNG becoming an even more lucrative option. As a result, there has been a steady
increase in the conversion rate of cars, buses, trucks, and PNG connections, thereby
further increasing demand for natural gas. Thus, the CGD licensing process is likely
to gain momentum to meet the unmet demand of the cities.
n Hike in APM gas prices: The government finally increased APM gas prices by more
than 100% to $4.2/mmbtu, effective from 1st Jun'10. This development has reduced
losses of upstream companies, mainly ONGC and OIL and set a base price in the
Indian market at ~$4.2/mmbtu. Besides this, the government allowed the marketer,
GAIL to charge marketing margin of Rs.200/tcm on APM gas, which it had been
demanding for many years. (See annexure, page no. 20)
Natural Gas Sector
n Clarity on section 16 notification: Clarity on the key section 16 notification of the

PNGRB act has reduced the confusion in the regulatory space. With this notification,
the regulator PNGRB now has the power to authorize an entity to lay, build, operate or
expand any pipeline or any city/local distribution network that has not been notified
yet. Due to this recent development, announcement of three trunk pipelines, which
have already been submitted are expected in a short span. Also, new bids for CGD
licensing for eight new cities (which were stalled for more than a year) are expected
soon.
n New transmission tariffs provide better revenue visibility for companies: Recently,
PNGRB announced lower tariffs for old pipelines and significantly higher tariffs for
new expansions, thereby ensuring adequate returns for transmission players. The
board has determined tariffs of Rs.25.46/mmbtu for the country's largest pipeline,
HVJ-GREP-DVPL as against the current tariff of Rs.28.48/mmbtu, decline of 12%
compared to current tariff. Regarding the tariff on DVPL/GREP up gradation, the
board has fixed a tariff of Rs.53.65/mmbtu, 88% higher over current HVJ tariff. Same
with GSPL, the result for the transmission tariff is expected soon from PNGRB. So
going forward, we see better clarity in transmission tariff improving company
fundamentals as well as rendering increased revenue visibility.
Do the sharp run up in stock prices signal 'Game Over' for the
sector? NO. We believe it is just the beginning...
We initiate coverage on the natural gas sector- specifically transmission and distribution
companies with a long term bullish view. With most of the concerns on the sector being
addressed, we expect a sharp improvement in the fundamentals of companies under
our coverage. While the conducive regulatory framework and increased supply of KG D6
gas has already resulted in a sharp run up in share prices of transmission and distribution
companies, we believe that the sector is likely to witness a re-rating as these positives
begin reflecting on their earnings. We believe that this sector offers huge upsides from
a long term perspective. We expect our natural gas universe to register strong PAT CAGR
of 11.1% over FY10-12E. With healthy volume growth, huge capex plans and strong cash
flow generation, we expect the natural gas companies to continue to command premium
valuations of 15-18x 1year forward earnings. Therefore, we initiate coverage on the
natural gas sector with a bullish view and BUY rating on GSPL, Petronet LNG and GGCL
and ACCUMULATE rating on GAIL and IGL. Our top picks in the sector are GSPL, Petronet
LNG and GGCL, due to strong volume growth, huge demand backing, higher capex
plans and attractive valuations of 14.8x, 15.6x and 17.8x FY12E EPS respectively. We
also like GAIL and IGL but valuations are stretched due to sharp run up in stock prices in
the last couple of months.
Valuations
GAIL GSPL IGL GGCL Petronet LNG

FY11E FY12E FY13E FY11E FY12E FY13E FY11E FY12E FY13E CY10E CY11E CY12E FY11E FY12E FY13E
Financials (Rs mn)
Emkay Research
Revenue 342281 380790 439199 10491 11698 12498 17289 19783 21551 18171 20196 21896 118833 135766 171929
EBIDTA 61056 69720 77912 9781 10941 11661 4878 5506 5966 3965 4706 5158 10717 12708 16724
APAT 35800 39881 41615 4046 4396 4476 2600 2935 3138 2444 2892 3163 5080 6140 7886
Growth (%)
Net Sales 33.3 11.3 15.3 4.8 11.5 6.8 59.5 14.4 8.9 28.0 11.1 8.4 11.6 14.2 26.6
EBIDTA 13.6 14.2 11.7 3.9 11.9 6.6 26.2 12.9 8.4 41.8 18.7 9.6 26.6 18.6 31.6
22 December, 2010
APAT 7.7 11.5 4.4 -2.2 8.7 1.8 20.7 12.9 6.9 39.7 18.3 9.3 25.6 20.9 28.4
Margins (%)
EBIDTA Margin 17.8 18.3 17.7 93.2 93.5 93.3 28.2 27.8 27.7 21.8 23.3 23.6 9.0 9.4 9.7
APAT Margin 10.4 10.4 9.4 38.6 37.6 35.8 15.0 14.8 14.6 13.4 14.3 14.4 4.3 4.5 4.6
Return Ratios (%)

ROCE 20.9 19.3 16.9 21.5 20.7 19.6 38.4 34.2 30.8 29.8 29.5 27.3 17.5 18.4 21.6
ROE 18.6 18.1 16.6 23.3 21.0 18.1 28.4 26.6 23.9 24.5 23.2 20.9 21.1 21.8 23.5
Per Share Data (Rs)

EPS 28.2 31.4 32.8 7.2 7.8 8.0 18.6 21.0 22.4 18.9 22.4 24.5 6.8 8.2 10.5
CEPS 35.0 39.6 42.6 12.4 13.8 14.8 25.6 28.8 31.2 23.3 27.6 30.6 9.3 10.8 14.4
BVPS 160.4 183.7 208.3 33.8 40.5 47.3 71.7 86.2 101.6 77.9 97.2 118.2 34.5 40.5 49.0
Valuation Ratios (x)

PE 17.9 16.1 15.4 16.1 14.8 14.6 18.0 15.9 14.9 21.1 17.8 16.3 18.9 15.6 12.2
P/BV 3.1 2.7 2.4 3.4 2.9 2.5 4.7 3.9 3.3 5.1 4.1 3.4 3.7 3.2 2.6
EV/EBIDTA 10.9 10.0 9.5 8.1 7.2 6.5 9.4 8.3 7.7 11.7 9.5 8.4 11.1 9.8 7.1
EV/Sales 1.9 1.8 1.7 7.5 6.7 6.0 2.7 2.3 2.1 2.6 2.2 2.0 1.0 0.9 0.7
Rating ACCUMULATE BUY ACCUMULATE BUY BUY
Source: Emkay Research

Natural Gas Sector
6
Natural Gas Sector
India's natural gas market

India is the world's 7th largest energy producer, which accounts for 2.49% of the world's
total annual energy production. India's GDP has grown at more than 8-8.5% during the
last few years, and we expect it to grow at 8.6% in the near future. This growth has taken
place despite the huge deficit in energy infrastructure like ports, railways, pipeline and
power transmission and other infrastructure. Even today, half of the country's population
does not have access to electricity or any other form of commercial energy, and still use
non-commercial fuels such as firewood, crop residues as a primary source of energy for
cooking in over two thirds of households. The future growth of the country demands a
move towards large scale commercial energy forms. In particular, natural gas as a clean
energy source holds the highest promise for the country. The world's resources of natural
gas, although finite, are enormous. Estimates of its size continue to grow as a result of
innovations in exploration and extraction techniques. Natural gas resources are widely
and plentifully distributed around the globe. It is estimated that a significant amount of
natural gas remains to be discovered. Natural gas has emerged as the most preferred
fuel due to its inherent environmentally benign nature, greater efficiency and cost
Natural gas consumption to increase effectiveness. At the global level, demand for natural gas has sharply increased in the last
from 12% to 14% by FY15 two decades. In India, natural gas was first discovered off the west coast in 1970s, and
today, it constitutes 10% of India's total energy consumption. Over the last decade it has
gained importance as a source of energy and its share is slated to increase to about 14%
of the total energy basket by 2014-15 compared to 12% in 2009-10.
Energy mix in 2009-10 Energy mix in 2014-15E

Hydro Hydro
Nuclear Electric Electric
Oil Nuclear Oil
Energy 7% 8%
2% 14% Energy 13%
4%
Natural gas
Natural gas
12% 14%
Coal
65% Coal
61%
Source: EIA, Emkay Research Source: EIA, Emkay Research
Supply to increase at 14% CAGR from 162.7mmscmd to 275.9mmscmd

in FY14E
In 1974, the offshore discovery of the Bombay High field along the western coast was the
Supply mix likely to shift from PSU to
most important event in India's upstream segment, significantly boosting the country's oil
private players, majorly RIL KG D6
and gas production. In 1980, natural gas contributed just 1% of the country's total primary
energy consumption. However, this mix has changed considerably, with natural gas
gaining in importance as a cleaner and more economical fuel compared to alternate fuel.
This inherent advantage coupled with build up of gas production and regulatory push over
the past three decades has raised the share of natural gas to 9% of India's primary
energy consumption.
In FY10, overall gas supply was ~162.8mmscmd, of which 36mmsmcd was contributed
by LNG. The major source of gas was ONGC ~61.4mmscmd followed by RIL's KG D6
block. The supply mix was purely dominated by ONGC till FY10. RIL's KG D6 field has
significantly eased the pressure on the gas deficit Indian market. Supply mix is likely to
shift from PSU to private players, majorly RIL KG D6, which will contribute ~32% of India's
Natural Gas Sector
natural production by FY12E. We expect the supply from domestic gas sources to increase
at 11.2% CAGR from ~126.8mmscmd in FY10 to ~194mmscmd in FY14E. The KG D6 is
likely to play a major role in increasing domestic supply with a total production of
~86mmscmd in FY14E. Supply from ONGC and OIL, is expected from its marginal/small
fields, eventually increasing up to ~72mmscmd by FY14E. GSPC, another new domestic
gas will start its production by FY13E and ~6-7mmscmd of gas output is expected by
FY14E. CBM is also likely to contribute ~6mmscmd of gas by FY14E. Despite this sharp
increase in domestic gas supply, it is unlikely to meet the growing demand for natural
gas. We expect this deficit to be met by imported LNG.
Supply break-up (MMSCMD)

FY10 FY11E FY12E FY13E FY14E
ONGC 61.4 61.3 70.0 72.0 72.0
OIL 6.4 6.4 7.8 8.0 8.0
Private/JV/PMT/GSPC 23.0 21.9 21.9 23.9 27.9
KG D6 36.0 60.0 72.0 83.0 86.0
Total (A) 126.8 149.6 171.7 186.9 193.9
LNG
Dahej 28.0 29.0 33.0 38.0 43.0
Kochi 0.0 0.0 0.0 5.0 10.0
Shell Hazira 8.0 12.0 12.0 12.0 12.0
Dabhol 0.0 0.0 5.0 8.0 11.0
CBM 0.0 3.0 3.0 5.0 6.0
Total (B) 36.0 44.0 53.0 68.0 82.0
Total Production (A+B) 162.8 193.5 224.6 254.9 275.9
Flared + Internal consumption 17.0 17.0 17.0 17.0 17.0
Total supply 145.7 176.6 207.7 237.9 258.9
Source: Industry, Emkay Research
Currently, LNG contributes ~22% (~36mmscmd) of the natural gas requirement of the
Indian gas market and it is expected to touch 28% (~76mmscmd) by FY14E. Currently,
Going forward, RLNG to contribute Petronet LNG is the major supplier of imported LNG- ~28mmscmd in the market and is
significant share (28%) to the total expected to supply ~53mmscmd of the re-gasified LNG by FY14E, backed by its expansion
supply in Dahej and Kochi terminals. Shell Hazira and Dabhol will contribute ~12mmscmd and
~11mmscmd by FY14E. Some of the unmet demand will also be fulfilled by importing
spot LNG on ongoing basis.
Capacity addition in LNG (mtpa) FY10 FY11E FY12E FY13E FY14E

Dahej 10.0 10.0 10.0 13.0 13.0
Kochi 0 0 0 2.5 2.5
Dabhol 0 0 5.0 5.0 5.0
Hazira 2.5 2.5 2.5 2.5 2.5
Total capacity addition (mmtpa) 12.5 12.5 17.5 23.0 23.0
MMSCMD 49.0 49.0 68.6 90.1 90.1
Concerns over pricing for LNG seem to be reducing looking at the current environment
and capacity expansion globally. On the basis of past trends, LNG prices have generally
been at a discount to naphtha and fuel oil, and have tended to be less volatile than that.
Natural Gas Sector
International LNG prices v/s JCC Prices LNG price to JCC price ratio
15 140 25
13 120
20
100
$/mmbtu
11 Average
$/bbl
80 15
9
(%)
60
7 10
40
5 20 5
3 0
0
Feb-00
Feb-03
Feb-06
Feb-09
Nov-00
May-02
Nov-03
May-05
Nov-06
May-08
Nov-09
Aug-01
Aug-04
Aug-07
Aug-10
Feb-00
Feb-03
Feb-06
Feb-09
May-02
May-05
May-08
Nov-00
Nov-03
Nov-06
Nov-09
Aug-01
Aug-04
Aug-07
Aug-10
LNG Prices JCC Prices
Ratio
Source: Bloomberg, Emkay Research Source: Bloomberg, Emkay Research
Despite crude prices hovering around $75-78/bbl (average), spot cargos are presently
available for ~$8-9/mmbtu, primarily because US LNG demand has dipped owing to the
emergence of shale gas. Currently, US consumes ~15% of gas from its shale gas reserves.
We believe this is just the beginning for the US Shale gas story and it has a long way to go.
Other major gas consuming regions like Europe and China are also spreading their
wings into conventional gas (shale gas exploration). So, looking at the strong response
and capacity expansion of LNG globally, we expect prices of LNG to remain low, which will
highly benefit the Indian growth story.
Demand to increase at 8.8% CAGR from 222.8mmscmd in FY10 to

311.6mmscmd in FY14E
Going forward, natural gas demand is expected to grow at 8.8% CAGR from 222.8mmscmd
Demand to increase at 8.8% CAGR in FY10 to 311.6mmscmd in FY14E. Demand is likely to increase due to the expected
by14E backed by huge demand from commissioning of certain power plants, re-opening of some closed fertilizer units and
Power, Fertiliser and CGD sector continued investments in City Gas Distribution (CGD). The new discovery of RIL's D6 block
of KG basin is expected to play a significant role in meeting India's energy requirement.
Sectors (mmscmd) FY10 FY11E FY12E FY13E FY14E

Power 102.7 110.9 119.2 128.8 138.4
Fertilizer 59.86 61.0 64.4 77.8 84.0
City gas 13.8 15.3 15.8 17.7 19.9
Petrochemicals/Refineries/Industrial 29.5 31.4 33.3 35.4 37.7
Industrial 10 12.5 15.4 19.0 23.0
Sponge iron/Steel 6.9 7.3 7.8 8.2 8.7
Total 222.8 238.3 255.9 287.0 311.6
Consumption mix
50.0 46 44 FY10 FY14E
40.0
27 27
30.0
(%)
20.0 13 12
6 6 4 7
10.0 3 3
0.0
Petroch/Refin/Ind
Industrial
Fertilizer
iron/Steel
City gas
Power
Sponge
ust
Natural Gas Sector
As seen above, natural gas demand is expected to improve over the next three-four years.
Power and fertilizers account for almost 71% of the total demand due to 1) Re-opening of
existing plant backed by availability of gas and 2) New capacity addition plus cost benefit
compared to other fuel prices. We expect gas demand from power sector to grow from
102.7mmscmd in FY10 to 138mmscmd in FY14E, mainly driven by major new power
projects, which are likely to start over the next few years, like NTPC's Kawas and Gandhar,
Reliance Power at Dadri, Uttar Pradesh, Torrent Power at Sugen etc.
Power sector: Fuel cost comparison

The table below illustrates the comparison of prices of fuels with regard to power
generation.
Power tariff
Fuel comparison Unit Calorific Fixed cost Heat rate Efficiency Price* Variable cost Tariff
value of generation
Kcal/unit Rs/kwh kcal/kwh (per cent) Rs/Unit Rs/kwh Rs/kwh
Natural gas-APM Cub Meter 8,500 0.80 1,800 47.8 9 1.9 2.7
Natural gas-RIL Cub Meter 8,100 0.80 1,800 47.8 12.1 2.7 3.5
Natural gas-LNG contracted Cub Meter 9,500 0.80 1,800 47.8 11.1 2.1 2.9
Fuel oil kg 9,000 1.00 1,800 47.8 20.2 4.0 5.0
Naphtha kg 10,500 1.00 1,800 47.8 28.2 4.8 5.8
Natural gas-LNG spot Cub Meter 9,500 0.80 1,800 47.8 14.0 2.7 3.5
Coal-Domestic kg 3,360 1.00 2,500 34.4 1.37 1.0 2.0
Coal-Imported kg 6,500 1.00 2,500 34.4 3.9 1.5 2.5
We have compared fuels based on expenditure incurred to generate one million

kilocalories of energy. The above comparison shows that natural gas has traditionally
been more economical than naphtha and FO. Hence, industries, which currently operate
plants using naphtha and FO, are expected to switch over to natural gas. The cheapest
source of power generation is APM natural gas.
Fertilizer Sector
Fertilizer sector also accounts for 27% of the total demand, with major demand coming
from the re-opening of existing plants and converting the feed stock from FO, Naphtha to
Natural Gas. Also, it has been well established that natural gas is the most cost effective
fuel vis-a-vis other liquid fuels in the fertilizer sector. We expect demand from fertilizer to
grow at 8.8% CAGR from 59mmscmd in FY10 to 84mmscmd in FY14E, backed by higher
demand from gas based plants.
City Gas Distributions

This is another sector which is going to be a potential growth sector. Worldwide, gas
distribution is an area which has grown hand in hand with the gas sector development in
terms of supply infrastructure and transmission infrastructure. With expected growth in
the gas supply and the simultaneous creation of gas inter-state transmission infrastructure
in India, this sector is bound to grow in the coming years. With the emphasis on clean
environment, this sector would get the necessary thrust in the coming years. In line with
this, various players, primarily led by GAIL, have drawn up ambitious plans to roll out city
gas infrastructure across a number of cities in the country. From the existing coverage of
15 cities, the coverage is expected to grow to 50 cities by FY14E. On the back of such
expansion, we expect the sector to grow at 9.5% CAGR from 13.8mmscmd in FY10 to
19.9mmscmd in FY14E.
Natural Gas Sector
This expected growth of CGD is likely play a crucial role in driving future gas demand,
especially from FY13E onwards, as government is encouraging the supply of CNG for
transportation sector and PNG for households. Even large number of private car
manufacturers are introducing CNG variants, as CNG is an eco-friendly and economical
fuel. Moreover, the pace of conversion of private cars to CNG has been high. Higher petrol
and diesel prices are providing impetus to CNG conversion.
The table below illustrates the analysis of cost recovery of the CNG kit for different types of
vehicles.
Analysis of cost recovery of CNG Kit Bus 4 Wheeler 3 Wheeler

