Indraprastha Gas Shares Gain After Jefferies Upgrades Rating, Hikes Target
Jefferies has upgraded its rating on Indraprastha Gas Ltd., citing a robust margin and volume outlook amid an improving regulatory environment for CNG.
The research firm has upgraded the gas distributor stock to ‘buy’ from ‘hold’, and raised target price to Rs 660 from Rs 580, implying a potential upside of 27%, according to its report.
“We build in Ebitda margin of Rs 8-8.1 per scm in FY23E/24E,” Jefferies said. “Margins had been range-bound till FY19 with earnings supported by a 13% volume growth. But margin expansion being displayed recently has become an additional tailwind for earnings growth for Indraprastha Gas,” the research house said, adding it expects the company to maintain margins even as input costs rise.
That, it said, is because even if costs are fully passed through, CNG would still remain at an attractive 43-58% discount to petrol/diesel.
Jefferies expects domestic administered pricing mechanism gas costs to rise 60% in October to $3.2 per metric million British thermal unit from $2/mmbtu, and rise further to $5.4 next year.
Besides, Jefferies said the impact of Covid-19 has been “transient” but underlying volume drivers remain strong.
“Monthly four-wheeler vehicle additions in 4Q FY21 was much higher than pre-Covid levels, while CNG volumes too had almost normalised by March despite a likely 10-15% impact from schools being closed and services sector working from home,” the report said. The second wave of Covid, it said, could result in about 20% sequential decline in overall volumes for Indraprastha Gas in Q1 FY22.
CNG car sales from India’s largest carmaker, Maruti Suzuki India Ltd., rose 50% over the year earlier in FY21 even as its overall sales fell 8%, Jefferies said. “The contribution of CNG has risen from 5% of overall sales in FY18 to 12% in FY21.”
To be sure, Gujarat Gas Ltd. remains Jefferies’ preferred longer-term pick on better multi-year growth story and upside optionality. But the sharp spike in spot LNG prices, it said, could put pressure on near-term earnings for Gujarat Gas, while Indraprastha Gas is less exposed to spot LNG.
The research firm also highlighted certain upside and downside risks to its target price for Indraprastha Gas.
Margin expansion from current levels.
Domestic gas price floor.
Open access in city gas distribution.
Any change in domestic gas allocation policy leading to unfavourable economics.
A softening of stance against substitute fuels and lower-than-expected volumes with a slowdown in vehicle additions.
Separately, Indraprastha Gas on Wednesday entered into an agreement with Kinetic Green Energy & Power Solutions for setting up battery-swapping stations initially at Delhi-NCR and thereafter at mutually agreed locations. The two companies plan to set up 50 battery-swapping chargers for two-wheelers and three-wheelers by the end of this financial year.
The company is scheduled to announce results for the quarter ended June on Friday.
Shares of Indraprastha Gas gained as much as 1.75% to Rs 531 apiece. The stock is trading 0.67% higher as of 12:30 p.m. on Thursday. Of the 36 analysts tracking the company, 28 have a ‘buy’ rating, three suggest a ‘hold’ and five recommend a ‘sell’, according to Bloomberg data. The average of the 12-month consensus price targets implies an upside of 11.2%.