IGL: Strong prospects, regulatory clarity to drive re-rating

Analysts are likely to upgrade stock after favourable SC verdict

Delhi-based city gas distribution (CGD) company Indraprastha Gas (IGL)’s scrip surged as much as 16 per cent in Wednesday's trade, cheering the Supreme Court’s decision to dismiss the Petroleum and Natural Gas Regulatory Board (PNGRB)’s special leave petition. The decision removes a major overhang on the company, as PNGRB was looking to cap the gas marketing margin of IGL and had asked the company to cut its transportation and compression charges by 64 per cent in April 2012.

Even though the decision was on expected lines, the stock surge was due to the removal of this uncertainty. The regulator was also looking to cut prices with retrospective effect, which would have dented IGL’s profitability significantly. Earlier, the Delhi High Court had backed IGL and agreed that PNRGB can’t fix retail gas prices, which was upheld by the Supreme Court on Wednesday.

The focus will now shift to actual growth prospects at IGL. Some analysts believe the stock could re-rate from current levels given the strong prospects and removal of regulatory uncertainty.

“Due to lifting of regulatory overhang, we raise our P/E multiple from 13 times to 15 times FY17 estimated earnings per share of Rs 37.7 (unchanged). We add another Rs 18.5 for its investments to arrive at a target price of Rs 584 from Rs 509 earlier,” says Swarnendu Bhushan of Elara Securities.

IGL, which was earlier present only in Delhi and the national capital region, recently acquired Pune’s leading CGD Maharashtra Natural Gas and a majority stake in Central UP Gas. These acquisitions will enable IGL to de-risk its business model from concentration in a single region. Analysts are factoring an EPS of Rs 6 from both the entities combined in FY17. IGL’s volume growth is pegged at a healthy 20-30 per cent over the next two-three years. Delhi Transport Corporation (DTC) is also set to add 1,400 compressed natural gas (CNG) buses, which will provide impetus to IGL’s CNG business (75 per cent of IGL’s total volumes). Notably, IGL has signed a 10-year agreement with DTC to supply CNG till December 2020.

Prior to the verdict, most analysts polled by Bloomberg were already positive on IGL. While their average target price of Rs 480 indicates limited upside potential from Wednesday's closing price of Rs 455, analysts are likely to raise their target prices in the next few days to factor in the SC verdict. On the flip side, a sharp jump in CNG prices could impact demand and remains a key downside risk.