Cost of Kit 175000 40000 25000
CNG Price 28 28 28
Mileage per Km 4.2 23 35
Cost per Km 6.7 1.2 0.8
Other Fuel price (Bus - Diesel, 4-3 wheeler - Petrol) 42 56 56
Mileage per Km 3.5 15 25.0
Other Fuel Cost per Km 12.0 3.7 2.2
Saving per Km 5.3 2.5 1.4
Daily Average travel, Km 75 45 55
Yearly Travel (Assuming 300 days of travel Km) 22500 13500 16500
Yearly Savings 120000 33965 23760
Payback Period (Monthly) 17.5 14.1 12.6
Breakeven (in Km) 32813 15899 17361
Source: Emkay Research Note: Prices of Petrol and Diesel as on Oct-10.
Based on our analysis, for buses, cars and three wheelers, it would take 17.5, 14.1 and
12.6 months, respectively, for costs to be recovered from conversion to CNG. Due to cost
benefit with better mileage, we believe CNG segment will drive higher growth in the future.
We expect CGD to grow at 9.5% CAGR from 13.8mmscmd in FY10 to 19.9mmscmd in
FY14E.
Industrial sector
Given the cost benefits of using natural gas in power generation, as feed stock and in the
PNG segment, we believe industrial, petrochemical and other industries are likely to
increase their consumption of natural gas in the future. We expect volumes from this
industry to grow at 10.6% CAGR from 46.4mmscmd in FY10 to 69.4mmscmd in FY14E.
Doubling the pipeline infrastructure by FY14E: Demand from new

areas
Gas sector and gas transport in particular, is developing rapidly in India. It has a total
natural gas pipeline infrastructure of around 11,402kms with a designated capacity of
~320mmscmd. Gas Authority of India Limited (GAIL) is the country's largest gas
transmission and marketing company. GAIL currently owns and operates around 60% of
the total pipeline network, with over 6,800 km of pipeline spread across the country. Its
existing gas infrastructure can support the production and transportation of 151 mmscmd
of gas. GSPL owns and operates 1,664km of pipeline with a transmission capacity of 50
mmscmd, occupying second place. Currently, these two companies play a vital role in
transmission of natural gas in India. However, Reliance Gas Transportation Infrastructure
(RGTIL) "the east-west pipeline" has joined hands with GSPL and GAIL. It has a total
pipeline network of ~1440km with a total carrying capacity to transport 120mmscmd.
Natural Gas Sector
Company-wise pipeline ownership (Km)

GAIL 6800
GSPL 1664
GGCL 1285
RIL 1440
Others 213
Total 11402
Several other pipeline systems have been proposed and are under construction in the
country. GAIL, with its dominating position in the pipeline segment, has announced an
aggressive expansion plan, doubling its capacity from the current level of ~6,800km to
~14,000km, increasing its transmission capacity from ~150mmscmd to ~300mmscmd
by FY14E.
Pipeline project Capacity Length Completion

(mmscmd) (KM) schedule
DVPL Pipeline - Phase II 24 to 78 610 Apr-11
Vjaipur Dadri pipeline 20 to 80 505 Apr-11
Dadri-Bawana-Nanpal Pipeline 31 646 Apr-11
Expansion of pipeline is on full swing, Chainsa-Jhajjar-Hissar pipeline 35 349 Apr-11

we see doubling the pipeline Jagdishpur-Haldia Pipeline 32 2050 Jan-13
infrastructure by FY14E Dhabol-Banglore Pipeline 16 1389 Dec-12
Kochi-Koottanad-Mangalore/Bangalore 16 1114 Dec-12
Total 6663

Several other pipelines have been proposed for expansion
Pipeline Length(Km) Capacity(mmscmd)
Mehsana - Bhatinda 900 30
Bhatinda-Jammu-srinagar 300 15
Mallavaram-Bhilwarar-Vijaipur 1585 30
Surat-Paradip 1600 30
Source: PNGRB
Natural Gas Sector
Natural Gas Pipelines in India

Natural Gas Pipelines Network
Pricing of natural gas plays a major role in determining future demand

Presently, there are broadly two pricing regimes for gas in India - gas priced under
Administered Price Mechanism (APM) and non-APM or free market gas. The price of APM
gas is set by the Government. APM gas comes from the existing fields of Oil and Natural
Gas Corporation (ONGC) and Oil India Limited (OIL), which were earlier given to them on
a nomination basis by the Government. APM gas is allocated only to a select category of
Future demand depends on favorable
consumers belonging primarily to the power, fertilizer and city gas distribution (CGD)
gas pricing scenario
business. Recently, the Ministry of Petroleum and Natural Gas has given freedom to the
state-run ONGC and OIL to price the natural gas produced by them at $4.2/mmbtu, an
increase of 133%. With domestic supplies not able to keep pace with demand, gas prices
are set go up in due course due to new reforms. This is evident from the increase in APM
gas cost to $4.2/mmbtu. Also, gas prices coming up for revision from existing and new
fields are getting contracted above $4.2/mmbtu. Largest PSU, ONGC has cleared their
intention on pricing for KG-DWN-98/2 at ~$7/mmbtu. If crude oil prices trade above $80/
bbl, then the long and spot LNG prices are likely to be more expensive in the future. Higher
prices could impact the future demand of the country. Hence, to protect the gas consumers
from excessive volatility in gas prices, GOI plans to introduce gas pooled pricing by end of
CY12E.
Natural Gas Sector
Natural gas prices in India
7
6 6.5
5 5.7
4
4.2 4.2
3 3.5
2
1
0
ONGC/OIL APM PMT Other JV's RLNG Reliance KG D6
(Ravva)
$/mmbtu
Pooled price of natural gas is likely to help develop the natural gas market in India. Power
and fertilizers constitute ~71% of India's total demand for natural gas. Attaining a single
benchmark price for natural gas will bring stability in the varying gas prices, which in turn,
will bring stability across various projects. In the future, large upsurge in gas demand is
foreseen to meet the unmet and latent demand, as well as the future energy needs. Gas
is not only a clean fuel, but will also make up for the significant short fall between demand
and supply of energy in the country. The key objectives of gas price pooling mechanism
are:
a) to encourage broadening of gas supplies in the country,
b) to achieve price stability
c) to develop a natural gas market in the country.

These would in turn, provide a clear reference for long gestation projects to plan their
investments and also to provide for mitigation of risks.
Natural Gas Sector
Valuation
Do the sharp run up in stock prices signal 'game over' for the sector?
We believe it is just the beginning…..
We initiate coverage on the Natural Gas sector- specifically transmission and distribution
companies with a long term bullish view. With most of the concerns on the sector being
addressed, we expect a sharp improvement in the fundamentals of companies under our
coverage. While the conducive regulatory framework and increased supply of KG D6 gas
has already resulted in a sharp run up in share prices of transmission and distribution
companies, we believe that the sector is likely to witness a re-rating as these positives
begin reflecting on their earnings. We believe that this sector offers huge upsides from a
long term perspective. We expect our Natural gas universe to register strong PAT CAGR of
11.1% over FY10-12E. With healthy volume growth, huge capex plans and strong cash
flow generation, we expect the natural gas companies to continue to command premium
valuation of 15-18x 1year forward earnings. Therefore, we initiate coverage on Natural
gas sector with a bullish view and a BUY rating on GSPL, Petronet LNG and GGCL and
ACCUMULATE rating on GAIL and IGL. Our top picks in the sector are GSPL, Petronet LNG
and GGCL, due to strong volume growth, backed by huge demand and higher capex plan
with the attractive valuation of 14.8x, 15.6x and 17.8x FY12E EPS respectively. We also
prefer GAIL and IGL but valuations are stretched due to sharp run up in stock prices in the
last couple of months.
Valuation table
Year end March Rating CMP Target Potential P/E P/BV EV/EBIDTA ROE
(Rs) Price upside (x) (x) (x) (%)
Company (%) FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E
GAIL ACCUMULATE 505 565 11.9 16.1 15.4 2.7 2.4 10.0 9.5 18.1 16.6
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6.5 21.0 18.1
Indraprastha gas ACCUMULATE 338 382 13.0 15.9 14.9 3.9 3.3 8.3 7.7 26.6 23.9
Gujarat Gas BUY 398 481 20.9 17.8 16.3 4.1 3.4 9.5 8.4 23.2 20.9
Petronet LNG BUY 128 156 21.9 15.6 12.2 3.2 2.6 9.8 7.1 21.8 23.5
Average 16.1 14.7 3.3 2.8 9.0 7.8 22.1 20.6
We initiate coverage on the natural gas sector comprising of five companies including
large cap and midcap. While the natural gas sector had been plagued by volume and
regulatory concerns in the last few years, the current developments in the sector promise
a conducive environment for growth in the future. The following are the positive
developments in the sector-
1) Higher availability of natural gas supply from new domestic sources plus imported LNG
2) New reforms with better clarity on pricing, authorization, natural gas volume allocation
and new transmission tariff,
3) Gas pool pricing will play a key role in the future for developing Indian natural gas industry.
Sharp run up compared to Sensex

Over the last one year, gas stocks have out performed the Sensex due to various factors
like a) higher supply of KG D6 gas, b) de-regulation of auto fuel prices, c) hike in APM gas
prices, d) clarity on transmission tariff, e) improvement in the volume, margin, and earnings
etc. Thus, improvement in the fundamentals and reduced confusion on regulatory issues
brought back confidence in the sector.
Natural Gas Sector
Price performance Vs Sensex
500
400
300
200
100
0
Feb-09
Feb-10
Jun-09
Jun-10
Dec-08
Dec-09
Dec-10
Oct-09
Oct-10
Aug-09
Aug-10
Apr-09
Apr-10
GAIL GSPL IGL GGCL PLNG Sensex
Name Chg Chg Chg Chg Chg Chg Rel 1d Rel 5d Rel 1m Rel 3m Rel 6m Rel 1yr
Pct 1d Pct 5d Pct 1m Pct 3m Pct 6m Pct 1yr
Gail India Ltd 0.1 -0.4 2.2 4.5 9.3 26.3 0.5 -0.5 5.3 3.4 -3.5 8.1
Gujarat State Petronet Ltd -1.4 5.0 1.8 7.9 23.3 23.5 -0.9 4.9 4.9 6.8 8.9 5.8
Indraprastha Gas Ltd 1.3 0.3 4.5 6.4 36.8 75.1 1.8 0.3 7.7 5.2 20.9 49.9
Gujarat Gas Co Ltd -1.2 2.2 4.1 -0.9 37.7 82.2 -0.8 2.1 7.3 -1.9 21.7 56.0
Petronet lng Ltd 0.3 6.6 7.7 21.4 60.4 82.6 0.8 6.5 11.0 20.1 41.7 56.4
NSE S&P CNX Nifty Index -0.5 0.2 -3.4 0.9 13.2 17.5
In the last six months, midcap gas stocks have shown sharp gains compared to Sensex.
As a result, these stocks offer limited upsides in the short term, with most of the positives
already priced in. For the short term, we recommend Buy on dips. However, from a long
term perspective, the sector offers huge upsides as the growth story has just begun
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from 125.21.171.18 on the
We believe for 2011-02-24
long term,08:09:17
investorsEST. DownloadPDF.
should remain invested in the natural
gas sector and enjoy the advantage of being early in play. We believe valuation multiples
like P/E, P/BV and EV/EBIDTA are likely to expand in the near future and gas stocks are
likely to outperform the Sensex. We initiate coverage on natural gas sector with a BUY on
GSPL, Petronet LNG and GGCL and an ACCUMULATE on GAIL and IGL.
Valuation summary
Year end March P/E (x) P/BV (x) EV/EBIDTA (x) ROE (%)
Company FY12E FY13E FY12E FY13E FY12E FY13E FY12E FY13E
GAIL 16.1 15.4 2.7 2.4 10.0 9.5 18.1 16.6
GSPL 14.8 14.6 2.9 2.5 7.2 6.5 21.0 18.1
Indraprastha gas 15.9 14.9 3.9 3.3 8.3 7.7 26.6 23.9
Gujarat Gas 17.8 16.3 4.1 3.4 9.5 8.4 23.2 20.9
Petronet LNG 15.6 12.2 3.2 2.6 9.8 7.1 21.8 23.5
Average 16.1 14.7 3.3 2.8 9.0 7.8 22.1 20.6
International Peers*
Beijing Enterprises Hldgs 16.0 14.0 1.4 1.3 10.7 9.4 9.7 9.9
Perusahaan Gas Negara Pt 13.9 12.5 5.5 4.6 9.4 8.6 43.6 39.7
Centrica Plc 12.0 11.0 3.0 2.7 6.2 5.7 26.0 25.2
TC Pipelines LP 17.4 16.3 2.1 2.1 14.5 13.0 11.9 12.6
Pacific Northern Gas Ltd 14.2 14.1 1.1 1.1 7.9 8.0 8.1 10.2
Transcanada Corp 16.3 15.4 1.6 1.5 10.2 9.7 10.2 10.6
Spectra Energy Corp 14.9 13.7 2.0 1.9 9.1 8.5 13.9 14.6
Gas Natural Sdg Sa 9.3 8.3 0.9 0.9 6.7 6.4 9.6 10.3
Enbridge Energy Partners LP 19.8 17.6 2.1 2.3 11.4 10.6 11.1 14.8
Envestra Ltd 17.2 16.6 1.5 1.5 9.1 8.8 8.6 8.9
Average 15.1 14.0 2.1 2.0 9.5 8.9 15.3 15.7
Source: Bloomberg, Emkay Research, Note: * Year End December
Natural Gas Sector
Summary table
Company Rating CMP Target Potential Business Key Drivers Short term Investment
Price upside (%) Segment trigger Rationale
GAIL ACCUMULATE 505 565 12.0 Natural gas & Natural Gas Near term Trading &
LPG transmission volume growth Transmission
transmission, volume & with higher volume growth,
Petrochemical, transmission tariff approved Higher
LPG & Others tariff, by PNGRB and transmission
improvement in better tariff, additional
petchem realisation in supply of natural
margins and petchem gas but clarity on
fuel price hike business subsidy sharing
remains key
concern
GSPL BUY 116 151 30.2 Natural gas Natural Gas Near term Higher volume
transmission transmission volume growth growth backed
Volume & with better by huge demand
transmission realisation, in Gujarat,
tariff new tarrif Expanding
announcement pipeline network
from PNGRB outside Gujarat-
New avenues for
business and will
gain from new
supply of natural
gas
IGL ACCUMULATE 338 382 13 Natural gas

Volume Volume growth Higher volume
Distribution
expansion in with better growth backed
NCR and realisation, by huge demand
Ghaziabad
ISIEmergingMarketsPDF us-eyintranet from 125.21.171.18 on 2011-02-24 backed
08:09:17 EST. by
DownloadPDF. in NCR,
recent hike in Expansion in
CNG prices existing area on
full swing and
will gain from
new supply of
natural gas
GGCL BUY 398 481 21.0 Natural gas Volume growth Authorisation Change in
Distribution with better for existing Business mix,
realisation and area by better margins
higher natural PNGRB, Price backed by recent
gas supply hike in hike in CNG and
from PMT Industrial Industrial
segment segment
PLNG BUY 128 156 22.0 Importing LNG LNG import Higher than Rise in LNG
and Volume(Firm + expected spot import and re-
Regasification Spot), volumes and gasification
Regasification New contracts charges to help
Margins for long term ROE increase,
LNG Margin to expand
in tandem with
higher volumes
and re-
gasification
charges
Natural Gas Sector
GAIL (Accumulate: TP Rs.565)

GAIL is India's leading public sector natural gas company, integrating all aspects of the
natural gas value chain including exploration, production, transmission, marketing,
extraction, processing, distribution, utilization including petrochemicals and natural gas
related infrastructure, products and services. After a sharp 30% growth in volumes in
FY10, we expect a more moderate yet high volume growth of 14% CAGR from FY10 to
FY13E. We expect the company's sales to grow at a CAGR of 17.6% from Rs.270.3bn in
FY10 to Rs.439bn in FY13E. We expect EBIDTA and PAT to grow at 13.2% & 7.7% CAGR
over FY10-13E respectively. Clarity on transmission tariff, aggressive expansion plans,
stable margins in petrochem segment and lower subsidy pay out for the year justify our
TP of Rs.565.
GSPL (BUY: TP Rs.151)

Gujarat State Petronet Ltd. (GSPL) is the first pure Indian natural gas transmission company.
The company operates the second-largest natural gas transmission network in India.
GSPL's gas transmission network serves Gujarat, connecting its major natural gas supply
source and demand centers. We expect volumes to increase at a 12.1% CAGR from
32mmscmd in FY10 to 45.1mmscmd in FY13E. We expect the company's sales to grow
at a CAGR of 8% from Rs.10.0bn in FY10 to Rs.12.5bn in FY13E. We expect EBIDTA and
PAT to grow at a 7.4% and 2.7% CAGR over FY10-13E respectively. Clarity on transmission
tariff, huge volume growth with aggressive expansion plan and the promising Gujarat
story, justifies our TP of Rs.151.
Indraprastha Gas (Accumulate: TP Rs.382)

Indraprastha Gas Ltd. (IGL), a JV between GAIL and BPCL, was started to lay the network
for natural gas distribution to consumers in the National Capital Territory (NCT) of Delhi in
the domestic, transport, and commercial and industrial sectors. IGL's volumes are likely
to grow at 15.6% CAGR, from 2.1mmscmd in FY10 to 3.2mmscmd in FY13E. We expect
the company's sales to grow at a CAGR of 26% from Rs.10.8bn in FY10 to Rs.21.5bn in
FY13E, on the back of higher realisations. Similarly, we expect 16% and 13% CAGR in
EBIDTA and PAT during FY10-13E period. Ability to pass costs to the customer, with
authorization for another 2 years backed by huge expansion plans and increased volumes
in both CNG and PNG segment, justifies our TP of Rs.382.
Gujarat Gas (BUY: TP Rs. 481)

GGCL distributes ~3.3 mmscmd of natural gas to various districts in Gujarat. It is the
largest private sector gas distribution company in terms of sales volume and has a
proven track record of distributing gas to the entire range of customers-bulk industrial,
retail industrial, commercial, domestic and CNG. We expect volumes to grow at a CAGR
of 10% from 2.8mmsmcd in CY09 to 3.8mmscmd in CY12E. We expect the company's
sales to grow at a CAGR of 15.5% from Rs.14.1bn in CY09 to Rs.21.8bn in CY12E. We
expect EBIDTA and PAT to grow at 22.7% & 21.8% CAGR during FY10-13E period
respectively. With demand outpacing supply in Gujarat, expected authorization from PNGRB
for existing cities, revision in selling prices across segments, and increased supply of KG
D6 gas from Q3CY11, Reduce the volume concern backed by long term supply of RLNG,
justifies our TP of Rs.481.
Natural Gas Sector
Petronet LNG (BUY: TP Rs.156)

