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Stock_____

TALES

September 30, 2019

ICIC

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Retail E

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Stock T

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September 30, 2019

CMP: | 133 Target: | 140 (5%) Target Period: 12 months

Adani Gas (ADAGAS)

HOLD

Long term play on India’s CGD sector…

Adani Gas (AGL) is one of India’s largest private players in the city gas

distribution (CGD) business. The company has authorisation to distribute

compressed natural gas (CNG) and piped natural gas (PNG) in 38

geographical areas including JVs spread around the country. AGL’s

operations in Ahmedabad, Vadodara, Faridabad and Khurja contributed to

sales volumes in FY19. AGL’s gas sales volumes were at 1.5 mmscmd in

FY19 and have grown at 15% CAGR in the last two years. Increasing

geographical areas, favourable regulatory scenario and increasing demand

of natural gas are expected to lead to 14.3% CAGR in volumes in FY19-21E

to 1.9 mmscmd in FY21E. Subsequently, revenues and PAT are expected to

increase at a CAGR of 12.6% and 8.7%, respectively, in FY19-21E.

Increasing geographical areas to drive volumes

AGL had operations in four geographical areas (GAs) on a standalone basis

and nine GAs in joint venture with IOC prior to the ninth and tenth bidding

round for CGD licenses. With the company emerging as one of the most

successful bidders, it now has presence in 19 GAs on a standalone basis and

19 GAs in JVs. By winning new areas, AGL has lined up aggressive capex

plans of ~| 6000 crore on a standalone business in the next five to seven

years, which would drive strong volume growth. Hence, it remains a long

term story to play India’s growing CGD sector. In the medium term, we

expect AGL CNG and PNG volumes to increase at 15.7% and 12.8% CAGR,

respectively, in FY19-21E with overall volumes of 1.9 mmscmd in FY21E.

Favourable regulatory scenario gives competitive advantage

The CGD sector has gained momentum over the past few years post the

government’s decision to allocate domestic gas to CNG and domestic PNG

customers. Cheaper domestic gas has improved the cost advantage of CNG

over petrol and diesel for customers and will enable increased conversion

to CNG vehicles. Also, the recent decision to increase market exclusivity

period to eight years will improve visibility in profits for new players. We

believe the current regulatory guidelines will help AGL establish its presence

in new areas along with ability to have reasonable pricing power.

Valuation and outlook

AGL has the potential to emerge as one of the key players over the long term

in the CGD business in India. With newly acquired GAs, the company, along

with its JV partner, covers 8% of India’s population. This will drive volume

growth on a sustainable basis. However, higher front loaded capex to set up

a huge infrastructure network would limit profitability growth to 8.7% CAGR

in FY19-21E due to higher depreciation and interest expenses in our opinion.

Hence, we have a HOLD rating on the stock with a target price of | 140/share.

(Year-end March) FY17 FY18 FY19 FY20E FY21E CAGR (FY19-21E)

Revenues (| crore) 1,162.4 1,457.7 1,823.5 2,038.1 2,313.7 12.6

EBITDA (| crore) 277.0 365.3 454.6 519.2 573.6 12.3

Net Profit (| crore) 101.2 164.6 228.7 307.4 270.2 8.7

EPS (|) 0.8 1.5 2.1 2.8 2.5

P/E (x) 168.7 88.9 64.0 47.6 54.1

Price / Book (x) 23.9 16.6 13.2 10.6 9.1

EV/EBITDA (x) 64.3 44.3 33.3 31.0 29.8

RoCE (%) 14.2 18.7 20.6 22.3 16.8

RoE (%) 15.1 12.4 21.8 14.7 10.4

Source: Company, ICICI Direct Research

Key Financial Summary

Particulars

Particular Amount

Market Capitalization (| Crore) 14,627.3

Total Debt (FY19) (| Crore) 667.2

Cash and Investments (FY19) (| Crore)159.8

EV (| Crore) 15,134.7

52 week H/L 184/70

Equity capital (| Crore) 110.0

Face value (|) 1.0

Price Performance

9,500

10,000

10,500

11,000

11,500

12,000

12,500

0

50

100

150

200

Sep-1

9

Aug-19

Jul-19

Jun-19

May-19

Apr-19

Mar-19

Feb-19

Jan-19

Jan-19

Dec-18

Adani Gas(RHS) Nifty(LHS)

