Hold Indraprastha Gas Ltd For Target Rs.560 - ICICI Direct
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Volume growth drives performance
About the stock: Indraprastha Gas (IGL) is one of India’s largest city gas distribution companies and primarily operates in NCT of Delhi.
* CNG sales contribute more than 70% of its total sales volume
* Sales volume grew at 6% CAGR in FY16-21
Q2FY22 Results: IGL reported Q2FY22 results that were better than estimates.
* Revenue increased 40.3% YoY to | 1831.2 crore as sales volume grew 31.6% YoY and 36.1% QoQ post relaxations in lockdown
* Gross margin declined | 0.2/scm YoY and | | 0.8/scm QoQ to | 13.4/scm due to higher gas costs. EBITDA was at | 530.2 crore, up 30.2% YoY and 39.2% QoQ
* Consequently, PAT was at | 400.5 crore (up 30.1% YoY and 64% QoQ)
What should investors do? IGL’s share price has grown ~3x over the past five years (from ~| 160 in November 2016 to ~| 500 levels currently).
* We retain our HOLD rating on the stock
Target Price and Valuation: We value IGL at | 560 (standalone at ~| 513 i.e. 24x P/E on FY23E EPS and investments at ~| 46)
Key triggers for future price performance:
* IGL will continue to benefit from stricter environmental regulations in NCR and India’s aim to increase the share of natural gas in the energy mix
* On account of competitive advantage against traditional auto fuels, IGL has potential for further sales volume growth in NCR and other CGD areas
* IGL hiked prices in Q3FY22E to pass on increase in domestic gas costs Debt free balance sheet and consistent dividend payout
Alternate Stock Idea: Apart from IGL, in our oil & gas coverage we also like Gail.
* Gail is India’s leading gas transmission company, which is a beneficiary of increasing gas consumption. Stable volume growth along with higher profitability from gas trading, petchem and LPG segment due to higher oil prices will add value
* BUY with target price of | 180
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