Petronet LNG Ltd set up the country's first LNG receiving and re-gasification terminal at
Dahej, Gujarat, and is in the process of building another terminal at Kochi, Kerala. It
currently supplies ~7.5mmtpa of RLNG in the Indian market. We expect volumes to
increase at 10.6% CAGR from 7.5mmtpa in FY10 to 10.6mmtpa in FY13E. We expect the
company's sales to grow at a CAGR of 17.5% from Rs.106.5bn in FY10 to Rs.171.9bn in
FY13E. We expect EBIDTA and PAT to grow at a 25.5% and 25% CAGR during FY10-13E
respectively. Favorable pricing of LNG from a long term perspective, huge capex plans to
set up Kochi terminal in the south (new market) is likely to drive future volumes and
revenues. Higher re-gasification charges and better margins in the future, justify our TP of
Rs.156.
Natural Gas Sector
Industry Annexure
n Hike in APM gas price
The price of APM natural gas was fixed at US$ 1.9/MMBTU (Rs 3,200/MSCM) (thousand
standard cubic meters) since July 1, 2005. Subsequently, the price of APM natural gas
supplied to City Gas Distribution (CGD) projects and small consumers having
allocations up to 50,000 SCMD was increased to Rs 3,840/MSCM. As on June 5, 2010,
it has been decided that the price of APM natural gas produced by National Oil
Companies (NOCs) i.e. ONGC and OIL will be fixed at US$ 4.2/MMBTU (Rs 6820/
MSCM). Hence, the APM price inclusive of royalty would be US$ 4.2/MMBTU but excludes
marketing margin of 11.2 cents/MMBTU. This price would be applicable for supply of
APM gas to APM customers. The price would be converted to Rs/MSCM (at 10,000
KCal/SCM) at the RBI reference exchange rate of the month previous to the month
during which supply of APM gas is made. The price in Rs/MSCM would be adjusted
every month on the basis of RBI reference exchange rate. The price would be excluding
cess, transportation charge, marketing margin/service charge, taxes, etc. After the
hike, APM prices will now be in line with EGoM-determined gas prices for the KG-D6.
APM gas prices were last revised in 2005. The move follows the Finance Ministry's
suggestion of bringing about pricing parity between APM and KG gas in one swift
move, rather than a phased increase in the APM gas prices as was proposed by the
petroleum ministry.
n Imposing marketing margin on APM Gas

In APM pricing, the component of marketing margin was not there till recently. As the
quantity of gas is allocated by Government and the price is through administered
mechanism, there was not much role of marketing as such. In past, GAIL attempted to
levy marketing margin at 2.5% or Rs.110/tcm. However, as there was no approval from
MoP&NG or Government, this component was not reimbursed and the same was
subsequently withdrawn by the GAIL. GAIL continued to charge this component on
gases other than APM (like R-LNG, Spot etc). The marketing margin is considered for
reimbursement for these gases which are at market driven rates (other than APM).
However, MoP&NG vide their order dated 31st May 2010 have decided that the marketing
margin of Rs. 200/mscm should be charged from customers by the company marketing
the gas produced by National Oil Companies.
n Gas allocation in India
Gas in India is primarily utilized in power generation, fertilizer, city gas, Petrochemicals/
Refineries, & Steel/Sponge Iron industries. Presently, the allocation of gas is based on
sectoral priorities, gas availability and potential gas markets in particular regions. The
priority of gas allocation in India, as proposed by MoPNG is 1. Fertilizer Plants, 2. LPG
and Petrochemical Plants, 3. Power Plants, 4. City Gas Distribution (CGD), 5. Refineries,
6. Other industries. Also based on the new domestic gas production mainly KG D6,
Government has changed the sectoral priority for allocation.
Natural Gas Sector
Priority sector for KG D6 gas allocation

Sectors FIRM Fall Back Total
Power 31.2 12.0 43.2
Fertilizer 15.5 0.0 15.5
CGD 0.8 2.0 2.8
Petrochemical 1.9 0.0 1.9
Refineries 5.0 6.0 11.0
Steel 4.2 0.0 4.2
Captive 0.0 10.0 10.0
LPG 3.0 0.0 3.0
Total (mmscmd) 61.6 30 91.6
Natural Gas Sector
Companies
Gas Authority of India Ltd. (GAIL)
Gujarat State Petronet Ltd.
Indraprastha Gas Ltd.
Gujarat Gas Ltd.
Petronet LNG Ltd.
Emkay ©
Initiating Coverage
Gas Authority of India Ltd. (GAIL)
Your success is our success
Gains in the pipeline
22 December, 2010
n Transmission volumes to increase at a healthy 14% CAGR from
Reco 108mmscmd in FY10 to 160mmscmd in FY13E
Accumulate
n Transmission tariff to grow at 9% CAGR from Rs 0.8/scm in
CMP Target Price
FY10 to Rs 1.03/scm in FY13E; Positive for future earnings
Rs505 Rs565
n Expect higher subsidy payout of Rs. 14.2 bn compared to last
EPS change FY11E/12E (%) NA
year
Target price change (%) NA
Nifty 5,947 n Accumulate with TP of Rs.565, given its dominant market
Sensex 19,889 share in transmission business and expected volume growth.
Subsidy sharing remains a key overhang on the stock
Price Performance
(%) 1M 3M 6M 12M
Transmission volumes to increase at a healthy 14% CAGR during FY10-13E: We expect
Absolute 3 5 7 26
volume growth to be driven by new pipelines, capacity augmentation of existing pipelines
Rel. to Nifty 2 4 (4) 5
(See page no. 24) and increased gas availability. Currently, company supplies 116
Source: Bloomberg
mmscmd of natural gas to different parts of the country. Better pipeline network coupled
Relative price chart with increased gas availability is likely to drive volumes at 14% CAGR from 108mmscmd
525 Rs % 20
in FY10 to 160mmscmd in FY13E.
490 14
455 8 Clarity on transmission tariff: Reduces concerns, positive for future earnings: Recently,
420 2 PNGRB announced lower tariffs for old pipelines and significantly higher tariffs for new
385 -4
expansions, thereby ensuring adequate returns for transmission players. The new tariff
for the HVJ-GREP-DVPL pipeline (country's largest pipeline) was fixed at Rs.25.46/mmbtu
350 -10
Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10
against the current tariff of Rs.28.48/mmbtu. However, on DVPL/GREP up-gradation, the
Gail (India) (LHS) Rel to Nifty (RHS)
board fixed the tariff at Rs.53.65/mmbtu, 88% higher over current HVJ tariff. Hence, we
Source: Bloomberg
expect transmission tariff to grow at 9% CAGR from Rs0.8/scm in FY10 to Rs1.03/scm in
Stock details FY13E. Commencement of the other pipelines provide further upside to earnings based
Sector Oil & Gas on higher tariff approved by the PNGRB.
Bloomberg GAIL@IN
Equity Capital (Rs mn) 12685 Transmission and petrochemical segment: Future revenue driver: The significant
Face Value (Rs) 10 capacity expansions in the transmission and petrochemical segments are likely to drive
No of shares o/s (mn) 1268 future revenues, with both segments enjoying higher volumes and better realizations. We
52 Week H/L (Rs) 520/383 expect the contribution of the transmission segment to go up from the current 11% to 13%
Market Cap (Rs bn/USD mn) 641/14,108 of revenues by FY13E.. While we expect the Petrochemical segment's contribution to fall
Daily Avg Vol (No of shares) 1530344 from the current 11% to 8% of revenues in FY13E, we expect significant share in revenue
Daily Avg Turnover (US$ mn) 16.6 mix, post ramp up in expansion.
Shareholding Pattern (%)
Sep-10 Jun-10 Mar-10 Recommend ACCUMULATE with a target price of Rs.565: GAIL's investments to expand
Promoters 57.4 57.4 57.4 its network over the next four years, will enable it to increase gas transmission volumes
FII/NRI 13.2 13.3 13.1 and thereby, revenues and earnings in the long term. We recommend ACCUMULATE on
Institutions 19.1 19.2 19.4
GAIL with a target price of Rs.565 based on SOTP valuation. We have a positive bias on
GAIL, given its dominant market share (78%) in the transmission business in India,
Private Corp 1.0 0.8 0.8
strong track record, expected volume growth and robust business model with no
Public 9.4 9.4 9.5
commodity risk. However, subsidy burden remains the key overhang on the stock.
Source: Capitaline
Valuation table
Y/E, Mar Net EBIDTA EBIDTA APAT AEPS EPS RoE P/E EV / P/BV
(Rs mn) Sales (Core) (%) (Rs) % chg (%) (x) EBITDA (x) (x)
FY10 270353.0 53727.8 19.9 33113.7 26.2 17.7 19.8 19.2 11.9 3.6
FY11E 342280.7 61056.1 17.8 35444.1 28.2 7.5 18.6 17.9 10.9 3.1
FY12E 380790.1 69720.1 18.3 39881.5 31.4 11.3 18.1 16.1 10.0 2.7
FY13E 439199.3 77911.9 17.7 41614.6 32.8 4.5 16.6 15.4 9.5 2.4
Emkay Global Financial Services Ltd.

Gas Authority of India Ltd. (GAIL) Natural Gas Sector
Doubling pipeline network by FY14E: ~6,700km to ~14,000km

GAIL leads the natural gas pipeline industry with a total market share of 78% and pipeline
network of ~6,700Km. In order to capitalize on the strong growth prospects of the natural
gas industry, GAIL has announced aggressive plans to double its pipeline capacity from
the current 6,700km to 14,000 kms by FY14E. This expansion will increase its
transmission capacity from the current 150mmscmd to ~300mmscmd by FY14E. Given
its dominating position in the pipeline segment and continued expansion, it will be a key
beneficiary of the growing natural gas market in India.
Project network under construction.

Pipeline project Approved cost Capacity Length Completion
(Rs. Bn) (mmscmd) (KM) schedule Status
DVPL Pipeline - Phase II 51.6 24 to 78 610 Apr-11
Vjaipur Dadri pipeline 56.7 20 to 80 505 Apr-11 Commissioned up to Chainsa at Rs.25.8 bn
as on March 2010
Dadri-Bawana-Nanpal Pipeline 23.5 31 646 Apr-11 Commissioned up to Bawana at Rs.2.4 bn
as on March 2010
Chainsa-Jhajjar-Hissar pipeline 12.6 35 349 Apr-11 Commissioned up to Sultan at Rs.2.8 bn
as on March 2010
Jagdishpur-Haldia Pipeline 76.0 32 2050 Mar-12 Phase I
Jan-13 Phase II
Dhabol-Banglore Pipeline 50.1 16 1389 Mar-12 Phase I
Dec-12 Phase II
Kochi-Koottanad-Mangalore/Bangalore 32.6 16 1114 Mar-12 Phase I
Dec-12 Phase II
Total 303.1 6663
New spur pipelines capacity build-up

Pipeline Projects Approved cost (Rs. Bn) Capacity(mmscmd) Length (Km)
Karanpur Moradabad Kashipur Rudrapur pipeline 252 2.5 185
Focus energy Consortium to RRUVNL (Ramgarh Terminal) 99 1.2 90
Capacity Augmentation of Agra & Ferozabad region 200 1.25 to 2.75 71
Vijaipur Kota Pipeline Upgradation and laying of spurlines
(to bhilwada & Chittorgarh) 463 2 290
Bawana Nangal spurlines (Uttranchal & Punjab) 541 4 270
Total 1555 906
Transmission volumes to increase at a healthy 14% CAGR during

FY10-13E
We expect volume growth to be driven by new pipelines, capacity augmentation of existing
pipelines and increased gas availability. Currently, company supplies 116 mmscmd of
natural gas to different parts of the country. Better pipeline network coupled with increased
Volume to increase backed by gas availability is likely to drive volumes at 14% CAGR to 160mmscmd in FY13E. Additional
higher gas availability gas availability is expected from - A)RIL KG basin ~30mmscmd, B) Dabhol-RLNG
~10mmscmd, C) Petronet LNG ~10mmscmd, D) ONGC's marginal field ~3mmscmd, E)
Focus energy, Rajasthan field ~3mmscmd,and F) New addition of Long term LNG and
Spot LNG ~3mmscmd on ongoing basis. Due to additional gas availability, we expect
volume to growth at 14% CAGR from 108mmscmd in FY10 to 160mmscmd in FY13E.
Transmission volume & EBIDTA margin
200.0 22.6 25.0

19.9
17.7 17.8 18.3 17.7
160.0 20.0
120.0 15.0
80.0 10.0
108.4
118.0
135.8
160.0
40.0 5.0
82.1
83.3
0.0 0.0
FY08 FY09 FY10 FY11E FY12E FY13E
Volume (mmscmd) EBIDTA Margin (%)
Petrochem expansion: doubling capacity

GAIL, the country's premier natural gas marketer & transporter, diversified into the
manufacturing and marketing of downstream HDPE & LLDPE from natural gas cracking
at its Pata plant (UP) in FY99. GAIL is the only HDPE/LLDPE plant operating in Northern
India and has a dominant market share in North India. With the additional gas availability,
company is doubling the capacity of its Pata plant to 0.9mmtpa. The project is expected to
be completed by FY15E. Capacity is likely to increase to 0.5mmtpa from the current level
of 0.44mmtpa by Q4FY11E end.
Natural gas trading segment to grow in tandem with the ramp up in

transmission volume
Currently, Gail has a market share of 70% of the of the gas marketing business in India.
Trading volume would increase with the additional gas availability in the future. Currently
ISIEmergingMarketsPDF us-eyintranetit from
trades125.21.171.18
~84.8mmscmd onof2011-02-24
natural gas. We expect
08:09:17 EST.this to grow at 8.9% CAGR to
DownloadPDF.
~105mmscmd by FY13E. The volume addition is expected from Dabhol, ONGC's Marginal
Field, Long term RLNG, KG D6, Petronet LNG and spot volumes on an ongoing basis.
Clarity on transmission tariff: Reduces concerns, positive for future

earnings
Recently, PNGRB announced lower tariffs for old pipelines and significantly higher tariffs
for new expansions, thereby ensuring adequate returns for transmission players. The
board has determined tariffs of Rs.25.46/mmbtu for the country's largest pipeline- HVJ-
GREP-DVPL as against the current tariff of Rs.28.48/mmbtu. On DVPL/GREP up-gradation,
the board has fixed the tariff at Rs.53.65/mmbtu, 88% higher over current HVJ tariff. Thus,
commencement of the other pipelines provides further upside to earnings based on
higher tariff approved by the PNGRB for new pipelines.
Transmission and petrochemical segment: future revenue driver

Given the aggressive expansion in transmission network and petrochemical segment
backed by huge demand in the domestic market, we expect future revenue growth to be
mainly driven by these two segments. Both these segments are likely to enjoy higher
volumes and better realizations. Currently, transmission revenues contribute around 11%
of GAIL's revenues. We expect it to grow to 13% in FY13E. Petrochemical segment
contributes around 11% of the revenue and is expected to decline to 8% in FY13E. But,
after the completion of its ongoing expansion by FY14E, the revenue mix is likely to reflect
growing contribution from the petrochemical business in tandem with ramp up in
expansion.
Transmission and Petrochemical- Future revenue drivers
480
400
320
Rs. Bn
240
160
80
0
Natural Gas trading Natural Gas transmision
LPG & Other LHC Petrochemical
Others (GAIL Tele, CGD & Others) LPG transmission
Subsidy payout to be slightly higher than previous year

GAIL, which forms a part of the subsidy sharing group from the upstream segment, has
guided for a subsidy payout of ~Rs.8-9bn, which is lower than Rs13bn of last year. But
Subsidy payout of Rs.14.2bn, slightly looking at the average crude oil price at ~$78/bbl, the subsidy burden is likely to be higher
higher than last year than last year. We expect subsidy payout for FY11E to be around Rs.14.2bn, a 7.7% yoy
increase. But looking at the recent developments in the oil and gas sector, we believe
government will announce a proper subsidy sharing mechanism before end of FY11E. As
of now, we have modeled a subsidy of Rs.14.2bn, Rs.11.9bn and Rs.11.4bn for FY11E,
FY12E and FY13E respectively.
Trend of subsidy payout
20.0 40.0
35.6
30.0
15.0 20.0
7.7 10.0
10.0
0.0
-16.0 -4.1
-11.7
13.2
5.0 -10.0
13.1
17.8
14.2
11.9
11.4
-25.9 -20.0
0.0 -30.0
Subsidy Payout (Rs. Bn) % growth
Exploration and Production (E&P) provides further upside

GAIL has equity stakes in 27 E&P blocks comprising of 8 onshore and 18 offshore and 1
CBM block, at a total investment of ~Rs21bn till Jun'10. It has already reported discoveries
in six of its blocks (See table below). Out of these, the Cambay basin block is already in
production and gas production from Myanmar is likely to commence in FY13E-14E.
E&P portfolio
Total Blocks 27
Onshore Blocks 8
Offshore Blocks Deep 13 & Shallow 5
CBM Blocks 1 (Under Test well Drilling)
Major Operators ONGC, GSPC, Daweoo, Pertogas, Hardy,ENI, Jubilent, Arrow Energy
Net investment Rs. `2102 Cr (up to 30.06.2010)
Hydrocarbons Discoveries - where appraisal Hydrocarbons Discoveries made in 6 Blocks : Cambay onland, A1& A3 blocks (Myanmar),
& development activities are in progress Mahanadi offshore, Ankleshwar onland, & Tripura onland
Operator in 2 blocks RJ-ONN-2004/1 (NELPVI) & CY-ONN- 2005/1 (NELP VII)
Commercial Block Crude oil from Cambay Basin
Aggressive target for City Gas distribution: 50 cities by FY14E

Currently, GAIL is present in 15 cities with 8 operational JV's in CGD business. GAIL Gas,
CGD - New avenue of business
a 100% subsidiary of GAIL, plans to expand its CGD network to 50 cities by FY14E.
Management has guided that it will bid for all the Expression of Interest, whenever PNGRB
raises a bid.
Diesel de-regulation expected after 8-9 months: To reduce concerns

over future subsidy payouts
Recently, government has partially implemented the Kirit Parekh committee's
recommendations for reducing under recovery burden on OMCs. Petrol has been de-
regulated fully but diesel, which contributes 40% of the revenues has been partially de-
regulated by the government by raising prices by Rs.2/Ltr. Due to state election season,
Expectations of diesel de-regulation
which starts from Nov'2010, political pressure makes it very difficult to de-regulate diesel
to reduce concerns over future
subsidy payouts at this point in time. Post elections in May 2011, we expect diesel de-regulation to take
place because the next election will start from February 2012. So government has enough
time to think and implement the process to reduce under recovery of OMCs. On the basis
of the past upstream subsidy sharing formula, GAIL contributes ~7-10% of the upstream
share. Though the share would not change due to de-regulation of diesel, it could help
reduce the absolute value of the subsidy amount. Diesel de-regulation therefore, provides
further upsides to earnings and reduces concerns over future payouts of the company.
Aggressive capex plans