*Listed on November 5, 2018

Research Analyst

Mayur Matani

[email protected]

ICICI Securities | Retail Research 2

ICICI Direct Research

Stock Tales | Adani Gas

Company Background

Adani Gas (AGL) is currently one of India’s largest private players in the city

gas distribution (CGD) business. The company used to be a wholly-owned

subsidiary of Adani Enterprises, which itself is part of the conglomerate

Adani Group that operates in the infrastructure and energy sector. Following

a demerger with the parent company in September 2018, it was listed on

stock exchanges in November 2018. Currently, the promoter group holds

74.8% stake in equity shares of Adani Gas. Headquartered in Ahmedabad,

the company operates in only one segment i.e. supply and distribution of

natural gas. AGL is an authorised distributor of compressed natural gas

(CNG) and piped natural gas (PNG) in 38 geographical areas including JVs

spread around the country. CNG is distributed for use in motor vehicles

whereas PNG is supplied for domestic household, commercial and industrial

use. AGL has already developed city gas networks in Ahmedabad &

Vadodara in Gujarat, Faridabad in Haryana and Khurja in UP.

In FY19, AGL had a city gas infrastructure network of 82 CNG filling stations

with a compression capacity of 2 million kg/day, providing CNG to over 0.2

million vehicles. The company supplied PNG to 0.38 million domestic

customers, 2550 commercial and 1300 industrial customers, through an

integrated pipeline network of over 6661 km that includes 430 km of steel

and 6231 km of polyethylene pipeline.

AGL’s volumes have grown at 15% CAGR in the last two years and was at

1.5 mmscmd in FY19. Subsequently, AGL’s revenues and PAT have grown

at a CAGR of 25.2% and 50.3%, respectively, in FY17-19 on account of

increase in margins. In FY19, AGL generated 46.7% of its revenues from the

CNG segment, 52.1% from the PNG segment and 1.2% from other services.

In volume terms, CNG and PNG accounted for 51.3% and 48.7%,

respectively, of total sales volumes in FY19.

Exhibit 1: AGL business model


Adani Gas

Revenues (FY19)

| 1823.5 crore

Volumes (FY19)

1.5 mmscmd

CNG

| 851.7 crore

(46.7% of revenues)

0.8 mmscmd

(51.3% of volumes)

PNG

| 950.4 crore

(52.1 % of revenues)

0.7 mmscmd

(48.7% of volumes




Investment Rationale

Increasing penetration in existing areas of operations

Adani Gas has built a strong infrastructure network in its existing operating

CGD areas of Ahmedabad city, Faridabad, Vadodara and Khurja with an

integrated pipeline network more than 6000 km. These regions had sales

volumes of 1.5 mmscmd in FY19. Ahmedabad city contributes ~61% of

AGL’s volumes, followed by Faridabad that contributes ~30% of volumes.

Vadodara and Khurja contributed ~6% and 3% of volumes, respectively, in

FY19. The company’s joint venture Indian Oil Adani Gas Pvt Ltd (IOAGPL)

had eight areas under operations in FY19 with total sales volumes of 0.15

mmscmd. In standalone CGD business, AGL plans to increase penetration

by adding new customers for CNG and PNG segment. We expect volume

growth of ~12% CAGR in its existing areas of operations in the next two

years.

