In the Budget, the government announced that PNG would be rapidly scaled up to mission mode. It is considering a revised gas allocation with the highest priority to city gas distributors (CGDs).
The increased focus augers well, and investors optimism appears to be rising in hope that gas prices may not rise much for CGDs. After the price cuts in February, CNGs advantage over petrol (60%) and diesel (46%) is high. If clarity on gas price emerges soon, volume growth is likely to revive.
We view IGLs 50% stake purchase in Maharashtra Natural Gas (MNGL, unlisted), a CGD operator in and around Pune, positively. The deal valuation at 6.7x trailing FY14 EPS is attractive, and the acquisition will be earnings-accretive. As MNGL and Central UP Gas (CUGL; acquired last year) are consolidated (likely from FY15F), we expect IGLs consolidated earnings to be 9-10% higher due to these acquisitions.
We revise our Q1FY15F earnings to factor in the new depreciation rate and the MNGL acquisition. We raise our FY15F/FY16F earnings by 14%/10%. We continue to use a DCF valuation for IGL, but move our valuations to FY16F (earlier FY15F). We raise our target price to R450 and reiterate buy.