GAIL is expected to invest ~Rs.290bn in the next three years and ~Rs410bn in the next five
years. Projected capex for FY11E, FY12E and FY13E is Rs.67bn, Rs86bn and Rs.138bn
respectively.
Planned borrowing and Means of Finance

160
137.6 5%
10%
140
31%
120
100 85.6
Rs.Bn
80 66.9
60 23%
40
20 31%
0
FY11E FY12E FY13E Term Loan Bond ECB ECA OIDB
It will raise debt for funding its capex. Debt could be in the form of ECA, ECB, Bonds, OIDB
and term loans. Debt raising plans for FY11E, FY12E and FY13E are Rs. 24.3bn, Rs.45bn
and Rs.85bn respectively.
Key concerns
Lower than expected volume and delay in commissioning of the new pipeline could hurt
the earnings of the company.
Sharp decline in petrochem prices and higher than expected subsidy payout will adversely
impact profitability.
Company Background
GAIL (India) Limited, is India's leading public sector natural gas company, integrating all
aspects of the natural gas value chain, including exploration, production, transmission,
marketing, extraction, processing, distribution, utilization including petrochemicals and
natural gas related infrastructure, products and services. GAIL has 6,700 km of natural
gas high-pressure trunk pipeline with a capacity to carry 148 mmscmd of natural gas
across the country, 7 LPG gas processing units to produce 1.2 mmtpa of LPG and other
liquid hydrocarbons, 1,922 km of LPG transmission pipeline network with a capacity to
transport 3.8 MMTPA of LPG, 27 oil and gas exploration blocks and 3 Coal Bed Methane
Blocks and also North India's only gas based integrated petrochemical complex at Pata
with a capacity of 4,10,000 TPA of polymers. For supplying Piped Natural Gas (PNG) to
households and commercial users, and Compressed Natural Gas (CNG) to the transport
sector, the company has entered in to Jointventures with companies operating in Delhi,
Mumbai, Hyderabad, Kanpur, Agra, Lucknow, Bhopal, Agartala and Pune.
Shareholding Pattern as on Sep-30'2010
3% 1%
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26% 08:09:17 EST. DownloadPDF.
58%
12%
Promoter FII DII Non Institutions Bodies corporate
Financials
We expect revenues to increase from Rs.256.3bn in FY10 to

Rs.439.2bn in FY13E.
We expect GAIL's sales to grow at a CAGR of 19.6% from Rs.256.3bn in FY10 to
Rs.439.2bn in FY13E, mainly driven by higher transmission volume with new tariff revision
and better realizations in LPG and Liquid Hydrocarbons.
Revenue growth trend
490.0 35.0
32.1 33.3
420.0 30.0
439.2
350.0 25.0
380.8
342.3
280.0 20.0
15.3 15.0
256.8
210.0
239.4
13.7
181.3
140.0 11.3 10.0

7.3
70.0 5.0
0.0 0.0
Revenue (Rs. Bn) % growth
Margins to decline, due to higher operating expenditure and

aggressive expansion plans
We expect EBIDTA to grow at 13.2% CAGR from Rs.53.2bn in FY10 to Rs.77.9bn in FY13E.
During FY10, its EBIDTA margin was 19.9% and we expect it to be 17.7% in FY13E. This
is mainly on account of higher expenditure at operating level, slightly eroding operating
margins in FY13E.
Margin summary
25.0 22.6
19.9
17.7 17.8 18.3 17.7
20.0
14.7
15.0 11.3 12.2
10.4 10.4 9.4
10.0
5.0
0.0
Opearting Margin(%) PAT Margin (%)
We expect net profit to grow at 7.8% CAGR from Rs.32.9bn in FY10 to Rs.41.2bn in FY13E.
During FY10, its PAT margins were 12.2%, and we expect it to be 9.4% in FY13E. We
believe the margins would decline in future as aggressive expansion and debt raising
plans are likely result in higher depreciation and interest cost in the future, which have a
trickle down effect on the bottom line.
Outlook and Valuation
GAIL's investments to expand its network over the next four years, will enable it to increase
gas transmission volumes and thereby, revenues and earnings in the long term. We
recommend ACCUMULATE on GAIL with a target price of Rs.565 based on SOTP valuation.
We have a positive bias on GAIL, given its dominant market share (78%) in the transmission
business in India, strong track record, expected volume growth and robust business
model with no commodity risk. However, subsidy burden remains the key overhang on the
stock. Presently, stock trades at 16.1x one year forward P/E and 2.7x P/BV. Our valuation of
the core business plus other businesses works out to Rs.565/share, 12% upside to CMP
of Rs.505.
SOTP valuation
Business Metric Value/share
Core Business DCF 487
E & P Business EV/Boe 13
Investment in Other Company Fair/Market Value 64
Fair Value 565

CMP 505
% Return 12
Valuation Chart
GAIL - 1 Year forward P/E (x) GAIL - 1 Year forward P/E band
20 500 16x
ISIEmergingMarketsPDF us-eyintranet from 125.21.171.18 400

on 2011-02-24 08:09:17 EST. DownloadPDF. 13x
15
300 10x
10 7x
200
5 100
0 0
Feb-06
Mar-08
Feb-11
Jul-06
Jan-09
Jun-09
Dec-06
May-07
Nov-09
Oct-07
Sep-05
Sep-10
Apr-05
Apr-10
Aug-08
Oct-05
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Source: Company, Emkay Research Source: Company, Emkay Research
GAIL - 1 Year forward PB (x) GAIL - 1 Year forward EV/EBITDA band
4 500 9x
400 7x
3
300
2
5x
200
3
1 100
0 0
Feb-06
Mar-08
Feb-11
Jul-06
Jan-09
Jun-09
Dec-06
May-07
Nov-09
Oct-07
Oct-05
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Sep-05
Sep-10
Apr-05
Apr-10
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Aug-08
Financial Tables
Income Statement (Rs. Mn) Balance Sheet (Rs. Mn)
(Year Ending Mar 31) FY10 FY11E FY12E FY13E (Year Ending Mar 31) FY10 FY11E FY12E FY13E
Net Sales 270353.0 342280.7 380790.1 439199.3 Equity share capital 12684.8 12684.8 12684.8 12684.8
Growth (%) 9.6 26.6 11.3 15.3 Reserves & surplus 165415.0 190838.7 220331.4 251557.2
Expenditure 216625.2 281224.6 311070.0 361287.3 Net worth 178099.8 203523.5 233016.1 264242.0
Materials Consumed 169791.7 237276.0 262632.8 308574.7 Minority Interest 2302.2 2302.2 2302.2 2302.2
Employee Cost 6688.8 7530.2 8377.4 9662.4 Secured Loans 49993.6 72993.6 116993.6 171993.6
Other Exp 40144.7 36418.4 40059.8 43050.3 Unsecured Loans 4138.1 5138.1 6138.1 7138.1
EBITDA 53727.8 61056.1 69720.1 77911.9 Loan Funds 54131.7 78131.7 123131.7 179131.7
Growth (%) 23.3 13.6 14.2 11.7 Net deferred tax liability 14650.4 14650.4 14650.4 14650.4
EBITDA margin (%) 19.9 17.8 18.3 17.7 Total Liabilities 249184.1 298607.8 373100.4 460326.3
Depreciation 7443.8 8634.1 10383.3 12465.8
EBIT 46284.0 52422.0 59336.8 65446.2 Gross Block 251640.3 291640.3 346640.3 426640.3
EBIT margin (%) 19.3 16.7 17.0 16.1 Less: Depreciation 98336.1 106970.2 117353.5 129819.3
Other Income 5799.6 4899.6 5538.7 5112.6 Net block 153304.2 184670.1 229286.8 296821.0
Interest expenses 3856.4 4419.9 5881.4 8977.8 Capital work in progress 48818.5 74349.5 94930.5 104930.5
PBT 48227.2 52901.7 58994.1 61581.0 Investment 10651.3 10651.3 10651.3 10651.3
Tax 15313 17457.6 19468.1 20321.7 Current Assets 146145.4 158156.4 184127.7 217157.7
Effective tax rate (%) 31.8 33.0 33.0 33.0 Inventories 8578.4 10322.3 12127.3 14692.3
Adjusted PAT 33113.7 35444.1 39526.1 41259.2 Sundry debtors 15107.7 20630.6 22951.7 26472.3
Growth (%) 18.0 7.7 11.5 4.4 Cash & bank balance 45486.5 40781.8 52903.8 65100.7
Net Margin (%) 12.2 10.4 10.4 9.4 Loans & advances 76827.5 85570.2 95197.5 109799.8
(Profit)/loss from 355.4 355.4 355.4 355.4 Other current assets 145.3 851.4 947.2 1092.5
JVs/Ass/MI Current lia & Prov 109735.3 129127.7 145766.7 169092.2
Adj. PAT After 33469.1 35799.5 39881.5 41614.6 Current liabilities 59200.6 71998.8 82376.4 95039.1
JVs/Ass/MI Provisions 50534.7 57128.9 63390.3 74053.0
E/O items 190.6 0 0 0 Net current assets 36410.1 29028.7 38361.0 48065.5
Reported PAT 33278.5 35799.5 39881.5 41614.6 Misc. exp 0.0 0.0 0.0 0.0
PAT after MI 33278.5 35799.5 39881.5 41614.6 Total Assets 249184.1 298607.8 373100.4 460326.3
Growth (%) 17.7 7.6 11.4 4.3
Cash Flow (Rs. Mn) Key Ratios

PBT (Ex-Other income) 48591.3 52901.7 58994.1 61581.0 Profitability (%)
Depreciation 8292.6 8634.1 10383.3 12465.8 EBITDA Margin 19.9 17.8 18.3 17.7
Interest Provided 3853.4 4419.9 5881.4 8977.8 Net Margin 12.2 10.4 10.4 9.4
Other Non-Cash items 0.0 0.0 0.0 0.0 ROCE 22.9 20.9 19.3 16.9
Chg in working cap 14632.3 3382.9 2885.5 2637.7 ROE 19.8 18.6 18.1 16.6
Tax paid -16568.1 -17457.6 -19468.1 -20321.7 RoIC 39.3 33.1 30.6 26.5
Operating Cash flow 56363.9 51881.0 58676.2 65340.5 Per Share Data (Rs)
Capital expenditure -59581.1 -65531.0 -75581.0 -90000.0 EPS 26.2 28.2 31.4 32.8
Free Cash Flow -3217.2 -13650.0 -16904.8 -24659.5 CEPS 32.7 35.0 39.6 42.6
Other income BVPS 140.4 160.4 183.7 208.3
Investments -394.8 0.0 0.0 0.0 DPS 7.5 7.0 7.0 7.0
Investing Cash flow -54947.8 -65531.0 -75581.0 -90000.0 Valuations (x)
Equity Capital Raised 0.0 0.0 0.0 0.0 PER 19.2 17.9 16.1 15.4
Loans Taken / (Repaid) 15889.6 24000.0 45000.0 56000.0 P/CEPS 15.4 14.4 12.7 11.8
Interest Paid -4186.5 -4419.9 -5881.4 -8977.8 P/BV 3.6 3.1 2.7 2.4
Dividend paid (incl tax) -7422.3 -10388.8 -10388.8 -10388.8 EV / Sales 2.5 1.9 1.8 1.7
Income from investments 0 0 0 0 EV / EBITDA 11.9 10.9 10.0 9.5
Others 2214.1 0 0 0 Dividend Yield (%) 1.5 1.4 1.4 1.4
Financing Cashflow 6494.9 9191.3 28729.8 36633.4 Gearing Ratio (x)
Net chg in cash 7911.0 -4458.7 11825.0 11973.9 Net Debt/ Equity 0.0 0.1 0.3 0.4
Opening cash position 37587.1 45240.5 41078.8 53126.8 Net Debt/EBIDTA 0.0 0.4 0.9 1.3
Closing cash position 45486.5 40781.8 52903.8 65100.7 Working Cap Cycle (days) -50.5 -43.8 -45.3 -44.8
Emkay ©
Initiating Coverage
Gujarat State Petronet Ltd.
Spreading its wings
22 December, 2010
n Transmission volumes to grow at 12.1% CAGR from 32mmscmd
Reco in FY10 to 45.1mmscmd in FY13E
Buy
n Concern on transmission tariff already factored; Tariff to
CMP Target Price
remain at Rs.750-775/tcm level
Rs116 Rs151
n Corporate Social Responsibility concerns cease to exist
Target price change (%) NA n Expanding pipeline network outside Gujarat: Successful in
Nifty 5,947 winning two bids i.e Mehsana-Bhatinda and Mallavaram-
Sensex 19,889 Bhilwara-Vijaipur
Price Performance Doubling pipeline capacity in the next four years: GSPL continues to develop pipeline
(%) 1M 3M 6M 12M infrastructure in Gujarat to meet the growing demand of the state. Currently, it operates
Absolute 3 7 20 23 around 1,700 Km of pipeline within Gujarat and another 370km of pipeline is under
Rel. to Nifty 2 6 8 3 construction (See page no. 34). Recently, GSPL won two pipeline network bids outside
Source: Bloomberg Gujarat - Mehsana-Bhatinda and Mallavaram-Bhilwara-Vijaipur, for which they have
Relative price chart submitted EOI to PNGRB. The total length and capacity of these two pipelines would be
150 Rs % 20
~3,185km and ~60mmscmd respectively and will take around 3-4 years to build. However,
these pipelines point towards GSPL's future volume growth outside Gujarat. Considering
136 12
the future pipeline network, capacity and length are likely to double in the next four years.
122 4
108 -4
We expect volumes to increase at 12.1% CAGR from 32mmscmd in FY10 to 45mmscmd
94 -12
in FY13E: Currently, company supplies 37mmscmd of natural gas to its customers and
80 -20 another 3.5mmscmd of gas volume will be added from Essar and GNFC from Q3FY11E
Gujarat State Petronet (LHS) Rel to Nifty (RHS) onwards. Also, the expected commissioning of the new pipeline i.e Darod Jafrabad from
Source: Bloomberg Q4 FY11E are likely to add another 3.5mmscmd, due to existence of power plants in that
route. By end of FY13E, GSPL would be able to supply ~45.1mmscmd of natural gas.
Stock details Looking at the current development in Gujarat backed by huge demand, we expect volumes
Sector Oil & Gas to increase at a 12.1% CAGR from 32mmscmd in FY10 to 45.1mmscmd in FY13E.
Bloomberg GUJS@IN
Equity Capital (Rs mn) 5626 Concerns on transmission tariff already factored: As per the notification of Sec.16 of the
Face Value (Rs) 10 PNGRB act, the authorization process for GSPL's gas grid is expected to hit fast track.
No of shares o/s (mn) 563 GSPL has submitted authorization for the entire network. On the basis of authorization,
52 Week H/L (Rs) 128/82
PNGRB will decide on the tariff. We believe the current average tariff is justifiable based
Market Cap (Rs bn/USD mn) 66/1,453
on 12% IRR method as prescribed by the PNGRB. We have assumed tariff at Rs.760/tcm
Daily Avg Vol (No of shares) 2572110
for FY12-13E. We expect tariff notification by end of 2010 and believe it will not fall below
Daily Avg Turnover (US$ mn) 6.6
Rs750/tcm.
Sep-10 Jun-10 Mar-10 Recommend BUY with target price of Rs.151: With GSPL's investment phase (to expand
Promoters 37.7 37.7 37.8 its network over the next four years) underway, we expect it to increase its gas transmission
FII/NRI 15.9 16.1 16.1 volumes and thereby, revenues and earnings in the long term. Also, expansion of two new
pipelines outside Gujarat provide new avenues for business growth. We recommend a
BUY on GSPL with a target price of Rs.151 based on DCF method. GSPL is our top pick
in the sector given its monopoly in Gujarat, strong track record, expected volume growth
Public 23.9 23.7 24.9
and robust business model with no commodity risk.
Source: Capitaline
Valuation table
FY10 10008.5 9413.4 94.1 4137.4 7.4 235.4 29.8 15.8 8.0 4.2
FY11E 10490.7 9781.3 93.2 4046.0 7.2 -2.2 23.3 16.1 8.1 3.4
FY12E 11698.3 10940.7 93.5 4396.0 7.8 8.7 21.0 14.8 7.2 2.9
FY13E 12498.3 11660.9 93.3 4475.5 8.0 1.8 18.1 14.6 6.5 2.5

Gujarat State Petronet Ltd. Natural Gas Sector
Volume to increase at 12.1% CAGR from FY10-FY13E

GSPL covers the districts of Ahmedabad, Anand, Baroda, Bharuch, Gandhinagar and
Surat. This area is commonly known as the "Golden Corridor", in which a large number of
industries are concentrated. Currently, GSPL supplies 37mmscmd of natural gas to its
Near term volumes to be driven by customers. Most of its contracts are long term in nature. The current supply of 37mmscmd
Essar, GNFC and power plants is likely to see addition of another 3.5mmscmd of gas volume from Essar and GNFC from
Q3FY11E onwards. Also, the expected commissioning of the new pipeline i.e Darod
Jafrabad from Q4 FY11E will add another 3.5mmscmd. So by end of FY13E, GSPL would
be able to supply ~45.1mmscmd of natural gas. Looking at the current development in
Gujarat backed by huge demand, we expect volumes to increase at 12.1% CAGR from
32mmscmd in FY10 to 45.1mmscmd in FY13E.
Transmission volume trend
50 140
115.0 120
45.1
40
42.2
100
37.1
30 80
32.0
60
20 40
16.0 13.6 20
17.3
14.9
10 6.8
16.9
0
-11.8
0 -20
MMSCMD Growth (%)

Expansion within Gujarat
Company continues to develop pipeline infrastructure in Gujarat to meet the growing
demand of the state.
The following pipeline sections are being developed on priority:
Projected pipeline under construction

Pipeline Length(km)
Darod Jafrabad 220
Mundra spurlines 40
Satej to Sanand 35
Mehsana Palanpur 75
Total 370
Existing and future network plan
As mentioned above, Darod Jafrabad pipeline is the key volume driver for the company in
the near future. Due to existence of power plants in that route, company expects around
3.5mmscmd natural gas demand. Further, the company also continues to develop several
other spur lines to connect uncovered industrial clusters and medium sized customers
along the pipeline network, which include regions like Tarapur, Vilayat, Dahej, Silvasa,
Bhavnagar, Amreli, Veraval, Gandhidham, Anjar, Mundra, Jafrabad.
Tariff to remain at Rs.750-775/tcm level

