Neutral on IGL, target price Rs 485: Motilal Oswal

Motilal Oswal has given a neutral rating to Indraprastha Gas Ltd with a target price of Rs 485. The share price moved down by -5.09 per cent from its previous close of Rs 474.15. The last traded stock price is Rs 450.

IGL EBITDA was lower than brokerage estimate owing to a miss on volumes, which stood at ~6.2mmscmd (v/s est. -9 per cent, -1 per cent year on year). EBITDA/scm was at Rs 6.6 against brokerage estimate of Rs 7). However, it was up year on year at Rs 5.9 and quarter on quarter (Rs 6.4). The company has reported negative volume growth for the first time in the last five years. For FY20, the company reported single-digit volume growth of 9 per cent year on year to 6.44mmscmd (9MFY20 growth was ~13 per cent year on year), primarily led by the huge impact of the Covid-19 lockdown. This comes after Indraprastha Gas recording three years of strong double-digit growth of ~14 per cent year on year.

Investment Rationale

The company believes the CNG revival to be gradual in the coming months, which is in line with the way the brokerage thinks. Virtual connect has impacted intra-city/intra-state travel. Schools are shut and other economic activities have come to a halt. Commercial segment is completely down with dubiety on people returning to restaurants and malls. All of these have led to a huge impact on demand for fuels (CNG and mainly PNG-commercial). Thus, the entire value chain (right from producer to end consumer) should be up and running to bring back normalcy, and in turn, stable volume consumption in the space.

Source: Motilal Oswal

IGL has around 75 per cent of its volumes coming from CNG and this segment was leading growth over the last couple of years, led by proliferation of CNG stations and higher conversions. The brokerage believes that returning to normalcy may take more time. However, barring FY21, it has built in total volume growth of 14 per cent for FY22E over FY20.

The brokerage expects margins to remain strong for the company, although revival in demand/volume remains a key headwind for now. It believes in IGL’s volume trajectory, led by growth in NCR, intercity travel on CNG, the higher conversion to CNG due to BS-VI implementation and contribution from newer GAs. In the short-to-medium term, IGL could increase its sales volume from new areas such as Rewari, Karnal and Muzzafarnagar, Haryana City Gas and the newly-awarded GAs in the 10th round.

The stock trades at around 26.5 times FY22E EPS of INR17.9 and EV/EBITDA of 16.9 times FY22E. The brokerage values the company at 24 times FY22E adjusted EPS of Rs 17.7 and adds value from the JV to arrive at a target price of Rs 485.

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 1552.53 crore, down -6.71 per cent from last quarter sales of Rs 1664.17 crore and up 0.64 per cent from last year's same quarter sales of Rs 1542.64 crore. The company reported net profit after tax of Rs 242.17 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 45 per cent stake in the company as of March 31, 2020, while FIIs held 22.77 per cent, DIIs 16.6 per cent and public and others 10.48 per cent.