HDFC Securities Recommends Buy This Large Cap Gas Distribution Stock, Shares Can Surge 26%

HDFC Securities, a leading brokerage firm, has placed a buy call on the stock of Indraprastha Gas Limited (IGL) for potential gains of up to 26% with a target price of Rs 510 per share. It is a large-cap Gas distribution company. It has a market cap of Rs 28,535.53 crore.

Incorporated in 1998, IGL took over Delhi City Gas Distribution Project in 1999 from GAIL (India) Limited (Formerly Gas Authority of India Limited). IGL is in the business of city gas distribution in the National Capital Territory of Delhi. IGL also supplies the gas to the nearby regions of Noida, Greater Noida, Hapur, Gurugram, Ghaziabad, Meerut, Shamli, Kanpur, Muzaffarnagar, Hamirpur, Karnal and Rewari, Fatehpur, Ajmer, Pali, Rajasmand.

CMP, 52-Week Low/High, & Returns Over the Years

The current market price (CMP) of the stock stood at Rs 407.65 apiece on NSE, up 6.34% as compared to its previous close. The stock on 15 December 2021 touched the 52-week high level at Rs 513.45. Whereas, its 52 week low was recorded on 07 March 2022 at Rs 321.

The stock in a week moved up 7.39%, however, in the past 1 month, it moved down 0.54%. In the past 3 months, it gave 12.86% positive returns. In the past 1 year, it gave 13% negative returns. In the past 3 and 5 years, the stock gave positive returns of 8.12% and 29.73%, respectively.

Volumes

Blended volume remained robust at 8.09mmscmd (+12% YoY, +3% QoQ, HSIE: 7.97mmscmd). CNG volume stood at 6.09mmscmd (+15% YoY, +3% QoQ), domestic PNG at 0.5mmscmd (+11% YoY, +4% QoQ), industrial/commercial at 1mmscmd (+1% YoY, +2% QoQ) and trading volume at 0.5mmscmd, (flat YoY, flat QoQ). Overall, PNG volume was at 2mmscmd (+3% YoY, +2% QoQ).

Margins

Per-unit gross spread in Q2 came in lower at INR 12.7 (-6% YoY, - 11% QoQ; HSIE: INR 13.3) due to higher-than-expected gas cost of INR 35.1 (+2.5x YoY, +16% QoQ). Per-unit EBITDA came in at INR 7.1 (-11% YoY, -18% QoQ), as against HSIE's INR 7.6/scm. Per-unit opex was at INR 5.6 (flat YoY, -1% QoQ, HSIE INR 5.7/scm). 

Outlook on volume

"We expect average CNG volume to increase by 14% YoY to 5.8mmscmd in FY23E. Total volume is estimated to increase to 8 /8.5/10.2mmscmd in FY23/24/25E, from average volume of 7mmscmd in FY22," the brokerage has said. 

Outlook on per-unit EBITDA

"We expect per-unit EBITDA margin of INR 6.8/scm in FY23 on account of elevated gas cost and improving to INR 7/7.5 per scm in FY24/25E. Consolidated EBITDA should grow by 6/10/27% YoY in FY23/24/25E to INR 20/22/28bn, led by strong volume growth, positive outlook, and steady per-unit margin, despite the high gas cost environment," the brokerage has said. 

Change in estimates

"We cut our FY23/24/25E EPS estimates marginally by 2.5/0.2/0.2% to INR 22.1/23.7/30.1 per share, to factor in marginally lower margins. We maintain BUY rating with our revised TP of INR 510/sh," the brokerage said.

It added, "DCF-based valuation: Our target price is INR 510 (WACC 11%, terminal growth rate 3.0%). The stock is trading at 16.1x FY24E EPS."

Brokerage's comments

Commenting on the stock, the brokerage said, "Our BUY recommendation on Indraprastha Gas (IGL) with a target price of INR 510 is based on (1) robust volume growth at ~13% CAGR over FY22-25E; (2) regulatory support from the government to curb pollution in the Delhi/NCR region; and (3) a strong portfolio of mature, semi-mature, and new geographical areas. Q2FY23 EBITDA was at INR 5.3bn (-1% YoY, -15% QoQ), below our estimate, while APAT at INR 4.2bn (+4% YoY, -1% QoQ) came in marginally above our estimate, supported by higher-than-expected other income and marginally lower tax expense." 

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.