Buy Indraprastha Gas Ltd.
Target Price: Rs234
CMP: Rs 182.45
Indraprastha Gas Ltd (IGL), is in the business of City Gas Distribution (CGD) in the National Capital Region (NCR). Vast untapped potential, inelastic nature of demand and the first mover advantage makes IGL a low risk high growth proposition for investment.
- Key Investment Highlights
Assured Natural Gas supply and attractive pricing of CNG and PNG to encourage usage
With India expected to be a surplus gas state by 2012 and firm gas supply agreements in place (with its parent GAIL for over 2.2 mmscmd and RIL’s KG-6 gas for 0.308 mmscmd, scaleable to 2.1 mmscmd over 5 years), IGL foresees no problem in satisfying the burgeoning demand for gas in the NCR region in the medium term. Also the economic pricing of CNG (71% cheaper than petrol and 56% than diesel) & PNG (20% cheaper than subsidized LPG), pan India development of the gas infrastructure, pricing linkages of natural gas to crude and gradual phasing out of petro-subsidies will ensure that natural gas will eventually become the fuel of choice.
Robust capex funding largely through internal accruals
IGL’s Rs.1600 crore capex to increase its CNG stations from the current 181 to 231 before the commencement of the Commonwealth Games and establish its distribution network to provide PNG gas to households in the NCR region is to be funded majorly through internal accruals with very low gearing.
Commonwealth Games and marketing & network exclusivity are near term drivers
Common goals, of the Delhi government and IGL, to set up CNG stations will lead to faster implementation of the CNG network. Fleet additions of 2,500 CNG buses to the public transport and 5,000 radio taxis will boost demand for CNG in the short term besides helping to grow the CNG market. Also the three year marketing and 25 year network exclusivity provides IGL with a first mover advantage which its competitors will find difficulty to replicate.
Vast untapped potential of NCR region & CGD policy offers scope for growth
At a projected 1,93,000 PNG customers (7% penetration) for FY2010, and 3,47,851 CNG vehicles (5% penetration) and CAGR growth of population and vehicles in NCR region of 7.9% & 21% respectively, tremendous demand for both, CNG & PNG, through conversion and new demand exists. Also the government is looking at introducing CGD in 230 cities PAN India. With its successful track record in the CGD business and its strong parentage, IGL should easily secure a few wins
Valuation & Recommendation
At CMP of Rs 170.5, the stock is trading at 10.8x and 9.1x its estimated earnings of FY10 & FY11. Using a blended valuation, of its DCF value of Rs. 225. and mean PE of 13x, we recommend a strong BUY on the stock with a Price Objective (PO) of Rs. 234.0 representing a potential upside of 37% over a period of 18 months. In our opinion, the stock represents low risk as the CGD demand is relatively inelastic.
Report card
| Attribute | Value | Date |
|---|---|---|
| PE ratio | 14.85 | 09/12/09 |
| EPS (Rs) | 12.32 | Mar, 09 |
| Sales (Rs crore) | 273.85 | Sep, 09 |
| Face Value (Rs) | 10 | |
| Net profit margin (%) | 19.50 | Mar, 09 |
| Last dividend (%) | 40 | 27/05/09 |
| Return on average equity | 25.23 | Mar, 09 |
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FINQUEST Company has given a fresh call to Buy Indraprastha Gas with a target of Rs. 255
They believe that IGL should trade at 7 x FY11E EBITDA in line with valuation of Gujarat Gas Limited. They expect 30% growth in revenue from FY09-FY11E and 24% growth in PAT. They believe a higher growth rate justifies the narrowing of discount. They Initiate coverage with Price target of INR 255.