Exhibit 2: AGL’s geography wise sales mix FY19


AGL has increased its CNG filling stations from 65 in FY16 to 82 in FY19 with

a compression capacity of 2 million kg/day, providing CNG to over 0.2

million vehicles in FY19. Similarly, integrated pipeline network has increased

from ~5000 km in FY16 to 6661 km in FY19, which includes 430 km of steel

and 6231 km of polyethylene pipeline. The company supplied PNG to 0.38

million domestic customers, 2550 commercial and 1300 industrial

customers.

Exhibit 3: AGL's network of CNG stations


Ahmedabad

61%

Faridabad

30%

Vadodra

6%

Khurja

3%

65

70

73

82

50

60

70

80

90

FY16 FY17 FY18 FY19

CN

G s

tatio

ns




Exhibit 4: AGL's gas pipeline infrastructure


Exhibit 5: AGL's PNG customers


Increasing geographical areas to drive volumes

AGL had operations in four geographical areas (GAs) on a standalone basis

and nine GAs in joint venture with IOC prior to the ninth and tenth bidding

round for CGD licenses. In the recently concluded ninth & tenth bidding

round for city gas licenses conducted by Petroleum and Natural Gas

Regulatory Board (PNGRB), the company emerged as one of the most

successful bidders and was awarded licenses for 15 GAs on a standalone

basis. Its JV IOAGPL won 10 new GAs in the ninth and tenth bidding rounds.

AGL now has a presence in 19 GAs on a standalone basis and 19 GAs in JVs.

The company has won many areas in Uttar Pradesh, Haryana, Rajasthan,

Kerala, etc, which puts it firmly on the path of becoming a pan-India player.

Exhibit 6: AGL increasing geographical reach

Company Earlier 9th round 10th round Total

Adani Gas 4 13 2 19

IOAGPL 9 9 1 19

Total 13 22 3 38


355 360 378 430

4,6684,974

5,578

6,231

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY16 FY17 FY18 FY19

km

s

Steel Polyethylene

1,880

2,112

2,4002,550

975 1,017

1,2001,300

220,556

244,653

304,292

380,000

0

100,000

200,000

300,000

400,000

0

500

1,000

1,500

2,000

2,500

3,000

FY16 FY17 FY18 FY19

Commercial Customers Industrial Customers Domestic Customers




Exhibit 7: AGL and IOAGPL CGD presence


By winning new areas, AGL has lined up aggressive capex plans of ~| 6000

crore on a standalone business and | 6000-8000 crore in IOAGPL (JV

business) over the next five to seven years. In the next eight years, AGL

standalone plans to increase steel pipeline network from 430 km currently

to 3196 km. In the CNG segment, the company plans to add 501 retail outlets

in the new GAs. In PNG, AGL aims to reach 2.8 million households from

existing 0.38 million domestic customers. In case of industrial/commercial

customers, the company plans to have total 10387 customers in the next

eight years.

Exhibit 8: AGL, IOAGPL’s minimum work programme

Company CNG stations Donestic PNG customers Inch-kilometers

Adani Gas 501 2549676 13412

IOAGPL 876 2323869 12578

Total 1377 4873545 25990





Increasing penetration in existing areas and new geographical areas would

drive strong volume growth for AGL, which makes it a long term story to

play India’s growing CGD sector. In the medium term, we expect the

company’s CNG sales volume to increase at 15.7% in FY19-21E from 0.8

mmscmd in FY19 to 1 mmscmd in FY21E owing to the company’s

aggressive expansion plans of setting up CNG stations across newly

awarded GAs. In the PNG segment, volumes are expected to increase at

12.8% CAGR in FY19-21E to 0.9 mmscmd mainly on the back of 15% CAGR

in industrial PNG volumes in the same period. Total sales volumes for AGL

are expected to increase at 14.3% CAGR in FY19-21E to 1.9 mmscmd in

FY21E.

Exhibit 9: AGL total volumes trend


Favourable regulatory scenario gives competitive advantage

The CGD sector has gained momentum in the past few years post the

government’s decision to allocate domestic gas to CNG and domestic PNG

customers. This had given AGL access to cheaper APM and PMT gas for

CNG and domestic business segments, which currently comprise 59% of

sales volumes. Cheaper domestic gas has improved the cost advantage of

CNG over petrol and diesel for customers and will enable increased

conversion to CNG vehicles. For industrial and commercial segments, AGL

continues to source imported LNG providing a level field for all CGD players.

