Analyst Corner: ‘Buy’ on Indraprastha Gas with TP of Rs 593

We met IGL’s new Managing Director, Mr A K Jana, as part of our CGD CEO e-Series Conference. IGL’s volumes are poised to accelerate structurally. The new MD believes recent open access regulation is favourable for CGD incumbents as well, which will sustain profitability. Highlights, volumes are poised to accelerate to a 10–15% CAGR over five years led by a doubling in domestic gas connections and ‘enhanced economics’ of CNG vehicles. IGL targets 2x CNG stations in five years. Recent open access regulation encourages new CGD buildout while restricting a pure change of hands. High barriers remain. IGL has the option to widen margins as CNG is about half the price of competing fuels. We are raising the TP by 4.9% to INR593; reiterate ‘Buy’.

Sharp CNG volume recovery is underway, with Nov 2020 volumes at ~93% of pre- covid. IGL targets to end 3QFY21 with flat YoY volume and 4QFY21E with 10–12% YoY growth. For FY22E, it expects volume growth of 20–22% over FY20. Car conversions have jumped from 5,000/month to 7,000, and the MD expects this to touch 10,000. A 15–20% rise in diesel taxes has made CNG cost half of competing fuels, not to mention an 8–10% hike in cost of BSVI diesel vehicles. IGL targets to increase CNG stations by 15–18% pa, ~60% of which would be directly controlled by IGL versus 35–40% currently. Bus volumes (20–25% of CNG) should trend up from FY22E as ~30% (2,200) new buses would be added in the NCR region by FY22E. School buses (~12% of CNG) shall further augment volumes once schools reopen. IGL targets 2x PNG connections in five years, adding 0.25mn+ pa.

The PNGRB has notified a 12% post-tax RoCE (~16% pre-tax RoCE) for the 20% open access permitted in each geographical area. Most importantly, to encourage new infrastructure build-out, OMCS are prohibited from taking over existing CNG stations. Only one-third of NCR’s gas stations do not have CNG dispensing while the strategic ones are already in IGL’s fold.

We believe the risk from open access is already behind and, in fact, will spur profitability. We maintain ‘BUY/SO’ with revised TP of INR593 (from INR565) due to increase in EBITDA margin assumptions, implying 24.6x FY22E PER.