Buy Indraprastha Gas: target of Rs 650: Sharekhan

Sharekhan's research report on Indraprastha Gas

IGL’s stock price has been a laggard in the last six months as expectations of a steep hike in domestic gas prices raised concerns on margins. We believe such concerns are overblown as CNG car running costs would be nearly half that of petrol cars, even if domestic gas prices double; thus we stay confident on sustained high margins of >Rs. 8/scm for IGL. Rising CNG vehicle conversion rate (trebled to 14,000-15,000 vehicles per month versus pre-COVID level of 4,000-5,000 vehicles per month) in Delhi and ramp-up at new GAs would drive robust 18% volume CAGR over FY21-24E. Strong balance sheet and robust FCF offer scope to add new GAs from XIth CGD bidding round (PNGRB has finalized 65 new GAs for bidding). IGL is also eyeing new growth avenues and plans to have a battery swapping facility at 50 CNG stations initially and further expand to ~200 stations with overall capes of Rs100 crore.

Outlook

We maintain a Buy on IGL with an unchanged PT of Rs. 650 given strong volume-led earnings growth outlook, nil debt and high RoE of 21%. Sharp 17% correction in stock from 52-week high level makes valuation attractive at 19.8x FY24E EPS.