Exhibit 10: AGL’s gas source mix in FY19


Exhibit 11: AGL’s sales mix in FY19


0.6 0.7 0.8 0.81.0

0.5

0.60.7

0.8

0.91.1

1.3

1.5

1.7

1.9

0.0

0.5

1.0

1.5

2.0

2.5

FY17 FY18 FY19 FY20E FY21E

mm

scm

d

CNG Sales Volume PNG Sales Volume

PMT

12%

APM

46%

LNG

42%

CNG

51%

Commercial

PNG

3%

Domestic

PNG

8%

Industrial PNG

38%




Also, the recent decision to increase the market exclusivity period to eight

years will improve visibility in profit for new players. We believe the current

regulatory guidelines will help AGL to establish its presence in new areas

along with its ability to have reasonable pricing power.

Volumes to not reflect immediately in higher EBITDA margins

On account of increased capex plans on new geographical areas, we expect

AGL’s EBITDA margins to remain flattish in the next few years. Strong

profitability in existing areas will be slightly negated by lower margins in

newer areas as the company will push for higher sales volume in these

newer regions. Hence, in spite of 12.3% CAGR in absolute EBITDA over

FY19-21E, we expect EBITDA margins to remain flattish at ~24.8% in FY21E.

Exhibit 12: AGL EBITDA and EBITDA margins trend


On a per unit basis, we expect AGL’s EBITDA/scm to decline marginally from

| 8.4/scm in FY19 to | 8.1/scm in FY21E on account of entry in newer areas

as margin/scm will be relatively lower in initial phase of operations. Over the

long term, we expect stable margins as there is a ramp up and volume

growth from newer CGD areas. Higher front loaded capex to set up huge

infrastructure network would limit the profitability growth to 8.7% CAGR in

FY19-21E due to higher depreciation and interest expenses in our opinion.

Exhibit 13: AGL EBITDA/scm to decline marginally


277.0

365.3

454.6519.2

573.6

23.8

25.1 24.9

25.5

24.8

20.0

21.0

22.0

23.0

24.0

25.0

26.0

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0


%

| c

rore

EBITDA EBITDA margins (%)

6.8

7.6

8.4

8.6

8.1

6.0

6.5

7.0

7.5

8.0

8.5

9.0


| p

er s

cm




Exhibit 14: AGL trend in profits


101.2

164.6

228.7

307.4

270.2

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0


| c

rore




Key risks and concerns

Removal/reduction of gas allocation under priority sector status

According to New Domestic Natural Gas Pricing Guidelines 2014, the

government has classified CNG for transport and domestic PNG segment as

priority sectors. AGL is able to source natural gas from domestic allocation

at much lower price compared to imported LNG Prices. Any decline or

complete removal of its allocation will impact AGL’s margins adversely.

Decline in cost benefit for customers

AGL’s CNG conversions can be negatively impacted if petrol/diesel prices

and alternative fuels like fuel oil/propane/naphtha in the PNG segment are

cheaper than natural gas. This may adversely impact volumes, thereby

adversely impacting revenues and profits.

Government’s EV policy to impact demand negatively

In the long term, higher penetration of electric vehicles could hamper the

company’s sales volume as customers may refrain from using CNG vehicles,

posing a risk to the profits.

Dispute over some areas in Ahmedabad outskirts & Vadodara

AGL has a pending litigation in the Supreme Court with other CGD player

over the supply of natural gas to commercial and industrial units in the areas

of Sanand, Bavla and Dholka of Ahmedabad district of Gujarat. Any adverse

result on the same can have a negative impact on volumes. Similarly, any

negative result in Vadodara region can also have some negative impact on

its volumes.




