IGL’s earnings prospects are bright, but valuations seem pricey
Growing concerns over pollution in Delhi is leading to a further rise in industrial demand and will benefit IGL’s PNG volumes
The need for cleaner and cheaper fuel has continued to drive gas demand in the country, aiding prospects for city gas distribution companies or CGDs. The Air Quality Commission mandate that all industries operating in New Delhi must begin using piped natural gas by 31 January 2021 is expected to aid gas demand in the national capital region of Delhi (Delhi-NCR) further. Indraprastha Gas Ltd (IGL), the CGD catering to Delhi-NCR, remains the key beneficiary.
IGL is already in a sweet spot, with growth being led by rising compressed natural gas (CNG) demand from automobiles and piped natural gas (PNG) demand from households and industrials. Growing concerns over pollution in Delhi is leading to a further rise in industrial demand and will benefit IGL’s PNG volumes.
IGL currently supplies PNG to about 5,566 industrial/commercial users. At least 1,644 industries and 50 industrial areas are being identified that need to switch over to PNG, which will benefit IGL, according to analysts.
Morgan Stanley Asia analysts expect IGL’s industrial volumes to increase at a compound annual growth rate of 7% over FY21-23, to about 1.7 mmscmd (million metric standard cubic metres per day), representing 17% of total volumes.
The same should also lead to earnings upgrades for IGL. The company’s FY22/FY23 volumes and earnings are expected to see an upside of 4%-5% and 8%-9% respectively, while net asset value (NAV) should rise by 8%-10% as per Morgan Stanley. Hence the prospects are brightening further. Growth is expected to be driven by higher conversion rate to CNG due to the BS-VI norms implementation, inter-city CNG travel and contribution from newer geographical areas. The firm is growing its Delhi-NCR network with expansions in Gurugram.
Besides, medium-term drivers include expansions outside Delhi-NCR. IGL volume growth will see a boost also from expansion in new areas such as Rewari, Karnal and Muzaffarnagar; Haryana City Gas and the three newly-awarded geographical areas in the 10th round of bidding. These include Kaithal (Haryana), Ajmer, Pali, Rajsamand (Rajasthan), and Kanpur, Fatehpur, Hamirpur (Uttar Pradesh).
The major overhang on rising competition post end of marketing exclusivities in certain areas has been resolved by the regulator. There is no threat of competition from oil marketing companies with whom IGL shares retail outlets. The company reported strong operating performance in Q2, and volumes have rebounded after the lockdown impact seen during April-May. Analysts expect volume to normalize by Q4.
On the back of these developments, the stock has gained around 33% since October. It is trading at 26.3 times one-year forward earnings estimates. The valuations are at a significant premium over the long-term average of 18.3 times one-year forward earnings estimates. This shows that much of the positives have already been priced in.