ISIEmergingMarketsPDF us-eyintranet As per 125.21.171.18
from the notification of
onSec.16 of the PNGRB
2011-02-24 08:09:17act, the DownloadPDF.
EST. authorization process for GSPL's
We do not expect transmission tariff gas grid is expected to hit fast track. GSPL has submitted authorization for the entire
to fall below Rs.750/tcm network. On the basis of authorization, PNGRB will decide the tariff. We believe the current
average tariff is justifiable based on 12% IRR method as prescribed by PNGRB. We have
assumed tariff at Rs.760/tcm for FY11-13E. We expect tariff notification by end of 2010 and
believe it will not fall below Rs750/tcm. .
Expanding out of Gujarat: Higher demand from new areas to boost

future transmission volumes
GSPL has submitted expressions of interest for three pipelines outside Gujarat. 1)
Mehsana- Bhatinda, 2) Mallavaram - Bhilwara, 3) Bhatinda-Jammu. Company won two
pipeline network bids outside Gujarat i.e. Mehsana-Bhatinda and Mallavaram-Bhilwara-
Vijaipur, for which they have submitted EOI to PNGRB. The total length and capacity of
Expanding pipeline out of Gujarat,
these two pipelines would be ~3185km and ~60mmscmd respectively.
pointer towards the future volume
growth At this point in time, it is very difficult to ascertain the value of the pipeline because of
limited clarity on demand & supply source of gas. Also, it will take minimum 3-4 years to
build this pipeline. However, this pipeline points towards the future volume growth of the
company's network outside Gujarat. Considering the future pipeline network, capacity
and length is likely to more than double in the next five years.
Pipeline Length(Km) Capacity(mmscmd)

Mehsana - Bhatinda 1670 30
Bhatinda-Jammu-srinagar 740 15
Mallavaram-Bhilwarar-Vijaipur 1585 30
Surat-Paradip 1600 30
Source: PNGRB
Pipeline outside Gujarat
Foray into wind power generation

The company has initiated a 52.5 MW wind power project in the areas of Maliya Miyana,
Rajkot and Gorsar, Porbandar. Currently, 90% of the project work has been completed.
The investment in the new business is mainly for enjoying resultant tax benefits.
Corporate social responsibility tax concerns cease to exist

Since the announcement of a social tax by the Gujarat government two years back, none
of the PSUs have provided for the same. Also, the government is yet to identify a project for
contribution towards the social tax. This clearly signals removal of the social tax but any
formal discussion or announcement has not yet been made by the Gujarat government.
Investment in CGD; New growth avenues

GSPL has 36% stake in GSPC Gas and 13% stake in Sabarmati Gas. Sabarmati gas, a
JV between BPCL and GSPC, operates primarily in Mehsana, Gandhinagar and Sabarkatha
Investing in CGD presents huge with a current supply of 0.75mmscmd. GSPC Gas operates in Vapi, Valsad and Navsari
opportunity with a current supply of 3.1mmscmd. We believe that this investment in associate
companies with combined sales of ~4mmscmd will enable GSPL to cash in on the
strong growth in CGD.
Huge capex plans

GSPL plans to invest ~Rs.6-7bn each in FY11E and FY12E to expand its current pipeline
network within Gujarat. If company gets an authorization for its existing network, then the
expansion plan would be much higher compared to the current level. Financing of capex
is not an issue as company has maintained its debt/equity at 0.8 levels for the year.
Risks & Concerns
Competitive prices of substitute products

Change in prices of hydrocarbon products such as LPG, Naphtha or fuel oil would change
the preference from natural gas to that product.
Delay in supply of new gas

Later than expected delay in supply of new gas from KG basin will impact GSPL's revenues.
This would also impact the overall throughput of natural gas and expansion plans of key
pipelines.
Regulatory risk
Changes in regulation pertaining to gas pipeline tariffs by Petroleum and Natural Gas
Regulatory Board will adversely affect the company's revenues.
Company Background
Gujarat State Petronet Ltd. (GSPL) is the first pure Indian natural gas transmission company.
The company operates the second-largest natural gas transmission network in India.
GSPL's gas transmission network serves Gujarat, connecting its major natural gas supply
sources and demand centers. The company operates a 1,666 km natural gas pipeline
network and transports more than 37 mmscmd of gas.
Shareholding pattern as on Sep-30'2010 (%)
21%
38%
29%
12%
Promoter FII DII Non Institution
Financials
We expect GSPL's revenues to increase from Rs.10bn in FY10 to

Rs12.6bn in FY13E.
We expect the company's sales to grow at a CAGR of 7.7% from Rs.10.0bn in FY10 to
Rs.12.5bn in FY13E, mainly driven by higher volumes from existing players - Reliance
Industry, Torrent Power, Essar and other power companies. Expected commissioning of
the new pipeline to add new volume, and drive future revenues.
14 120
12 105.3 100
12.5
11.7
10
Growth (%)
10.5
80
10.0
Rs. Bn
8
60
6
4 31.6 40
4.9
4.2
2 16.7 4.8 11.5 20

6.8
0 0
Sales Growth (%)
Operating and Net margins to decline from FY10 to FY13E

However, we expect a marginal decline of 80bps in its EBITDA margins from 94.1% in
FY10 to 93.3% in FY13E on account of lower average tariff assumption in FY11-13E.
Margin summary
96 50
94 41.3 38.6 37.6 35.8 40
92 94.1 93.2 93.5 93.3
90 25.3 30
23.9
88 20
87.1
86 87.2
10
84
82 0
EBIDTA Margin(%) PAT Margin(%)
We expect net profit to grow at 2.7% CAGR from Rs.4.1bn in FY10 to Rs.4.5bn in FY13E.
During FY10, its PAT margins were 41.3%, and we expect it to be 35.8% in FY13E. Decline
in operating margins plus higher fixed cost (depreciation & interest cost due to higher
capex) will have a trickledown effect on its bottom line.
Key assumptions for DCF calculation

We have used three-stage DCF to ascertain the value of the stock. The first stage includes
explicit forecasts till FY13E with the second stage assuming declining growth till FY20E
(conservative estimates) and third stage comprising of terminal growth of 2% from FY21E
onwards. We value GSPL at INR151, based on DCF with a WACC of 10.5%.
Following are the key assumptions for DCF calculation

Particulars FY11E FY12E FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Sales 10,491 11,698 12,498 13,498 14,443 15,454 16,381 17,200 18,060 18,783
EBIT Margin 65.3% 64.6% 62.3% 62.0% 61.7% 61.4% 61.1% 60.8% 60.5% 60.2%
Capex -7000 -7000 -5000 -1500 -800 -800 -800 -800 -800 -800
FCFF (2,209) 1,533 4,800 8,282 9,411 9,869 10,281 10,644 11,028 11,345
Present value 98738 WACC assumption

Less: Net Debt 13596 Cost of equity 12.5%
Equity Value 85141 Risk free rate 8.0%
Numbers of Equity shares 562 beta 0.9
Value per share 151 Market risk premium 5.0%
Cost of debt 8.0%
WACC 10.5%
Terminal Growth 2%
GSPL's aggressive expansion of its network pipeline is likely to coincide with increased
gas availability, thereby ensuring higher gas transmission volumes, revenues and
earnings in the long term. Also, expansion of two new pipelines outside Gujarat provides
new growth avenues. We recommend a BUY on GSPL with a target price of Rs.151 based
on DCF method. GSPL is our top pick in the sector given its monopoly in Gujarat, strong
track record, expected volume growth and robust business model with no commodity
risk. Presently, stock trades at 14.8x, one year forward P/E and 2.9x P/BV. We value its core
business at Rs.151/share, a 30% upside to CMP of Rs116.
Valuation Chart
GSPL - 1 Year forward P/E (x) GSPL - 1 Year forward P/E band
50 150
40 15x
100
30 11x
20 50 7x
4x
10
0 0
Jul-07
Sep-06
Feb-07
Dec-07
Mar-09
Jan-10
Jun-10
May-08
Nov-10
Oct-08
Aug-09
Apr-06
Feb-07
Mar-09
Jul-07
Jan-10
Jun-10
Dec-07
May-08
Nov-10
Oct-08
Sep-06
Apr-06
Aug-09
GSPL - 1 Year forward PB us-eyintranet

ISIEmergingMarketsPDF (x) GSPL
from 125.21.171.18 on - 1 Year forward
2011-02-24 EV/EBITDA
08:09:17 band
EST. DownloadPDF.
5 250
12x
4 200
9x
3 150
2 100 6x
1 50
3x
0 0
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Feb-07
Mar-09
Jul-07
Jan-10
Jun-10
Dec-07
May-08
Nov-10
Oct-08
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Sep-06
Apr-06
Aug-09
Financial Tables
Materials Consumed 0 0 0 0 Minority Interest 0.0 0.0 0.0 0.0
Depreciation 2364.9 2928.2 3379.2 3870.4
EBIT 7048.5 6853.1 7561.6 7790.5 Gross Block 33254.8 38254.8 44254.8 47254.8
PBT 6268.6 6054.8 6561.1 6679.9 Investment 665.7 665.7 665.7 665.7
Tax 2131.2 2008.8 2165.2 2204.4 Current Assets 7549.3 6846.6 7464.1 10672.9
Growth (%) 235.4 -2.2 8.7 1.8 Cash & bank balance 1741.9 1082.7 988.3 3695.5
(Profit)/loss from JVs/Ass/MI 0 0 0 0 Other current assets 128.6 862.3 961.5 1027.3
AdJ. PAT After JVs/Ass/MI 4137.4 4046.0 4396.0 4475.5 Current lia & Prov 8334.2 5562.1 6361.5 7573.4
E/O items 0.0 0.0 0.0 0.0 Current liabilities 4848.4 4542.8 5178.9 6275.2
Reported PAT 4137.4 4046.0 4396.0 4475.5 Provisions 3485.8 1019.3 1182.6 1298.2
PAT after MI 4137.4 4046.0 4396.0 4475.5 Net current assets -784.9 1284.5 1102.6 3099.6
Growth (%) 235.4 -2.2 8.7 1.8 Misc. exp 3.1 0.0 0.0 0.0
Total Assets 29639.1 35777.2 39216.1 42342.7

Chg in working cap 1419.4 -2725.5 87.5 710.3 ROE 29.8 23.3 21.0 18.1
Tax paid 1958.2 2008.8 2165.2 2204.4 RoIC 37.1 29.1 27.9 28.2
Operating Cash flow 8862.6 5047.0 8863.1 10167.8 Per Share Data (Rs)
Free Cash Flow 1085.9 -1953.0 1863.1 5167.8 CEPS 11.6 12.4 13.8 14.8
Other income 0.0 0.0 0.0 0.0 BVPS 27.8 33.8 40.5 47.3
Investments 0.0 0.0 0.0 0.0 DPS 1.0 1.0 1.0 1.0
Investing Cash flow -7617.4 -7000.0 -7000.0 -5000.0 Valuations (x)
Loans Taken / (Repaid) 1085.9 2750.0 -299.2 -692.1 P/CEPS 10.0 9.4 8.4 7.8
Income from investments 0.0 0.0 0.0 0.0 EV / EBITDA 8.0 8.1 7.2 6.5
Others 0.0 0.0 0.0 0.0 Dividend Yield (%) 0.9 0.9 0.9 0.9
Financing Cash flow -477.8 1293.8 -1957.5 -2460.5 Gearing Ratio (x)
Net chg in cash 767.3 -659.2 -94.5 2707.3 Net Debt/ Equity 0.7 0.7 0.6 0.4
Opening cash position 974.6 1741.9 1082.7 988.3 Net Debt/EBIDTA 1.1 1.4 1.2 0.9
Emkay ©
Initiating Coverage
Indraprastha Gas Ltd.
Consolidating its position
22 December, 2010
n CNG and PNG volumes to grow at 12.1% and 40.4% CAGR from
Reco FY10 to FY13E respectively
Accumulate
n Venturing into Ghaziabad: new geographies to boost PNG
CMP Target Price
volumes
Rs338 Rs382
n Pricing pressure reduced: Ability to pass on cost to the customer
Target price change (%) NA n Given its monopoly in NCR and easing of pricing pressure,
Nifty 5,947 recommend ACCUMULATE with PT of 382
Sensex 19,889
Expansion in NCR on fast track; to boost volume growth in CNG and PNG segment:
Price Performance PNGRB has approved IGL as an authorized entity to implement the Delhi CGD project,
(%) 1M 3M 6M 12M supplying CNG to the transport sector and PNG to households, commercial and industrial
Absolute 9 2 29 74 sectors. The company has a three year marketing and 25 year network exclusivity in the
Rel. to Nifty 8 1 16 46 NCT of Delhi. This will enable it to enjoy higher margins over the next two years plus
Source: Bloomberg having the advantage of expanding its pipeline network in Delhi, Noida and Greater Noida.
Relative price chart The company plans to invest ~Rs.4-5bn each in FY11E and FY13E for expansion of its
375 Rs % 80 pipeline network and for setting up ~40 new CNG stations (ahead of the post exclusivity
330 62
period). It expects ~50,000 new PNG connections in FY11-FY13E each from the existing
geographies, resulting in volume growth across segments, backed by huge demand
285 44
from NCR.
240 26
195 8 Pricing power- Key to success: The recent move by IGL to pass on additional/higher cost
150 -10
to the consumer has eased its pricing pressure to a great extent. As this was a major
Indraprastha Gas (LHS) Rel to Nifty (RHS)

overhang on the stock, it underperformed the market till Dec'09. The price increases
clearly reflect company's ability to pass on cost. Following the recent hike in cost of natural
Source: Bloomberg
gas (by 133% to $4.2mmbtu), IGL increased their CNG prices from Rs.21/KG to Rs.27.5/
Stock details kg and PNG prices from Rs.17.89/scm to Rs.18.97/scm (average prices). This move has
Sector Oil & Gas reduced future concerns on pricing pressures and shown the ability of the company to
Bloomberg IGL@IN pass on cost to the customer successfully.
Equity Capital (Rs mn) 1400
Face Value (Rs) 10 Operating margins to be subdued due to higher focus on PNG: We expect IGL's EBIDTA
No of shares o/s (mn) 140 to grow at a 16% CAGR from Rs.3.8bn in FY10 to Rs.5.9bn in FY13E. We expect an 800
52 Week H/L (Rs) 374/186 bps decline in its EBIDTA margins from 35.7% in FY10 to 27.7% by FY13E on account of
Market Cap (Rs bn/USD mn) 47/1,034 higher focus on PNG. The service cost of the PNG segment is higher and increased
Daily Avg Vol (No of shares) 392443 revenues from this segment are likely to lower IGL's overall operating margins. As of now
Daily Avg Turnover (US$ mn) 2.8 its major revenue comes from the CNG segment but after the authorization, company is
expanding its wings in the PNG segment.
Sep-10 Jun-10 Mar-10 Recommend ACCUMULATE with target price of Rs.382: Our EPS estimate of Rs.21 and
Promoters 45.0 45.0 45.0 Rs.22.4 for FY12E and FY13E respectively, imply earnings CAGR of 13% over FY10-13E.
FII/NRI 15.9 11.4 11.9 We recommend an ACCUMULATE on IGL with a target price of Rs.382, based on DCF
Institutions 17.6 20.5 19.4 method. We have a positive bias on IGL, given its monopoly in the NCR region, strong
Private Corp 7.1 8.1 8.0 volume growth in CNG and PNG segment and robust business model with no commodity
Public 14.4 15.0 15.7 risk. We believe that concerns on pricing pressure and expansion in Ghaziabad have
eased and any dip should be used as an opportunity to accumulate the stock.
Source: Capitaline
Financial Snapshot
FY10 10838 3865 35.7 2154.9 15.4 24.9 28.6 21.7 11.7 5.7
FY11E 17289 4878 28.2 2600.2 18.6 20.7 28.4 18.0 9.4 4.7
FY12E 19783 5506 27.8 2934.9 21.0 12.9 26.6 15.9 8.3 3.9
FY13E 21551 5966 27.7 3138.1 22.4 6.9 23.9 14.9 7.7 3.3

Indraprastha Gas Ltd. Natural Gas Sector
Expansion in NCR:- To boost volume in CNG and PNG segment

The PNGRB has approved IGL as an authorized entity to implement the Delhi CGD
project, supplying CNG to the transport sector and PNG to households, commercial and
industrial sectors. The company has a three year marketing and 25 year network exclusivity
in the NCT of Delhi. This will enable it to enjoy higher margins over the next two years plus
having the advantage of expanding its pipeline network in Delhi, Noida and Greater Noida.
To ensure better connectivity for CNG and PNG users, company is planning to invest
Rs.4.5-5bn resulting in volume growth across segments, backed by huge demand from
NCR.
Pricing pressures ease: Able to pass on cost to the customer

The recent move by IGL to pass on additional/higher cost to the consumer has eased its
pricing pressure to a great extent. As this was a major overhang on the stock, it under
Following the recent hike in gas performed the market till July 2009. The price increases clearly reflect company's ability to
prices, IGL raised CNG prices from pass on cost. As part of the new reforms in the Oil and Gas sector, government increased
Rs.21/KG to Rs.27.5/kg and PNG from the APM gas prices by ~133% to $4.2/mmbtu, resulting in higher raw material cost for IGL.
Rs.17.89/scm to Rs.18.97/scm Following the recent hike in cost of natural gas, IGL increased their CNG prices from
Rs.21/KG to Rs.27.5/kg and PNG prices from Rs.17.89/scm to Rs.18.97/scm (average
prices). This move has reduced future concerns on pricing pressures and shown the
ability of the company to pass on cost to the customer successfully.
CNG and PNG volumes to grow at a CAGR of 12.1% and 40.4%

respectively
IGL's volumes are likely to grow at 15.6% CAGR from 2.1mmscmd in FY10 to 3.2mmscmd
in FY13E, due to a continued increase in natural gas demand. CNG business accounts
for 82% of its total volumes. IGL's major customers include public transportation buses,
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125.21.171.18 on Phatphat Sewa
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Transport Corporation (DTC),
Higher price of Petrol and diesel to which operates public transportation buses, is its largest client. Looking at the cost
increase CNG conversion competitiveness of CNG versus other fuels such as petrol and diesel, demand from
private vehicles and public transportation buses is expected to play a crucial role in CNG
consumption in the future. According to management, in the past, Delhi saw a conversion
of ~5,000 vehicles per month from normal to CNG variant, when petrol and diesel prices
were high and regulated. Currently, this region is seeing a conversion of ~3,000 vehicles
per month. Due to deregulation in auto fuel prices, we believe future vehicle conversion
would be much higher compared to current levels. We assume vehicle conversions of
~3,667/month in FY11E and 4,000/month in FY12E & FY13E. So, based on vehicle
conversions in FY10 to FY13E, we expect IGL's CNG volume to grow at 12.1% CAGR from
690mmscm in FY10 to 972mmscm in FY13E.
CNG & PNG volume trend
1200 25 250 112.1 120

