SBICAP Securities has a buy call on Indraprastha Gas with a target price of Rs 338.The current market price of Indraprastha Gas is Rs 280.60.Time period given by the brokerage is one year when Indraprastha Gas price can reach the defined target.Investment rationale by the brokerage-Robust margin despite higher opex and gas cost: IGLs Q3FY19 reported PAT at Rs1,980mn was 2-4 per cent ahead of our and Street expectation due to strong margin while volume growth continued to be robust.
EBITDA margin was strong at Rs5.85/scm (vs.
our estimate of Rs5.6/scm and Q2FY19 margin of Rs5.7/scm).
This was despite the rise in opex (to Rs5.21/scm from Rs5.0/scm in Q2FY19) and higher gas cost (to Rs16.7/scm vs.
Rs15.5/scm in Q2FY19) as the company was more than able to pass it on to end-consumers.
Given the strong pricing power shown by the company in a cost-inflationary environment, we increase our FY20/21 EBITDA margin assumption to Rs6.2-6.3/scm (from about Rs6/scm).Volume growth continued to be robust: Overall sales volume continued to be strong at 12.2 per cent YoY with CNG sales volume growth of 13.1 per cent YoY and PNG sales volume growth of 9.5 per cent YoY.
We continue to be positively surprised by IGLs sustained volume growth and believe the company will be able to sustain it, driven by: a) huge scope to expand in its existing lucrative NCR market itself with significant scope in Ghaziabad/Gurugram; b) expansion in new lucrative nearby cities (Jaipur, Agra, etc.); c) tapping intercity traffic given the governments focus on developing green highways (Delhi-Chandigarh, Delhi-Agra, Delhi-Kanpur, Delhi-Jaipur, Delhi-Haridwar, etc.).
Hence, we believe IGL wont be hard pressed (like other CGD companies) to bid aggressively for low RoE potential tier-2 and tier-3 cities.
Thus, we raise our volume growth estimate for: a) FY20-FY21 to 11-12 per cent (from 9-10 per cent assumed earlier); b) FY22-27 to 8-10 per cent (from 6-8 per cent); and c) terminal growth to 5 per cent (from 4 per cent).Upgrade to BUY on structural volume growth/strong pricing power: We revised our FY20e-FY21e PAT estimate by 7-12 per cent due to higher volume growth/margin assumption.
We roll forward our DCF-based valuation to Mar20 and revise our target price to Rs 338 (from Rs 221).
This sharp revision is due to: a) upgrade in our medium- to long-term volume growth assumption and; b) volume growth unlikely to be RoE dilutive as it will primarily be sourced from its lucrative NCR market; and c) higher valuation of MNGL/CUGL.
Hence, we upgrade our rating to BUY (from SELL) due to structural strength in volume growth and strong pricing power.
IGL is trading at FY20 P/E of 23.2x (3-year avg of 21.6x) and FY20 P/B of 4.4x (3-year avg of 4.1x).
We believe its valuation premium over its historical average and peers valuation (Exhibit 11) will sustain given its structural volume growth story/ strong pricing power.