Indraprastha Gas Shares Gain On Bullish Analyst Ratings, Volume Recovery In Q4

An employee refuels a vehicle with compressed natural gas at an Indraprastha Gas Ltd. gas station in Delhi. (Photographer: Prashanth Vishwanathan/Bloomberg)

Indraprastha Gas Shares Gain On Bullish Analyst Ratings, Volume Recovery In Q4

Shares of Indraprastha Gas Ltd. rose the most in four months as analysts remained bullish on the city gas distributor, citing better volumes outlook and benefits from a recovery in demand as the pandemic recedes.

That’s despite the company missing operating income and profit estimates in the quarter-ended March.

IGL, with distribution networks across 27 districts in Delhi, Uttar Pradesh, Haryana and Rajasthan, posted a net profit of Rs 332 crore in the fourth quarter of FY21, a 31% increase over the year earlier.

  • The company’s total revenue stood at Rs 1,700.52 crore against Rs 1,697 crore a year ago.

  • Its overall sales volume rose 8% to 614 million standard cubic meters in Q4.

  • While compressed natural gas registered sales volume growth of 7%, piped natural gas showed sales volume growth of 11% during the reported quarter.

  • The board has recommended a dividend of Rs 3.6 per share.

Though most analysts are optimistic, some are cautious over the gas stock’s premium valuation and adoption of electric vehicles.

Shares of IGL rose as much as 6.3% to Rs 545 apiece around noon on Monday. That's the biggest intraday gain since Feb. 24. Of the 36 analysts tracking the company, 26 have a ‘buy’ rating, five suggest a ‘hold’ and five recommend a ‘sell’, according to Bloomberg data. The average of 12-month consensus price targets implies an upside of 7.2%.

Here's what brokerages made of IGL's Q4 results:

Nomura

  • Maintains ‘buy’ rating at a target price of Rs 650, implying a potential upside of 27%.

  • Despite IGL’s Q4 Ebitda and profit after tax missing estimates, the numbers were good and outlook remains strong.

  • The Ebitda miss was driven by lower realised Ebitda margin. The margin was impacted due to sharp rise in LNG prices in Q4. Despite lower quarter-on-quarter margins, Q4 margin expanded 21% year-on-year.

  • While the second wave of Covid-19 was more intense, lockdowns were less. As per IGL, compared to the 80-85% impact on CNG demand during the peak of April-May 2020 lockdowns, the impact was 30-35% during the second wave peak in April-May 2021.

  • With the second wave receding, demand is recovering. Post-pandemic, the CNG demand outlook is better. Volume outlook remains good for domestic PNG and industrial and commercial segment (increased curbs on polluting fuels, recovery of commercial demand post pandemic.

  • Similar to peers, IGL’s volumes recovered to higher than pre-pandemic levels, and Ebitda margin expanded sharply in FY21. However, IGL’s recent performance is weak versus peers. This is partly driven by investor concerns on potential higher impact of electric vehicles for IGL.

  • Electric vehicles is a key long-term worry, but the research house sees low impact in the foreseeable future.

  • While Gujarat Gas is now Nomura’s preferred pick in India, it remains positive on IGL.

CLSA

  • Upgrades to ‘buy’ from ‘outperform’, raises target price to Rs 630 from Rs 615 apiece, implying a potential upside of 23%.

  • After recent underperformance of peers Gujarat Gas and Mahanagar Gas, IGL’s Q4 net profit came in line even as Ebitda missed by 2%, as a 5% volume beat was offset by a margin miss.

  • Even after passing the upcoming 70% rise in the domestic gas price, CNG would still be at 56-66% discount to petrol and diesel, and should allow IGL to protect its margins.

  • To build-in the impact of the recent lockdowns, CLSA cuts its FY22 earnings per share 5% but raises FY23 by 2%.

  • IGL is the steadiest volume-growth story in the city gas space and its recent underperformance relative Mahanagar Gas and Gujarat Gas provides a good entry point. It is also a good post Covid-19 re-opening play with the rebound in mobility.

Motilal Oswal

  • Maintains ‘neutral’ rating, cuts target price to Rs 480, implying a potential downside of 6%.

  • “Indraprastha Gas reported a mixed bag result, with lower than our Ebitda margin estimate and higher than our estimate volumes.”

  • Ebitda margin was lower than estimates due to higher operational expenditure, despite the company taking a CNG price hike of Rs 0.7 per kg in Q4 to compensate for the increase in cost.

  • Petrol/diesel prices have crossed the mental threshold of Rs 100 per litre for Indian consumers. The resolve of the city gas distributors to pass on increase in gas cost would be tested, owing to the aforementioned factors.

  • Expects IGL to touch pre-Covid CNG volumes by the end of Q2 or in Q3 of FY22.

  • “Our estimates are subject to downward risk from the third Covid wave (resulting in a delayed recovery) and adoption of EVs.”

Jefferies

  • Maintains ‘hold’ rating, raises target price to Rs 580 from Rs 560.

  • While volumes were in line, gross margin missed estimates leading to a 10-11% miss on Ebitda and profit after tax.

  • CNG volumes were a tad lower than expected but offset by better industrial/commercial volumes.

  • IGL was able to add 65 CNG stations in FY21. CNG station addition is expected to pick up to around 100 CNG stations next year boding well for volume growth in CNG segment.

  • “Softer-than-expected Q4 does not prompt us to turn fundamentally negative on IGL, but we maintain ‘hold’ noting rich valuations and limited upside optionality with not much cushion for any potential threat from electric vehicles.”

(Corrects an earlier version that misstated the return potential according to Bloomberg consensus 12-month price target.)

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