7.1
19.2 17.7 21.9
1000 20 200 100
14.4
800 80
MMSCM
MMSCM
12.3 15 150
600 40.3 60
197.0
9.5 9.4 100

10 26.3
400 40
16.2
210.9
161.6
505.9
602.9
811.8
972.3
5 50 20
43.0
54.3
76.2
200
690
889
0 0 0 0
FY08 FY09 FY10 FY11E FY12E FY13E FY08 FY09 FY10 FY11E FY12E FY13E
CNG volume Growth % PNG Volume Growth %
PNG business contributes only 10% to total revenues. Management sees immense
growth potential in the PNG segment. Currently, there are ~4 million registered and
unregistered users in the NCT of Delhi. Of this, only 0.18 million connections are covered
Huge potential in PNG segment by IGL. Comparison of the current number of PNG connections with the actual registered
and unregistered users (~4 million) reveals that there is huge potential in this market.
Based on the past performance and the opportunities in the PNG segment, we assume
that company would add around 45,000-50,000 new PNG connections every year. Based
on the estimated PNG connections from FY10 to FY13E, we expect PNG volume to grow
at 40.4% CAGR from 76mmscm in FY10 to 211mmscm in FY13E.
Venturing into Ghaziabad: New geographies to boost PNG volumes

Legal dispute with PNGRB regarding the authorization in Ghaziabad is now resolved. IGL
Ghaziabad: New area for PNG has already started its expansion in Ghaziabad following the Delhi high court's positive
connection verdict in Jan'2010. According to the company, it expects a demand of 0.4mmscmd from
Ghaziabad in the initial stage of the business, as it is largely an industrial area. For the
natural gas source for Ghaziabad, company is depending on KG D6 gas and is expected
to get further allocation for the same in the next year.
Margins may decline post marketing exclusivity period

According to the new regulations, existing players engaged in the CGD business for more
than three years in a city will enjoy marketing exclusivity for additional three years. The
network established in new cities will enjoy marketing exclusivity for five years. Post the
marketing exclusivity period, third-party access to the network will be allowed on a non-
Competition to starts, post the discriminating basis. Currently, IGL enjoys better EBIDTA margins, up to 35.7% (FY10),
exclusivity period due to APM gas costing lower than other gas. However, post FY12, its margins may
decline due to expiry of its exclusivity period (January 2012), as the market will open for
new players. According to the regulations for pipeline tariff, discounted cash flow method
based on a reasonable rate of return is used to determine the tariff for using the
infrastructure of the existing company. For fair competition, PNGRB has to ensure that the
existing players (IGL in this case) and new entrants get the gas at the same price. However,
looking at the current expansion plans of IGL, it may be difficult for them to capture the
existing CNG & PNG customers. But, competition arising from entry of new players is
likely to erode IGL's margins post the exclusivity period.
Capex plans
The company plans to invest ~Rs.4-5bn each in FY11E and FY13E in the pipeline network
and for setting up ~40 new CNG stations (ahead of the post exclusivity period). It also
plans to expand its CNG stations and PNG network coverage to newer geographies in
and around Delhi, Greater Noida, Noida and Ghaziabad. Company is expecting ~50,000
new PNG connections in FY11 to FY13E each, from existing geographies.
Key Concerns
Higher prices of RLNG could lead to fall in margins in case of difficulty in passing over the
cost to customers. Fall in crude oil prices or decrease in duties of petroleum products
could impact CNG demand, as auto fuels would then be more competitive than CNG.
Company Background
Indraprastha Gas Ltd. (IGL) was incorporated in 1998 as a JV between Gas Authority of
India Ltd. (GAIL) and Bharat Petroleum Corporation Ltd. (BPCL). The company was started
in order to lay the network for natural gas distribution to consumers in the domestic,
transport, commercial and industrial sectors of the National Capital Territory (NCT) of
Delhi. With the backing of strong promoters, IGL plans to provide natural gas in the capital
region. It supplies 2.3mmscmd of natural gas to CNG and PNG customers. The company
also supplies R-LNG to 25 industrial consumers in the NCT of Delhi.
17%
44%
23%
16%
Financials
We expect IGL's revenues to increase from Rs.10.8bn in FY10 to

Rs.21.5bn in FY13E.
We expect the company's sales to grow at a CAGR of 26% from Rs.10.8bn in FY10 to
Rs.21.5bn in FY13E, mainly driven by higher CNG conversion, new PNG connections, as
well as better realization due to recent hikes.
Revenue growth trend Net sales mix
25 70 100.0% 87.8%
82.0%
59.5 60
20
21.6
80.0%
19.8
50
17.3
15
Rs. bn
40 60.0%
10 20.2 26.5 30
16.1 40.0%
10.8
14.4 20
18.0%
8.6
5 8.9 12.2%
20.0%
7.1
10
0 0
0.0%
FY10 FY13E
Sales Growth % CNG PNG
Focus on PNG to dilute margin to 27.7% in FY13E

We expect EBIDTA to grow at 16% CAGR from Rs.3.8bn in FY10 to Rs.5.5bn in FY13E.
During FY10, its EBIDTA margin was 35.7%, and we expect it to be at 27.7% in FY13E. We
expect IGL's margins to drop in the future due to an expected increase in revenue from
PNG segment, where service cost is higher.
Margin summary
50 43.1
35.5 35.7
40
28.2 27.8 27.7
30 24.5
20.1 19.9
15.0 14.8 14.6
20
10
0
Operating Margin (%) Net Profit Margin (%)
We expect net profit to grow at 13% CAGR from Rs.2.1bn in FY10 to Rs.3.1bn in FY13E.
During FY10, its PATM was 19.9%, and we expect it to be at 14.6% in FY13E. We expect a
decline in margins as the squeeze in margins at operating level and higher fixed cost
(mainly depreciation) are likely to have a trickledown effect on the bottom line.

We have used three-stage DCF to ascertain the value of the stock. The first stage includes
explicit forecasts till FY13E, the second stage estimates declining growth till FY20E
(conservative estimate) and third stage comprises of terminal growth of 3% from FY21E
onwards. We value IGL at INR382, based on DCF with a WACC of 10.5%.

Particular FY11E FY12E FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Sales 17,289 19,783 21,551 23,707 25,840 27,907 29,861 31,653 33,235 34,897
EBIT Margin 22.6% 22.3% 22.0% 21.8% 21.5% 21.3% 21.0% 20.8% 20.5% 20.3%
Capex -4500 -3500 -3500 -1000 -800 -800 -800 -800 -800 -800
FCFF 186 1,029 1,235 4,004 4,530 4,835 5,111 5,352 5,554 5,794
Present value 52,824 WACC assumption

Less: Net Debt (687) Cost of equity 11%
Equity Value 53,512 Risk free rate 8%
Numbers of Equity shares 140 beta 0.7
Value per share 382 Market risk premium 5%
Cost of debt 7%
WACC 10.5%
Terminal Growth 3%
Outlook and Valuations
Our EPS estimate of Rs.21 and Rs.22.41 for FY12E and FY13E respectively, imply earnings
CAGR of 13% over FY10-13E. We recommend ACCUMULATE on IGL with a target price of
Rs.382 based on DCF method. We have a positive bias on IGL, given its monopoly in
NCR region, strong volume growth in CNG and PNG segment and robust business
model with no commodity risk. We believe that concerns on pricing pressure and expansion
in Ghaziabad have eased and any dip should be used as an opportunity to accumulate
the stock. Presently, stock trades at 15.9x one year forward P/E and 3.9x P/BV. Our value of
its core business works out to Rs.382/share, a 13% upside to CMP of Rs 338.
Valuation Chart
Indraprastha - 1 Year forward P/E (x) Indraprastha - 1 Year forward P/E band
20 400
15x
15 300
12x
10 200 9x
6x
100
5
0
0
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Apr-06
Apr-07
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Apr-09
Apr-10
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Indraprastha - 1 Year forward

ISIEmergingMarketsPDF PB (x) from 125.21.171.18 on 2011-02-24
us-eyintranet Indraprastha - 1 YearEST.
08:09:17 forward EV/EBITDA band
DownloadPDF.
5 400
9x
4
300 7x
3
200 5x
2
3
1 100
0 0
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Apr-06
Apr-07
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Apr-09
Apr-10
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Apr-10
Financial Tables
Expenditure 6973 12411 14276 15585 Net worth 8252.8 10034.0 12068.1 14223.4
EBITDA 3865 4878 5506 5966 Loan Funds 0.0 1500.0 2000.0 2500.0
Depreciation 774.5 978.6 1100.4 1223.4
EBIT 3090.5 3899.7 4405.9 4743.1 Gross Block 11053.2 13053.2 14553.2 16053.2
Interest expenses 0 80.2 130.0 170.0 Capital work in progress 1420.6 3920.6 5920.6 7920.6
PBT 3244.3 3902.5 4413.4 4719.0 Investment 1041.8 1041.8 1041.8 1041.8
Effective tax rate (%) 33.6% 33.4% 33.5% 33.5% Inventories 317.2 397.8 455.5 505.0
(Profit)/loss from JVs/Ass/MI - - - - Other current assets 25.8 41.1 47.1 51.3
Adj. PAT After JVs/Ass/MI 2154.9 2600.2 2934.9 3138.1 Current lia & Prov 1844.1 3468.3 4168.0 4690.9
E/O items - - - - Current liabilities 1007.3 1969.4 2439.2 2820.7
Reported PAT 2,154.9 2,600.2 2,934.9 3,138.1 Provisions 836.8 1498.9 1728.8 1870.2
PAT after MI 2,154.9 2,600.2 2,934.9 3,138.1 Net current assets -249.3 -489.5 -355.1 23.5
Growth (%) 24.9 20.7 12.9 6.9 Misc. exp 0.0 0.0 0.0 0.0
Total Assets 8727.1 12008.3 14542.4 17197.7

Chg in working cap 150.1 1078.8 470.7 329.7 ROE 28.6 28.4 26.6 23.9
Tax paid 1089.5 1302.3 1478.5 1580.9 RoIC 62.1 65.8 75.1 81.7
Operating Cash flow 3067.6 4737.7 4636.0 4861.2 Per Share Data (Rs.)
Free Cash Flow -417.7 237.7 1136.0 1361.2 CEPS 20.9 25.6 28.8 31.2
Other income 0 0 0 0 BVPS 58.9 71.7 86.2 101.6
Investments 0 0 0 0 DPS 4.5 5 5.5 6
Investing Cash flow -3485.3 -4500 -3500 -3500 Valuations (x)
Equity Capital Raised 0 0 0 0 PER 21.7 18.0 15.9 14.9
Loans Taken / (Repaid) 0 1500 500 500 P/CEPS 16.0 13.1 11.6 10.7
Interest Paid 0 -80.172 -130 -170 P/BV 5.7 4.7 3.9 3.3
Dividend paid (incl tax) -737.1 -819 -900.9 -982.8 EV / Sales 4.2 2.7 2.3 2.1
Income from investments 0 0 0 0 EV / EBITDA 11.7 9.4 8.3 7.7
Others 0 0 0 0 Dividend Yield (%) 2.1 1.5 1.6 1.8
Financing Cash flow -737.1 600.8 -530.9 -652.8 Gearing Ratio (x)
Net chg in cash -1154.8 838.6 605.1 708.4 Net Debt/ Equity -0.1 -0.1 -0.1 -0.1
Opening cash position 1461.7 306.9 1145.5 1750.6 Net Debt/EBIDTA -0.2 -0.1 -0.1 -0.2
Emkay ©
Initiating Coverage
Gujarat Gas Ltd.
Re-charged for growth
22 December, 2010
n Supply concerns addressed - Secured long term RLNG
Reco
Buy n New cities in Gujarat are open for bidding: New avenues for
expansion
CMP Target Price
Rs398 Rs481 n Healthier revenue mix (higher proportion of CNG and Industrial
Retail) to expand margins by 390bps to 23% in CY12
Target price change (%) NA n Given its monopoly in cities of Gujarat, expected volume
Nifty 5,947 growth plus zero debt and robust business model with no
Sensex 19,889 commodity risk, recommend BUY with TP of Rs.481
Price Performance Long term agreement with BG India Energy for purchase of RLNG to reduce supply
(%) 1M 3M 6M 12M concerns: Gujarat Gas' volumes over the past few years have dipped on account of lower
Absolute 6 (2) 35 77 supply from PMT, which contributes ~76% of the total volume consumption of the company.
Rel. to Nifty 5 (3) 21 48 Currently, the volume contribution of PMT has reduced from 76% to 56% (in Q2 CY10). So
Source: Bloomberg to ensure steady supply, company recently entered into an agreement with BG India
Relative price chart Energy for purchasing of 0.5mmscmd of re-gasified LNG on firm basis for the period of
425 Rs % 60
Oct'2010- Dec'2013. This move has reduced future supply concerns of the company. Also,
380 46
GGCL has allocation of KG D6 gas of ~0.6mmscmd on fall back basis. Though it has not
yet started supply, we expect it to start from Q3 CY11E. This is likely to further boost volume
335 32
growth as well as reduce supply concerns of the company.
290 18
245 4
Margins to expand backed by change in segmental mix from Bulk to Industrial retail
200
Dec-09Feb-10 Apr-10 Jun-10 Aug-10
-10
Oct-10
and CNG segment: Due to higher volume availability mainly from long term RLNG and KG
Gujarat Gas (LHS) Rel to Nifty (RHS) D6 Gas, GGCLhas changed their business mix from bulk segment to industrial and CNG
Source: Bloomberg segment, where company enjoys higher profitability and better margins, due to lower
ISIEmergingMarketsPDF us-eyintranet servicefrom
costs.125.21.171.18
We expect margins to improve from
on 2011-02-24 19.7%EST.
08:09:17 in CY09 to 23.6% in CY12E, an
DownloadPDF.
Stock details
increase of 390bps. Also, expected increase in the selling price will further support the
Sector Oil & Gas
margin and profitability of the company in the future.
Bloomberg GGAS@IN
Increase in selling price across segments provides upsides to margins and earnings:
Face Value (Rs) 2
To compensate the higher cost of APM gas and RLNG, company has increased CNG
No of shares o/s (mn) 128
52 Week H/L (Rs) 454/220
prices by 8% to Rs32.4/kg. Also, in other segments like industrial, domestic & commercial,
Market Cap (Rs bn/USD mn) 51/1,122 company has increased their selling prices by ~15% to Rs.13.5/scm. We expect company's
Daily Avg Vol (No of shares) 93796 new selling price in other segments to result in margin expansion of ~390bps to 23.6% by
Daily Avg Turnover (US$ mn) 0.8 CY12.

Recommend BUY with target price of Rs.481: Our EPS estimate of Rs.22.4 and Rs.24.5
Sep-10 Jun-10 Mar-10 for CY11E and CY12E respectively, imply earnings CAGR of 22% over CY09-12E. At CMP
Promoters 65.1 65.1 65.1 of Rs.398, stock trades at 17x and 15x CY11E and CY12E earnings respectively. We
FII/NRI 15.7 15.3 14.9 recommend BUY on GGCL with a target price of Rs.481 based on SOTP valuation. GGCL
Institutions 7.3 8.5 8.9 is one of our top pick in the sector given its monopoly in cities like Surat, Bharuch, Valsad,
Private Corp 1.8 1.5 1.4 and Ankleshwar, expected volume growth plus zero debt and robust business model with
Public 10.1 9.6 9.6 no commodity risk.
Source: Capitaline
Valuation table
CY09 14196.7 2795.2 19.7 1750.4 13.5 8.4 24.2 29.5 16.7 6.5
CY10 18170.8 3964.7 21.8 2444.2 18.9 40.0 24.5 21.1 11.7 5.1
CY11E 20196.2 4706.4 23.3 2892.0 22.4 18.4 23.2 17.8 9.5 4.1
CY12E 21895.6 5157.6 23.6 3163.2 24.5 9.4 20.9 16.3 8.4 3.4

Gujarat Gas Ltd. Natural Gas Sector
Volumes to grow at a CAGR of 10% from 2.8mmsmcd in CY09 to

3.8mmscmd in CY12E
Gujarat is the second-most industrialized state with 265 industrial clusters and estates.
Gujarat accounts for around 39% of India's industrial production and 20% of total exports.
Huge demand from industrial The state's annual growth has been 10-12% in the past five years. Of the total investments
segment to drive volume growth of proposed in the Vibrant Gujarat project, around $20 billion has been proposed for Surat
10% CAGR by CY12 and Bharuch. These investments augur well for the company to expand its business
activities. Due to the huge demand from these industrial hubs, Gujarat consumes highest
natural gas volumes of 58.22mmscmd compared to total demand of 70.68 mmscmd in
the state. Currently, company supplies 3.3mmscmd of natural gas in Gujarat. Due to the
huge demand in Gujarat mainly in the industrial segment, we expect it to increase to
3.8mmscmd by CY12E, backed by higher supply from long term RLNG and KG D6 gas.
Natural gas volume and growth
4 20
18.1
3.5 15
3 10
9.2 7.5
2.5 5.0 5
2
0
1.5
-8.9 -4.9 -5
1
0.5 -10
3.3
3.0
2.8
3.4
3.6
3.8
0 -15
CY07 CY08 CY09 CY10 CY11 CY12
Volume-mmscmd % Growth
ISIEmergingMarketsPDF us-eyintranet from

Source: 125.21.171.18
Company, Emkay Researchon 2011-02-24 08:09:17 EST. DownloadPDF.
Industrial and CNG segment - Key volume and revenue drivers in

the segment
In the past, the industrial retail segment was stagnant due to lower volumes from the
existing field of natural gas mainly PMT, which is the major source of natural gas. Industrial
retail (83%) segment is the major revenue and margin contributor for the company, followed
Changing the business mix from Bulk
by CNG segment, which comprises of 9% of the total volumes. Due to higher availability
to Industrial and CNG segment
of gas, mainly from KG D6 and long term contract of RLNG, company has plans to focus
on expanding the industrial and CNG segment, which provides them higher revenues &
better margins. Looking at the current unmatched demand and availability of gas, company
expects addition of ~200 industrial customers over the next few years. Based on expected
addition, we expect its industrial volume to grow at 10% CAGR from 847mmscm in CY09
to 1123mmscm in CY12E.
Volume break-up
1600
1400
1200
MMSCM
1000
800
600
400
200
0
CY07 CY08 CY09 CY10E CY11E CY12E
Industrial Retail Bulk CNG Dom/Com
In order to reduce the under recovery burden of the OMCs, the government recently de-
regulated auto fuel prices (only petrol and a price hike in diesel), resulting in higher petrol
and diesel prices. Future price is based on crude oil prices, which are volatile in nature.
But looking at the natural gas pricing scenario in India, we believe it will remain at the
same level for the next 4-5 years. Moreover, natural gas is a cleaner fuel and government
has been promoting CNG for the past few years. Currently, all the autos, taxis and buses
in Mumbai and Delhi run on CNG. This has helped in improving the overall demand for
CNG in Gujarat as well. In CNG segment, conversion rate remains stable at ~1700-2000/
month. On the basis of current and future demand, we believe the total industrial and CNG
customers in CY12E would be ~1053 and ~1,79,600 respectively, driving CNG volume
from 97mmscmd in CY09 to 135mmscmd in CY12E. These two segments are the major
volume and revenue drivers of the company, backed by huge demand.

