Gurugram foray adds to Indraprastha Gas' strong prospects

The approval is for 25% of total opportunity around Gurugram leading to scope for further expansion

The news of Indraprastha Gas (IGL) getting a go ahead from the Haryana government to operate its city gas distribution (CGD) network in Gurugram led to more gains on the bourses. The stock scaled its all-time high of Rs 1,164.70 on Monday before closing 2.3% higher at Rs 1,148. Tuesday has seen some decline in the counter largely due to weak market sentiment.

The news, however, adds to already strong growth prospects for IGL in the national capital region (NCR) of Delhi. The rising demand from various segments as piped natural gas (PNG) distribution, compressed gas, industrial demand, etc has led to a strong run up in IGL's stock price, which has almost doubled in last one year.

The company had been perusing Haryana government for building and operating CGD, and the efforts have paid off. It has now got permission to lay the network in the areas lying between the side of Sohna road and National Highway-8 of Gurugram. While IGL has appointed a consultant to carry out a detailed feasibility study of the new area to assess potential volumes and investments over next week, analysts at Edelweiss say that their preliminary analysis suggests volume potential of 0.2-0.3 mmscmd (million metric standard cubic meter per day) over the long term, primarily dominated by PNG segment.

What’s more, this is just 25% of the available opportunity in Gurugram and thus there is more for the company as it gets approvals for expansions which can drive further volume growth, say analysts who estimate high CGD volume potential of two mmscmd over the long term.

Besides Gurugram, IGL has strong growth opportunities in Faridabad and had participated in bids for new geographical areas of Ambala and Kurukshetra, Karnal and Bulandshahr too. It has started the sale of CNG at two outlets of oil marketing companies in Rewari, while the sale of PNG to domestic households is to start soon. With this addition of CNG outlets in FY18, which are the mainstay for company’s volumes, bode well for FY18 volume growth outlook, say analysts. The soft natural gas prices are already benefitting demand as the ban on fuel oils and pet coke usage in the NCR leads to large untapped opportunities for the company.

Following the record 14% volume growth last year, Edelweiss estimates robust 10% volume CAGR over FY17-20 driven by 8-10% growth in existing markets and Rewari, translating into EPS and free cash flow CAGR (compounded annual growth) of 14 and 12%, respectively and robust return on equity of 22%. Analysts at Motilal Oswal Securities model total volumes of 5.09/5.57/6.03 mmscmd in FY18/FY19/FY20. IGL had achieved 4.6 mmscmd in FY17.

While Edelweiss has a target price of Rs 1,251, target prices of most brokerages have been achieved, which could get reviewed post-June quarter results.