Valuation and outlook

AGL has the potential to emerge as one of the key players over the long term

in the CGD business in India. With newly acquired GAs, AGL along with its

JV partner has a presence in 19 GAs on a standalone basis, 19 GAs in JVs

and covers 8% of India’s population. Increasing geographical areas,

favourable regulatory scenario and increasing demand for natural gas are

expected to lead to 14.3% CAGR in volumes in FY19-21E to 1.9 mmscmd in

FY21E. We expect AGL to report strong volume growth on a sustainable

basis for the next five to seven years as there will be a ramp-up in volumes

from newer areas. However, higher front loaded capex to set up huge

infrastructure network would limit profitability growth to 8.7% CAGR over

FY19-21E due to higher depreciation and interest expenses in our opinion.

The higher profitability growth would be realised in the long run post the

aggressive expansion phase and on account of higher volumes from the

new CGD areas. Taking into account the above scenario, we have a HOLD

rating on the stock with target price of | 140 per share.

Exhibit 15: Valuation

Pariculars

WACC 10.5%

Present Value of Cash Flows till FY27E (| Crore) 55.2

Terminal Growth Rate 5%

Terminal Value(| Crore) 23519.8

Present Value of Terminal Cash Flows (| Crore) 11404.0

Total Present Value of the Firm (| Crore) 11459.2

Less: Net Debt (FY19) (| Crore) 507.4

Total Present Value of Equity (| Crore) 10951.8

Number of Outstanding shares (In Crore) 110.0

DCF - Standalone (| per share) 100

Value of JV (| crore) 4456.5

Number of Outstanding shares (In Crore) 110.0

Value of JV (| per share) 41

DCF - Target Price (| per share) 140

Source: ICICI Direct Research




Financial Summary

Exhibit 16: Profit & Loss statement (| crore)

(Year-end March) FY18 FY19 FY20E FY21E

Revenue 1457.7 1823.5 2038.1 2313.7

Growth (%) 0.3 0.3 0.1 0.1

Raw material Costs 873.0 1092.7 1212.1 1388.4

Employee Costs 38.9 42.0 44.9 53.2

Other Expenditure 96.5 129.7 143.0 164.3

Op. Expenditure 1092.4 1368.9 1518.9 1740.1

EBITDA 365.3 454.6 519.2 573.6

Growth (%) 31.9 24.5 14.2 10.5

Depreciation 61.0 67.3 78.6 135.0

EBIT 304.2 387.3 440.6 438.6

Interest 125.3 89.9 71.9 119.4

Other Income 80.1 86.7 42.2 42.0

PBT 259.0 356.5 410.9 361.2

Growth (%) 65.9 37.7 15.3 -12.1

Tax 94.4 127.8 103.5 91.0

Reported PAT 164.6 228.7 307.4 270.2

Growth (%) 62.6 39.0 34.4 -12.1

Adjustments 0.0 0.0 0.0 0.0

Adj. Net Profit 164.6 228.7 307.4 270.2

EPS 1.5 2.1 2.8 2.5


Exhibit 17: Cash flow statement (| crore)


Profit after Tax 164.6 228.7 307.4 270.2

Add: Depreciation 61.0 67.3 78.6 135.0

Add: Others 11.2 2.4 20.0 30.0

Cash Profit 236.8 298.5 406.0 435.2

Increase/(Decrease) in CL 151.0 -79.4 26.3 25.7

(Increase)/Decrease in CA -964.6 1,061.2 -27.1 -79.8

CF from Operating Activities -576.8 1280.3 405.2 381.1

Purchase of Fixed Assets 141.1 242.6 986.5 992.0

(Inc)/Dec in Investments -98.7 3.8 -350.0 -350.0

Others 0.0 0.0 0.0 0.0

CF from Investing Activities -239.8 -238.9 -1,336.5 -1,342.0

Inc/(Dec) in Loan Funds 825.9 -910.0 950.0 1,000.0

Inc/(Dec) in Sh. Cap. & Res. -0.5 35.2 0.0 0.0

Less: Dividend Paid 0.0 31.3 38.8 38.8

Others 0.0 0.0 0.0 0.0

CF from financing activities 825.4 -906.2 911.2 961.2

Change in cash Eq. 8.8 135.3 -20.1 0.3

Op. Cash and cash Eq. 15.7 24.5 159.8 139.7

Cl. Cash and cash Eq. 24.5 159.8 139.7 140.0


Exhibit 18: Balance Sheet Statement (| crore)


