1. Deutsche rates Indraprastha Gas Ltd as ‘Hold’, target price Rs 720

Deutsche rates Indraprastha Gas Ltd as ‘Hold’, target price Rs 720

Indraprastha Gas (IGL) has appreciated by 63% YTD, driven by an improved earnings outlook and stock re-rating. We raise FY17-18E EPS by 5-6% to factor improved margins and our TP by 21% to R720 after rolling forward to March 2018.

By: | Updated: October 8, 2016 6:40 AM
odd even impact - IGL sales IGL’s per unit EBITDA margin is currently the highest ever and 18% above the last three years’ average. (Reuters)

Indraprastha Gas (IGL) has appreciated by 63% YTD, driven by an improved earnings outlook and stock re-rating. We raise FY17-18E EPS by 5-6% to factor improved margins and our TP by 21% to R720 after rolling forward to March 2018. We forecast a 17% CAGR in FY16-19 EPS, driven by a 9.5% CAGR in volumes and higher margins as we believe IGL is well placed to benefit from i) a lower domestic natural gas price (down 34% YTD) and ii) greater government focus on increasing city gas sales to control air pollution in Delhi. However, we retain our hold rating on valuation as the stock is trading at five-year highs with a FY18 P/BV of 3.5x (22% RoE) and P/E of 17x (three-year average of 12x).

IGL’s per unit EBITDA margin is currently the highest ever and 18% above the last three years’ average.

In a bull case scenario, if we assume a 13% CAGR in volume over FY16-19 (vs base case of 9.5%) and EBITDA margin of R6.5/scm (vs base case of R5.9/scm) we get a valuation of R884/sh, which implies 3% upside.

In a bull case scenario, if we assume a 13% CAGR in volume over FY16-19 (vs base case of 9.5%) and EBITDA margin of R6.5/scm (vs base case of R5.9/scm) we get a valuation of R884/sh, which implies 3% upside.

In a bear case, assuming a 7% CAGR in volume and EBITDA margin of R5.3/scm but 100bps lower CoE, we get a valuation of R660/sh, implying 23% downside.
We value IGL using DCF, with a WACC of 11.6% based on Deutsche Bank’s CoE assumptions for India (rfr 7%, mrp 7.1%). Key risks: sharp changes in gas price, government policy and regulatory action.

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