Indicative segment size & profitability
High Bulk
Volume per customer
Industrial and CNG - most profitable

Industrial
segments Retail
Low Commercial
CNG
Domestic
Low High
Contribution (Margin)
Supply outlook remains robust backed by long term RLNG and KG

D6 gas
Currently, company consumes 3.5mmscmd (Q3 CY10, including RLNG at 0.6mmscmd)
of natural gas from various sources in Gujarat. But, volumes over the past few years have
Future volume supply depends on dipped on account of lower supply from PMT, which contributes ~76% of the total volume
firm and spot LNG and KG D6 gas consumption of the company. Currently, the volume contribution of PMT has reduced from
76% to 56% (in Q3 CY10). So to compensate for reduced supply, company has recently
entered into an agreement with BG India Energy for purchasing of 0.5mmscmd of re-
gasified LNG on firm basis for the period of Oct'2010- Dec'2013. This move has reduced
future supply concerns of the company. Also, GGCL has allocation of KG D6 gas of
~0.6mmscmd on fall back basis. Though it has not started yet, we expect it to start before
end of CY11E. This is likely to further boost volume growth as well as reduce supply
concerns, which had plagued the company in the last few years.
Supply source breakup
4
3.5
3
mmscmd
2.5
2
1.5
1
0.5
0
GAIL GSPC Cairn PMT Niko Others (Spot LNG, KG D6)
Authorization from PNGRB expected soon: positive trigger for GGCL

to expand in the existing cities
According to the new regulations, existing players engaged in the CGD business for more
than three years in a city will enjoy marketing exclusivity for additional three years. The
network established in new cities will enjoy marketing exclusivity for five years. Post the
marketing exclusivity period, third-party access to the network will be allowed on a non-
discriminating basis. Company has already applied for authorization to PNGRB. We
expect the formal approval of GGCL application for authorization to be finalized by PNGRB
shortly. This would benefit GGCL for expanding their networks in the existing cities and
enjoying a monopoly for three years from the date of authorization.
New cities in Gujarat are open for bidding

The Petroleum and Natural Gas Regulatory Board (PNGRB) has invited bids for giving
licenses for retailing CNG to automobiles and piped cooking gas to households in eight
cities in West Bengal, Gujarat, Punjab and Haryana. Bhavnagar, Gandhidham-Anjar, Bhuj-
Mundra and Jamnagar (all in Gujarat), are open for bidding. According to the public notice,
bids will close on December 3, 2010. We expect GGCL to apply for all these cities. If it gets
the license for any of the cities mentioned above, it is likely to drive volumes for GGCL.
Increase in selling price across segments

Recently, government has increased the natural gas prices by 133% to $4.2/mmbtu. This
has not impacted GGCL much, as the APM gas consumption is hardly 5% of its overall
purchase of natural gas. Also, prices of its other source of gas, mainly Spot LNG are
slightly higher compared to domestic gas. To compensate the higher cost, company has
increased CNG prices by 8% to Rs32.4/kg. Also, in other segments like industrial, domestic
& commercial, company has increased their selling prices by ~15% to Rs.13.5/scm. We
expect company's new selling price in other segments to result in a margin expansion of
~390bps to 23.6% by CY12.
Operating margin to expand, backed by better realizations and change

Margin expansion, backed by change in the business mix
in business mix and rise in selling Due to higher volume availability mainly from long term RLNG and KG D6 gas, GGCL has
price in across the segment changed their business mix from bulk segment to industrial and CNG segment, where
company enjoys higher profitability and better margins. As mentioned above in the
profitability chart, Industrial and CNG segment contribute higher profitability and margins
with lower service costs. Also, increase in the selling price will further support margins
and profitability of the company in the future. Due to this move, we expect margins to
improve from 19.7% in CY09 to 23.6% in CY12E, an increase of ~390bps.
Operating margins
25.0 21.8 23.3 23.6

20.2 19.7
20.0 18.1
15.0
10.0
5.0
0.0
Operating Margin (%)
Capex plans
GGCL plans to invest ~Rs.1.6-1.8bn each in CY10E and CY11E to expand its pipeline
network
ISIEmergingMarketsPDF us-eyintranet from and set up CNG stations.
125.21.171.18 If company
on 2011-02-24 gets an EST.
08:09:17 authorization for its existing cities,
DownloadPDF.
then the expansion plan would be much higher compared to the current level. Financing
its capex is not an issue as company is debt free.
Key Concerns
Currently, gas availability from existing sources (mainly PMT, a major source for GGCL) is
significantly affecting the company's volume expansion. After allocation of 0.6mmscmd of
KG D6 Gas, GGCL is dependent on KG basin gas for volume expansion, which has not
yet started. If KG D6 does not start supplying by CY11, then it would affect its expansion
plans, revenue and profitability.
Company background
GGCL, a subsidiary of British Gas group (which holds 65% equity), distributes ~3.3
mmscmd of natural gas to various districts in Gujarat (mainly Surat, Bharuch, Valsad, and
Ankleshwar). It is the largest private sector gas distribution company in terms of sales
volume and has a proven track record of distributing gas to the entire range of customers-
bulk industrial, retail industrial, commercial, domestic and CNG. The company's pipeline
network is spread over 3,000kms. A major chunk of volume (83%) goes to the industrial
retail segment (where the company has long-term contracts with its customers), followed
by CNG, domestic, commercial and bulk in that order. Currently, GGCL distributes gas to
over 3,09,809 retail (industrial, commercial and domestic) and 1,29,200 CNG customers
through a pipeline network of ~3000kms and 35 CNG stations. Of the 83% of natural gas
that goes to the industrial retail segment, customers in the textile and chemical industries
form a major portion, followed by glass and ceramics and dyes and intermediates. GGCL
expects demand from the textile and chemical industries to remain firm as the region is a
hub for these industries.
Shareholding Pattern as on Sep-30'2010 (%)
12%
7%
16%
65%
Financials
We expect GGCL's revenues to increase from Rs.14.1bn in CY09 to

Rs.21.8bn in CY12E.
We expect the company's sales to grow at a CAGR of 15.5% from Rs.14.1bn in CY09 to
Rs.21.8bn in CY12E, mainly driven by higher volume consumption by Industrial retail
segment and better realizations due to recent hike in CNG prices. Also, increase in selling
price across segments provides further upside to revenues.
25.0 30.0
28.5 28.0
20.0 25.0
20.0
15.0
21.9
15.0
10.0 11.1
9.1 10.0
8.4
5.0
12.4
13.0
14.2
18.2
20.2
4.5 5.0
0.0 0.0
Sales (Rs. Bn) % Growth
Shift in revenue mix and price hikes to expand margins

We expect EBIDTA to grow at 22.7% CAGR from Rs.2.7bn in CY09 to Rs.5.1bn in CY12E.
During CY09, its EBIDTA margin was 19.7%, and we expect it to be 23.6% in CY10E,
CY12E. This is mainly on account of the change in the business mix from bulk to Industrial
retail and better realizations due to hike in prices in across segments.
Margin summary
25.0 23.3
21.8 23.6
20.2 19.7
20.0 18.1
13.4 14.3
15.0 12.3 12.3 12.3 14.4
10.0
5.0
0.0
Operating Margin (%) PAT Margin (%)
We expect net profit to grow at 21.8% CAGR from Rs.1.7bn in CY09 to Rs.3.1bn in CY12E.
During CY09, its PATM was 12.3%, and we expect it to be 14.4% in CY12E. We believe the
margins would increase in future as the expansion in the margins at operating level will
have a trickledown effect on the bottom line.
Valuation
Our EPS estimate of Rs.22.4 and Rs.24.5 for CY11E and CY12E respectively, imply an
earnings CAGR of 22% over CY09-12E. At CMP of Rs.380, stock trades at 17x and 15x
CY11E and CY12E earnings respectively. We recommend BUY on GGCL with a target
price of Rs.481 based on SOTP valuation. GGCL is one of our top picks given its monopoly
in cities like Surat, Bharuch, Valsad, and Ankleshwar, expected volume growth plus zero
debt and robust business model with no commodity risk. Presently, stock trades at 17.8x,
one year forward P/E and 4.1x P/BV. Our valuation of the core business implies valuation
of Rs.481/share, 21% upside to CMP of Rs.398.
SOTP Valuation Metric Value/share

Core Business DCF 471
Investment in Other Company. (GSPC Ltd.) Fair/Market Value 10
Fair Value 481

CMP 398
% Return 21
Valuation Chart
Gujarat Gas - 1 Year forward P/E (x) Gujarat Gas - 1 Year forward P/E band
20 400 17x
15 300 13x
10x
10 200
7x
5
ISIEmergingMarketsPDF us-eyintranet from 125.21.171.18 on 100
2011-02-24 08:09:17 EST. DownloadPDF.
0 0
Jul-07
Jul-08
Jul-09
Jul-10
Jan-07
Jan-08
Jan-09
Jan-10
Jul-07
Jul-08
Jul-09
Jul-10
Jan-07
Jan-08
Jan-09
Jan-10
Gujarat Gas - 1 Year forward PB (x) Gujarat Gas - 1 Year forward EV/EBITDA band
5 400 10x
4 8x
300
3 6x
200
2 4x
100
1
0
0
Jul-07
Jul-08
Jul-09
Jul-10
Jan-07
Jan-08
Jan-09
Jan-10
Jul-07
Jul-08
Jul-09
Jul-10
Jan-07
Jan-08
Jan-09
Jan-10
Financial Tables
Depreciation 473.6 542.8 650.8 764.5
EBIT 2321.6 3421.9 4055.6 4393.1 Gross Block 9139.8 10439.8 11739.8 13039.8
PBT 2586.5 3621.2 4323.8 4728.6 Investment 4237.6 4237.6 5237.6 6737.6
(Profit)/loss from JVs/Ass/MI 0.0 0.0 0.0 0.0 Other current assets 99.5 141.3 141.5 141.7
Adj. PAT After JVs/Ass/MI 1750.4 2444.2 2892.0 3163.2 Current lia & Prov 3476.3 3136.1 3287.1 3606.8
E/O items 0.0 0.0 0.0 0.0 Current liabilities 2152.2 2681.3 2791.4 3071.2
Reported PAT 1750.4 2444.2 2892.0 3163.2 Provisions 1324.1 454.7 495.7 535.7
PAT after MI 1741.9 2433.9 2879.9 3148.9 Net current assets -1683.5 -528.6 15.2 181.6
Growth (%) 8.4 39.7 18.3 9.3 Misc. exp (incl. other Ex.) 243.9 255.5 255.5 255.5
Total Assets 9962.7 12167.5 14655.4 17354.6

Chg in working cap -364.2 -860.5 -20.1 120.2 ROE 24.2 24.5 23.2 20.9
Tax paid -778.4 -1177.0 -1431.8 -1565.4 RoIC 58.8 58.0 61.8 63.0
Operating Cashflow 1781.6 2136.7 3527.7 4050.9 Per Share Data (Rs)
Free Cash Flow 228.6 536.7 1927.7 2250.9 CEPS 17.3 23.3 27.6 30.6
Other income BVPS 60.8 77.9 97.2 118.2
Investments -14224.7 0.0 -1000.0 -1500.0 DPS 8.0 1.5 2.6 3.0
Investing Cashflow -1966.0 -1600.0 -2600.0 -3300.0 Valuations (x)
Loans Taken / (Repaid) 0.0 0.0 0.0 0.0 P/CEPS 23.0 17.1 14.4 13.0
Income from investments 0.0 0.0 0.0 0.0 EV / EBITDA 16.7 11.7 9.5 8.4
Others 279.9 0.0 0.0 0.0 Dividend Yield (%) 2.0 0.4 0.7 0.8
Financing Cashflow 38.9 -242.1 -404.1 -464.3 Gearing Ratio (x)
Net chg in cash -145.5 294.7 523.6 286.6 Net Debt/ Equity -0.6 -0.5 -0.5 -0.5
Opening cash position 224.3 78.9 373.5 897.2 Net Debt/EBIDTA -1.5 -1.2 -1.3 -1.5
Emkay ©
Initiating Coverage
Petronet LNG Ltd.
Encashing shortfalls
22 December, 2010
n Delays in KG D6 gas provides upside to spot volumes from
Reco 0.3mmtpa in FY10 to 2.1mmtpa in FY13E
Buy
n Volumes to increase at 10.6% CAGR from 7.8mmtpa in FY10 to
CMP Target Price
10.6mmtpa in FY13E
Rs128 Rs156
n EBIDTA margins to expand in tandem with higher volumes and
re-gasification charges from 7.9% in FY10 to 9.7% in FY13E
Target price change (%) NA
Nifty 5,947 n Rise in LNG import and re-gasification charges to help ROE
Sensex 19,889 increase from 19% to 23.5% by FY13E, Recommend BUY with
PT of Rs.156
Price Performance
(%) 1M 3M 6M 12M Volumes to increase at 10.6% CAGR from 7.8mmtpa in FY10 to 10.6mmtpa in FY13E:
Absolute 13 15 63 80 The company has entered into a take-or-pay agreement with RasGas, Qatar for purchase
Rel. to Nifty 12 14 47 51 of 7.5 MMTPA of LNG on FOB basis for 25 years for its Dahej terminal. For its Kochi
Source: Bloomberg terminal, company has signed a contract with an Australian subsidiary of Exxon Mobil for
Relative price chart importing 1.44 MMTPA from the proposed Gorgon LNG project in Western Australia.
150 Rs % 60 Assurance of firm contracts are likely to result in total volume growth from 7.5mmtpa in
132 46
FY10 to 8.94mmtpa by FY13E. We expect a total supply of ~1mmtpa from Exxon Mobil for
Kochi terminal by FY13E. Moreover, expected delay in the KG D6 gas and ONGC's
114 32
production from KG basin would help to increase spot volumes from 0.3mmtpa in FY10 to
96 18
2.1mmtpa in FY13E. Considering firm and spot volumes, we expect volumes to grow at
78 4
10.6% CAGR from 7.8mmtpa in FY10 to 10.6 mmtpa in FY13E.
60 -10
Petronet LNG (LHS)EBIDTA margins to expand in tandem with higher volumes and re-gasification charges:
Rel to Nifty (RHS)
Source: Bloomberg From 2004, re-gasification charges have increased by 5% every year. Current re-gasification
chargesfrom
ISIEmergingMarketsPDF us-eyintranet are Rs.31.76/mmbtu
125.21.171.18 on and2011-02-24
it is expected to be Rs.35/mmbtu
08:09:17 by FY13E for Dahej
EST. DownloadPDF.
Stock details
terminal. On the basis of the 16% IRR, re-gasification charges for Kochi terminal have
Sector Oil & Gas
been decided at Rs.80/mmbtu. We expect the margins to expand by 180 bps from 7.9% in
Bloomberg PLNG@IN
FY10 to 9.7% in FY13E, backed by A) higher re-gasification charges for Dahej and Kochi
terminal and B) higher spot volumes due to delay in supply of KG D6 gas.
Face Value (Rs) 10
No of shares o/s (mn) 750
52 Week H/L (Rs) 131/69
Rise in LNG import to boost ROE to 23.5% in FY13E: We expect PLNG's LNG volume to
Market Cap (Rs bn/USD mn) 96/2,113 rise at a CAGR of 10.6% over FY10-13E as the company expands capacity at Dahej and
Daily Avg Vol (No of shares) 2886776 Kochi. We expect ROE to climb from 19% in FY10 to 23.5% in FY13E due to higher LNG
Daily Avg Turnover (US$ mn) 7.6 volumes (Firm + Spot) and re-gasification charges. PLNG should benefit from rise in
demand of natural gas in India over FY10-13 and delay in gas production from domestic
E&P blocks, as demand for imported LNG to address the deficit increases
Sep-10 Jun-10 Mar-10
Recommend BUY with target price of Rs.156: Our EPS estimate of Rs.8.2 and Rs.10.5
Promoters 50.0 50.0 50.0
for FY12E and FY13E respectively, imply earnings CAGR of 25% over FY10-13E. PLNG is
FII/NRI 20.9 19.2 20.9
one of our top picks, given the huge demand for imported LNG in domestic market,
expected increase in re-gasification charges, improvement in operating margin and
improvement in return ratios. We recommend BUY on PLNG with a target price of Rs.156.
Public 17.5 20.2 21.6
Source: Capitaline
Valuation table
FY10 106490.9 8464.6 7.9 4045.0 5.4 -22.0 19.2 23.7 13.3 4.3
FY11E 118833.2 10717.5 9.0 5079.7 6.8 25.6 21.1 18.9 11.1 3.7
FY12E 135766.4 12707.6 9.4 6139.6 8.2 20.9 21.8 15.6 9.8 3.2
FY13E 171929.4 16724.4 9.7 7886.0 10.5 28.4 23.5 12.2 7.1 2.6

Petronet LNG Ltd. Natural Gas Sector
Capacity to expand over the next 2-3 years

Currently, Petronet LNG Ltd. (PLNG) operates ~10.5mmtpa RLNG capacity at Dahej and
Expansion of Kochi terminal on fast plans to add another capacity of ~2.5mmtpa by developing 2nd jetty by Q1 FY13E. The
track, to be completed by end FY12 company is adding another terminal at Kochi with a capacity of 2.5mmtpa. This greenfield
LNG terminal will be complete by end of FY12E. The terminal at Kochi will help in meeting
enormous demand of natural gas for power, fertilizers, petrochemicals and various other
industries in the southern states. The terminal is expandable upto 5mmtpa depending on
LNG supplies and market conditions.
Details of capacity addition FY10 FY11E FY12E FY13E

A Dahej terminal 10.5 10.5 10.5 10.5
Add: 2nd Jetty 0 0 0 2.5
Total: Dahej Terminal 10.5 10.5 10.5 13
B Kochi Terminal 0 0 0 2.5

