"We are positive on growth outlook for IGL and expect 15-18 percent return from current level," says Hemang Jani, Head - Advisory at Sharekhan.
Head - Advisory, Sharekhan
The Sensex is trading close to 18x its one year forward earnings and is clearly not cheap anymore. The consensus earnings estimates are factoring a 20 percent plus annual growth rate in Sensex earnings over FY2018 to FY2020. Though the revision in earnings of some banks and other adjustment could lead to some downward revision in estimates going forward, the healthy growth in earnings would definitely support equity markets.
Historically we have seen equities have delivered 12-15 percent returns, so if earnings growth improves we are likely to see similar kind of returns. Assuming earning growth of 22 percent and 17 percent respectively for FY19 and FY20, if we assign multiple of 18x then we may see Nifty to reach 11,700. If we assign 17x then we may see Nifty at 11,400.
The 15 percent year-to-date correction in stock price of Indraprastha Gas given concern of increase in gas cost are overblown in our view given significant pricing power of IGL.
Moreover, favourable regulatory/judiciary/policy regime [ban on new diesel vehicles above 2000cc, ban on use of polluting fuels in NCR region and Petroleum and Natural Gas Regulatory Board to start bidding for 86 GAs comprising 156 districts for city gas distribution (CGD) development] are likely to provide sustainable double-digit volume growth and thus, justifies the stock’s premium valuation (27.3x FY2019E EPS and 21.8x FY2020E EPS).Led by robust volume growth and likely expansion in EBITDA margin, we expect IGL to report strong earnings CAGR of 26 percent over FY2017-FY2020E along with healthy return on equity (RoE) of 20-22 percent. We are positive on growth outlook for IGL and expect 15-18 percent return from current level.