Published on 13/03/2019 10:46:39 AM | Source: Motilal Oswal Securities Ltd

Buy Indraprastha Gas Ltd For Target Rs.389 - Motilal Oswal

Posted in Broking Firm Views - Long Term Report| #Oil and Gas Sector #Indraprastha Gas Ltd #Broking Firm Views Report #Motilal Oswal

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Far away from the electric shock

* The Delhi Cabinet aims to introduce 1,000 electric buses by Jun’20. This is in addition to CNG buses (500 low-floor and 500 normal).

* We note that Energy Efficiency Services Ltd (EESL) has not progressed much with the earlier order of 10,000 electric cars. More so, the recent tender of additional 10,000 cars has been quashed indefinitely.

* Multiple medium term triggers exist in the form of (a) intercity/highway travel on CNG, (b) higher conversion of LCVs, (c) increasing differential of diesel vehicles v/s petrol/CNG post the BS-VI implementation, (d) increasing launches from OEMs, (e) newer applications, (f) stricter enforcement of pollution norms in industries, and (g) growth in existing and newer areas.


Electric vehicles not ready to take off

* EESL floated its first tender for 10,000 EVs in Aug’17, with the first phase of 500 cars to be delivered by Nov’17 and the rest by Jun’18. The tender was closed after much delay in Jan’18, with revised delivery deadline of Mar’19.

* Only 10% of the contracted EVs were delivered by end-Dec’18, extending the timeline further to Sep’19.

* EESL’s tender in Nov’17 for 250 charging stations was finally awarded after cancellation of the first tender (Sept’17) and the follow on snap-bid (Oct’17), pitiful when compared against the ~4,000 charging stations required for efficient running of 10,000 EVs.

* The second tender for additional 10,000 EVs in Apr’18 got cancelled as the automobile companies awaited government policies on specifications for the charging infrastructure.


Expect insignificant impact on volumes in the medium term

* Hence, we believe that EVs may have an impact only in the longer run. In the short- to medium-term, new areas like Rewari, Karnal and Muzzafarnagar would add 0.2mmscmd capacity each in the next 3-4 years.

* Haryana City Gas sells 0.4mmscmd; of this, it sources 0.25mmscmd from IGL with margins to IGL being minimal. Post the takeover, IGL may increase sales volume to ~1-1.5mmscmd within three years.

* Newly awarded geographical areas in the tenth round — (a) Kaithal (Haryana), (b) Ajmer, Pali and Rajsamand (Rajasthan), and (c) Kanpur, Fatehpur and Hamirpur (Uttar Pradesh) – would further add to the growth in the medium term.

* Implementation of BS-VI would increase the cost differential of diesel vehicles over petrol/CNG vehicles. Increasing penetration of natural gas with implementation of the ninth and tenth round of CGD bidding is expected to boost intercity/highway travel on CNG.


Valuation and recommendation

* We do not expect EVs to be a threat to IGL in the short-to medium-term. We expect volume growth to stay strong at 12%/11% in FY20/21. In the short term, EBITDA/scm may increase due to the INR appreciation. However, we remain conservative with estimate of INR5.8/INR5.9 in FY20/21.

* Both IGL’s subsidiaries — MNGL and CUGL – have been growing at a steady pace. Contribution from JVs for 9MFY19 stands at INR695m, +25% YoY.  We expect ROEs of 20.1%/19.9% in FY20/21. The stock is trading at 23.4x FY20 standalone EPS of INR12.7. We expect standalone EPS CAGR of 16% during FY18-21. We move our valuation from Dec’20 to FY21, valuing IGL at 24x (unchanged) FY21 standalone EPS of INR14.6, adding the contribution from its JVs. With a target price of INR389 (earlier: INR381), we reiterate our Buy recommendation for the stock.


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