Brokerage UBS has downgraded Indraprastha Gas Ltd (IGL) to 'sell' from 'buy' and cut its target price to Rs 400 from Rs 630 a share earlier.
"We downgraded our rating on Indraprastha Gas (IGL) from buy to sell as the FY23-26 volume growth could lag, with a 6 percent CAGR, while the risk of fleet electrification weighs on IGL's valuation," UBS said in its latest note.
IGL's CNG growth has been disappointing despite positive changes in gas pricing and network expansion. UBS suggests slower growth in new areas, stagnant volume in existing ones, or both. Delhi's shift to EVs raises doubts about IGL's long-term CNG prospects. However, recent pricing actions may help maintain the current margins. The stock's current valuation doesn't fully consider short-term volume challenges and the potential impact of EVs on long-term growth.
IGL's CNG volume growth lags its rapid infrastructure expansion. Despite a 24 percent increase in CNG volume from FY21-23 and a significant rise in stations/pipeline length, it falls short of expectations. Even with favourable gas policies, volume growth continuously misses projections. UBS reduces FY24-26 volume estimates by 11-16 percent, below market consensus by 2-5 percent.
"We raise our FY24-26 EBITDA to Rs 8.5-8.7/scm (5-11 percent above consensus; FY20-23 average: Rs 7.1/scm), given (1) domestic gas price visibility; (2) existing LNG contracts; and (3) IGL's recent CNG pricing action. However, we see limited scope for margin expansion beyond FY24, as CNG's price discount to gasoline has shrunk," the UBS report said.
"We value IGL on explicit DCF to FY35, on unchanged WACC (11.5 percent) and lower terminal growth (to 1 percent beyond FY35 from 3.5 percent after FY30). Our PT implies 11.4x FY26 PE," it added.
At 10.30am, the stock was trading at Rs 413 on the BSE, down 3.5 percent from its previous close while India's benchmark Sensex rose 0.05 percent to 71422 points.
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