Buy Indraprastha Gas; target of Rs 480: Sharekhan

Sharekhan's research report on Indraprastha Gas

Recent favorable policy changes in the form of higher domestic gas allocation to CNG/D-PNG would help IGL to maintain its pricing power (likely CNG price cut would improve economics versus petrol) and monopoly in the exiting GA of NCR region. Higher APM gas allocation of 94% (versus 85% in Q1FY23) to CNG/D-PNG is expected to reduce gas cost by 25% to $8.4/mmBtu for IGL and provides room for further improvement in EBITDA margin in Q2FY23. A likely capping of domestic gas prices at current levels and use of term LNG could remove margin overhang and drive re-rating for CGD companies. Growth in existing GAs (of NCR region), ramp-up of new GAs of Rewari, Karnal and Gurugram and three GAs (won under the Xth CGD bidding round) would drive 14% volume CAGR over FY22-24E. We highlight here that IGL’s CNG volume grew strongly by 21% in Q1FY23 as compared to peak pre-pandemic volume in Q3FY20.

Outlook

We maintain a Buy on IGL with an increased PT of Rs. 480 as we assign higher PE multiple given accommodative policy framework would improve volume/earnings growth visibility. IGL trades at an attractive valuation of 18.6x FY24E EPS, which is at 22% discount to 5-year average PE multiple of 24x.