Total: Kochi Terminal 0 0 0 2.5
Total: PLNG capacity (A+B) 10.5 10.5 10.5 15.5

Volume to increase at 10.6% CAGR from 7.8mmtpa in FY10 to

10.6mmtpa in FY13E
The company has entered into a take-or-pay agreement with RasGas, Qatar for purchase
of 7.5mmtpa of LNG on FOB basis for 25 years for its Dahej terminal. For its Kochi
Higher spot volumes and terminal, company has signed a contract with an Australian subsidiary of Exxon Mobil for
commencement of Kochi terminal to importing 1.44mmtpa from the proposed Gorgon LNG project in Western Australia.
ISIEmergingMarketsPDF
drive volume us-eyintranet from 125.21.171.18
Assurance of these two firmoncontracts
2011-02-24 08:09:17
is likely to resultEST. DownloadPDF.
in Petronet LNG's total volume
rising from 7.5 to 8.94mmtpa by FY13E.
We expect the total firm supply of ~1mmtpa from Exxon Mobil for Kochi terminal by FY13E.
Moreover, expected delay in the KG D6 gas and ONGC's production from KG basin would
help increase the spot volumes from 0.3mmtpa in FY10 to 2.1mmtpa in FY13E. We expect
volume to increase at 10.6% CAGR from 7.8mmtpa in FY10 to 10.6mmtpa in FY13E
considering firm and spot volumes.
Volume assumption
12
10
8
8.5
mmtpa
7.8
7.5
7.5
6
10.6
6.3
6.3
5.7
8.7
8.0
7.8
4 2.14
6.3
6.3
5.7
2 0.45 0.9
0.34
0
FY07 FY08 FY09 FY10 FY11E FY12E FY13E
Total Volume Firm Spot
Delays in KG D6 gas provide short term upside to spot volume

Reliance Industries has capped their KG D6 gas production at 60mmscmd for reservoir
level study, which will take around 8-10 months. Huge demand backed by delay in KG D6
gas plus ONGC's KG basin gas production has helped the company to increase the spot
LNG cargo for medium term. Also, addition in the new pipeline capacity by GAIL would
help to meet the growing demand by serving spot volumes in the future. We expect the
spot volume for FY11E, FY12E and FY13E at 0.3mmtpa, 0.9mmtpa and 2.1mmtpa
respectively.
Outlook remains positive for RLNG in the long run at a favorable

price
We believe PLNG's longer-term outlook continues to remains positive due to various
factors working in its favor. In the next 2-3 years, no new major source of gas is available
in domestic gas, while demand will continue to increase in the future. Small sources of
gas like GSPC are expected to start supply from its KG block in FY13E but due to lower
volumes ~6-7mmscmd, it will be unable to add significant value to the overall supply.
Further, there are number of other smaller fields like C-Series, CBM etc., which can start
production but these small volumes are unlikely to impact the supply-demand scenario.
Hence, import of LNG into India will play a vital role in meeting the growing demand of the
country.
On the supply side: Huge volumes of LNG to be available in the long run backed by a)
large capacity additions from Qatar, b) Reduced demand from US due to huge reserve of
shale gas. This is likely to ensure that there will be adequate supply of LNG on spot basis
at reasonable levels in the near term.
Pricing Scenario: The price of LNG on FOB basis was fixed for the first five years (2004-
08) at $2.53/mmtbu (linked to Japanese Crude Cocktail (JCC) benchmark crude at US
Heavy us-eyintranet
dependence on shale gas from 125.21.171.18 on 2011-02-24 08:09:17 EST. DownloadPDF.
USD 20/bbl). Thereafter, from 2009 to 2013, prices are gradually being aligned with JCC
holds back demand for RLNG from prices by using a classified formula. From 2014, prices will be fully aligned with benchmark
US and European countries JCC prices. Currently, company sells RLNG at $6.1-6.4/mmbtu depending on location.
Also, current spot cargos are available at $8-9/mmbtu, slightly higher than KG D6 gas.
Looking at the current condition of the US, which is banking on shale gas for the future and
large capacity additions from Qatar, near-term supply LNG on spot basis at a reasonable
rate is assured.
EBIDTA margins to expand in tandem with higher volumes and re-

gasification charges
Re-gasification is the bread and butter of the company. From 2004, re-gasification charges
Margin expansion of 190bps backed
have increased by 5% every year. Current re-gasification charges are Rs.31.76/mmbtu
by higher regasification charges and
and it is expected to be Rs.35/mmbtu by FY13E for Dahej terminal. On the basis of the
spot volumes
16% IRR, re-gasification charges for Kochi terminal have been decided at Rs.80/mmbtu.
So, we expect the margins to expand in the future from 7.8% in FY10 to 9.7% in FY13E,
backed by higher regasification charges and higher spot volumes.
EBIDTA margin expansion
12 12
9.0 9.4 9.7
10 7.9 10
8 8
6 6
10.6
8.7
7.8
8.0
4 4
2 2
0 0
FY10 FY11E FY12E FY13E
Volume (mmtpa) EBIDTA margin (%)
Venturing into power sector

PLNG is planning to diversify into the power sector for forward integration by establishing
a 1,200 MW gas-based power plant at Dahej. About 50 hectares of land has already been
acquired for the project. Considering the high costs of generation, there is no clarity on
how much of the power produced by the R-LNG-based plant will be sold as merchant
power. As of now, management has not yet decided on any issue relating to financing,
starting and completion period etc. We believe venturing into power sector would negate
concerns on volume off take and hence, provide further upside to valuations.
Key concerns
Higher than expected cut in re-gasification charges due to higher RLNG prices.
Higher than expected ramp up in domestic supply source may impact the demand for
RLNG in the country.
Company Background
Petronet LNG is into importing LNG and setting up LNG terminals in the country. GAIL
(India) Ltd (GAIL), Oil & Natural Gas Corporation Ltd (ONGC), Indian Oil Corporation Ltd
(IOCL) and Bharat Petroleum Corporation Ltd (BPCL) formed Petronet LNG Limited as a
Joint Venture company. It has (LNG) receiving and re-gasification terminal at Dahej, Gujarat.
It also has plans to set up a LNG terminal at Kochi with a total capacity of ~2.5mmtpa.
Petronet also has a strategic partnership with French-based Gas Company, GAZ De
France and a LNG sale and purchase agreement with Ras Laffan Liquefied Natural Gas
Company, Qatar for the supply of LNG in India.
30%
50%
10%
10%
Financials
We expect revenues to increase from Rs.106.5bn in FY10 to

Rs.171.9bn in FY13E
We expect the company's sales to grow at a CAGR of 17.5% from Rs.106.5bn in FY10 to
Rs.171.9bn in FY13E, mainly driven by higher capacity addition with huge demand for
spot volumes and increase in the re-gasification charges.
200 35
171.9
28.6 30
170
26.3 135.8 26.6
25
140 118.8
19.0 106.5 20
110 84.3
14.2 15
80 65.6
11.6 10
50 5
20 0
Revenue (in Bn) % Growth
Margin to increase on account of higher re-gasification charges and

volume growth..
We expect EBITDA margins to expand from 7.9% in FY10 to 9.7% in FY13E on account of
the higher re-gasification charges backed by volume growth..
Margin summary
12 9.7
9.0 9.4
10 7.9
8
6 4.3 4.5 4.6
3.8
4
2
0
FY10 FY11E FY12E FY13E
EBIDTA margin (%) PAT margin %
We expect net profit to grow at 25% CAGR from Rs.4.1bn in FY10 to Rs.7.8bn in FY13E.
During FY10, its PAT margins were 3.8% and we expect it to be 4.6% in FY13E. We believe
the margins would increase in future as the expansion in the margins at operating level
will have a trickledown effect on the bottom line.

We used three-stage DCF to ascertain the value of the stock. The first stage includes
explicit forecasts till FY13E, the second stage assumes declining growth till FY20E
(conservative estimate) and third stage comprises of terminal growth of 1% from FY21E
onwards. We value PLNG at INR156, based on DCF with a WACC of 9.3%.

Particulars FY11E FY12E FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20
Sales 118,833 135,766 171,929 197,719 223,422 247,999 270,319 286,538 300,865 312,899
EBIT Margin 7.4% 7.9% 8.0% 7.7% 7.3% 7.0% 6.6% 6.3% 5.9% 5.6%
Capex -11500 -12500 -100 -1000 -200 -200 -200 -200 -200 -200
FCFF (4,753) (2,456) 9,451 11,759 13,367 14,017 14,469 14,618 14,552 14,340
Present value 140,072 WACC assumption

Net Debt 23,383 Cost of equity 12.0%
Equity Value 116,689 Risk free rate 8.0%
No. of Equity shares 750 beta 0.8
Value per share 156 Market risk premium 5.0%
Cost of debt 7.0%
WACC 9.3%
Terminal Growth 1.0%
Our EPS estimate of Rs.8.2 and Rs.10.5 for FY12E and FY13E respectively, imply earnings
CAGR of 25% over FY10-13E. PLNG is one of our top picks, given the huge demand for
imported LNG in the domestic market, expected increase in re-gasification charges,
improvement in operating margin and improvement in return ratios. We recommend BUY
on PLNG with a target price of Rs.156. Presently, the stock trades at 15.6x, one year
forward P/E and 3.2x P/BV. We have valued the core business at Rs.156/share, 22%
upside to CMP of Rs.128.
Valuation Chart
Petronet LNG - 1 Year forward P/E (x) Petronet LNG - 1 Year forward P/E band
20 200
15 150
16x
10 100 12x
8x
5 50
4x
0 0
Oct-05
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Oct-05
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Petronet LNG - 1 Year forward PB (x) Petronet LNG - 1 Year forward EV/EBITDA band
5 200on 2011-02-24 08:09:17 EST. DownloadPDF.
us-eyintranet from 125.21.171.18
4 150 10x
3
100 8x
2 6x
50
1 4x
0 0
Oct-05
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Oct-05
Oct-06
Oct-07
Oct-08
Oct-09
Oct-10
Apr-05
Apr-06
Apr-07
Apr-08
Apr-09
Apr-10
Financial Tables
Materials Consumed 96647.6 106520.9 121103.8 152712.0 Minority Interest
Growth (%) -6.1 26.6 18.6 31.6 Net deferred tax liability 3261.0 3261.0 3261.0 3261.0
Depreciation 1608.6 1889.5 1984.8 2938.0
EBIT 6856.0 8828.0 10722.8 13786.4 Gross Block 35495.3 35595.3 35695.3 59695.3
PBT 5995.0 7556.1 9163.5 11770.2 Investment 5386.2 5386.2 5386.2 5386.2
Growth (%) -22.0 25.6 20.9 28.4 Cash & bank balance 3405.3 969.0 -402.0 2178.0
(Profit)/loss from 0.0 0.0 0.0 0.0 Other current assets 30.7 39.6 45.3 57.3
JVs/Ass/MI Current lia & Prov 9005.5 11631.1 13884.9 15152.1
Adj. PAT After 4045.0 5079.7 6139.6 7886.0 Current liabilities 7448.7 9428.8 11374.7 11988.5
JVs/Ass/MI Provisions 1556.8 2202.3 2510.2 3163.6
E/O items 0.0 0.0 0.0 0.0 Net current assets 3210.7 1841.0 -399.4 4817.0
Reported PAT 4045.0 5079.7 6139.6 7886.0 Misc. exp 0.0 0.0 0.0 0.0
PAT after MI 4045.0 5079.7 6139.6 7886.0 Total Assets 50608.1 58848.8 67123.6 69502.0
Growth (%) -22.0 25.6 20.9 28.4

PBT (Ex-Other income) 5995 7556 9164 11770 Profitability (%)
Depreciation 1609 1890 1985 2938 EBITDA Margin 7.9 9.0 9.4 9.7
Interest Provided 1740 1998 2453 2976 Net Margin 3.8 4.3 4.5 4.6
Other Non-Cash items 0 0 0 1 ROCE 16.3 17.5 18.4 21.6
Chg in working cap 3026 -1067 869 -2636 ROE 19.2 21.1 21.8 23.5
Tax paid 1640 2476 3024 3884 RoIC 29.9 31.2 40.4 37.3
Operating Cash flow 10279 7901 11447 11163 Per Share Data (Rs)
Capital expenditure -10472 -11500 -12500 -100 EPS 5.4 6.8 8.2 10.5
Free Cash Flow -193 -3599 -1053 11063 CEPS 7.5 9.3 10.8 14.4
Other income 0 0 0 1 BVPS 29.8 34.5 40.5 49.0
Investments -855 0 0 0 DPS 1.8 1.8 1.8 1.8
Investing Cash flow Valuations (x)
Equity Capital Raised 0 0 0 1 PER 23.7 18.9 15.6 12.2
Loans Taken / (Repaid) 4000 4741 3715 -3928 P/CEPS 17.0 13.8 11.8 8.9
Interest Paid -1739 -1998 -2453 -2976 P/BV 4.3 3.7 3.2 2.6
Dividend paid (incl tax) -1536 -1580 -1580 -1580 EV / Sales 1.1 1.0 0.9 0.7
Income from investments EV / EBITDA 13.3 11.1 9.8 7.1
Others -1819 0 0 0 Dividend Yield (%) 1.4 1.4 1.4 1.4
Financing Cash flow -1094 1163 -318 -8483 Gearing Ratio (x)
Net chg in cash -3173 -2436 -1371 2580 Net Debt/ Equity 1.1 1.2 1.1 0.8
Opening cash position 6578 3405 969 -402 Net Debt/EBIDTA 0.7 0.9 0.9 0.6
Closing cash position 3405 969 -402 2178 Working Cap Cycle (days) -0.7 4.1 1.4 7.0
Natural Gas Sector
Glossary
APM Administered price mechanism
CBM Coal-Bed Methane
CGD City Gas Distribution
CNG Compress Natural Gas
DUPL Dahej-Uran pipeline project
DVPL Dahej-Vijaipur Pipeline
EGOM Empower Group of Ministers
GREP Gas Rehabilitation Expansion Program
HDPE High-density polyethylene
HVJ Hazira-Vijaipur-Jagdishpur
LLDPE Low Liner density polyethylene
LNG Liquefied Natural Gas
LPG Liquefied Petroleum Gas
mmbtu Million British thermal unit
mmscmd Million standard Cubic meter per day
ISIEmergingMarketsPDF us-eyintranetmmtpa Million tonesonper

from 125.21.171.18 annum
2011-02-24 08:09:17 EST. DownloadPDF.
NELP New Exploration Licensing Policy
PNG Piped natural gas
PNGRB Petroleum and Natural regulatory Board
SKO Superior Kerosene Oil
TCM Thousand Cubic Meter
Natural Gas Sector
Emkay Rating Distribution

BUY Expected total return (%) (stock price appreciation and dividend yield) of over 25% within the next 12-18 months.
ACCUMULATE Expected total return (%) (stock price appreciation and dividend yield) of over 10% within the next 12-18 months.
HOLD Expected total return (%) (stock price appreciation and dividend yield) of upto 10% within the next 12-18 months.
REDUCE Expected total return (%) (stock price depreciation) of upto (-)10% within the next 12-18 months.
SELL The stock is believed to under perform the broad market indices or its related universe within the next 12-18 months.
DISCLAIMER: This document is not for public distribution and has been furnished to you solely for your information and may not be reproduced or redistributed to
any other person. The manner of circulation and distribution of this document may be restricted by law or regulation in certain countries, including the United States.
Persons into whose possession this document may come are required to inform themselves of, and to observe, such restrictions. This material is for the personal
information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed as an offer to sell or the solicitation of
an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. No person associated with Emkay Global Financial Services Ltd.
is obligated to call or initiate contact with you for the purposes of elaborating or following up on the information contained in this document. The material is based upon
information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon. Neither Emkay Global Financial Services
Ltd., nor any person connected with it, accepts any liability arising from the use of this document. The recipient of this material should rely on their own investigations
and take their own professional advice. Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on
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investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. We and our affiliates,
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Emkay Research
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NATURAL GAS SECTOR

The stage is set, let the flow begin

Aggressive expansion to ensure

Do the sharp run up in stock prices

Top picks: GSPL, GGCL, Petronet

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Natural Gas Pipelines in India ............................................................................................................................... 13

Valuation Summary .............................................................................................................................................. 15

Sharp run up compared to Sensex ........................................................................................................................ 15

Industry Annexure ..................................................................................................................................................... 20

Gujarat State Petronet Ltd. ........................................................................................................................................ 32

Indraprastha Gas Ltd. ................................................................................................................................................ 41

Gujarat Gas Ltd. ....................................................................................................................................................... 49

Petronet LNG Ltd. ..................................................................................................................................................... 58

Emkay Research 22 December, 2010 2

We initiate coverage on the Natural Gas sector- specifically transmission and

Revenue EBIDTA APAT

Emkay Research 22 December, 2010 3

Demand growth at 8.8% CAGR to far outpace supply

Supply to increase by 14%, largely driven by KG D6 supply

Doubling the pipeline infrastructure by FY14E

Continuous development in policy & reforms reducing sector

Emkay Research 22 December, 2010 4

n Clarity on section 16 notification: Clarity on the key section 16 notification of the

Emkay Research 22 December, 2010 5

GAIL GSPL IGL GGCL Petronet LNG

Financials (Rs mn)

Return Ratios (%)

Per Share Data (Rs)

Valuation Ratios (x)

Rating ACCUMULATE BUY ACCUMULATE BUY BUY

Source: Emkay Research

India's natural gas market

Energy mix in 2009-10 Energy mix in 2014-15E

Source: EIA, Emkay Research Source: EIA, Emkay Research

Supply to increase at 14% CAGR from 162.7mmscmd to 275.9mmscmd

Emkay Research 22 December, 2010 7

Supply break-up (MMSCMD)

Capacity addition in LNG (mtpa) FY10 FY11E FY12E FY13E FY14E

Emkay Research 22 December, 2010 8

Source: Bloomberg, Emkay Research Source: Bloomberg, Emkay Research

Demand to increase at 8.8% CAGR from 222.8mmscmd in FY10 to

Sectors (mmscmd) FY10 FY11E FY12E FY13E FY14E

Source: Industry, Emkay Research

Emkay Research 22 December, 2010 9

Power sector: Fuel cost comparison

We have compared fuels based on expenditure incurred to generate one million

City Gas Distributions

Emkay Research 22 December, 2010 10

Analysis of cost recovery of CNG Kit Bus 4 Wheeler 3 Wheeler

Doubling the pipeline infrastructure by FY14E: Demand from new

Emkay Research 22 December, 2010 11

Company-wise pipeline ownership (Km)

Pipeline project Capacity Length Completion

Expansion of pipeline is on full swing, Chainsa-Jhajjar-Hissar pipeline 35 349 Apr-11

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Emkay Research 22 December, 2010 12

Natural Gas Pipelines in India

ISIEmergingMarketsPDF us-eyintranet from 125.21.171.18 on 2011-02-24 08:09:17 EST. DownloadPDF.

Source: Company, Emkay Research

Pricing of natural gas plays a major role in determining future demand

Emkay Research 22 December, 2010 13