Source of Funds

Equity Capital 110.0 110.0 110.0 110.0

Preference capital 0.0 0.0 0.0 0.0

Reserves & Surplus 768.9 1,001.5 1,270.1 1,501.5

Shareholder's Fund 878.9 1,111.5 1,380.1 1,611.5

Loan Funds 1,577.2 667.2 1,617.2 2,617.2

Deferred Tax Liability 99.6 102.0 122.0 152.0

Minority Interest 0.0 0.0 0.0 0.0

Source of Funds 2555.7 1880.7 3119.3 4380.7

Application of Funds

Gross Block 1,064.9 1,214.1 1,964.1 2,914.1

Less: Acc. Depreciation 168.2 230.8 322.8 465.8

Net Block 896.7 983.4 1,641.3 2,448.3

Capital WIP 101.8 190.5 440.5 490.5

Total Fixed Assets 998.5 1,173.8 2,081.8 2,938.8

Investments 189.3 185.5 535.5 885.5

Inventories 42.2 44.0 58.6 66.6

Debtor 141.2 82.8 94.9 107.8

Cash 24.5 159.8 139.7 140.0

Loan & Advance, Other CA 1416.4 411.8 412.0 471.1

Total Current assets 1624.2 698.3 705.3 785.4

Current Liabilities 250.7 170.3 195.4 221.9

Provisions 5.7 6.7 7.8 7.1

Total CL and Provisions 256.3 177.0 203.3 229.0

Net Working Capital 1367.9 521.3 502.0 556.4

Miscellaneous expense 0.0 0.0 0.0 0.0

Application of Funds 2555.7 1880.7 3119.3 4380.7


Exhibit 19: Key Ratios


Per share data (|)

Book Value 8.0 10.1 12.5 14.7

Cash per share 0.8 1.5 1.3 1.3

EPS 1.5 2.1 2.8 2.5

Cash EPS 2.1 2.7 3.5 3.7

DPS 0.0 0.3 0.3 0.3

Profitability & Operating Ratios

EBITDA Margin (%) 25.1 24.9 25.5 24.8

PAT Margin (%) 11.3 12.5 15.1 11.7

Fixed Asset Turnover (x) 1.5 1.6 1.0 0.8

Inventory Turnover (Days) 10.6 8.8 10.5 10.5

Debtor (Days) 35.3 16.6 17.0 17.0

Current Liabilities (Days) 62.8 34.1 35.0 35.0

Return Ratios (%)

RoE 18.7 20.6 22.3 16.8

RoCE 12.4 21.8 14.7 10.4

RoIC 12.9 23.9 15.4 10.7

Valuation Ratios (x)

PE 88.9 64.0 47.6 54.1

Price to Book Value 16.6 13.2 10.6 9.1

EV/EBITDA 44.3 33.3 31.0 29.8

EV/Sales 11.1 8.3 7.9 7.4

Leverage & Solvency Ratios

Debt to equity (x) 1.8 0.6 1.2 1.6

Interest Coverage (x) 0.0 0.0 0.0 0.0

Debt to EBITDA (x) 2.0 2.0 3.0 3.0

Current Ratio 6.3 3.9 3.5 3.4

Quick ratio 6.2 3.7 3.2 3.1





RATING RATIONALE

ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its

stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold,

Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined

as the analysts' valuation for a stock

Buy: >15%

Hold: -5% to 15%;

Reduce: -15% to -5%;

Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]




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