Sustainable high-growth outlook; EPS CAGR of 14% estimated over FY17-20
Indraprastha Gas (IGL) has received the go ahead from the Haryana Government to operate its city gas distribution (CGD) network in Gurugram. The area authorised to IGL covers 25% of Gurugram. While IGL has appointed a consultant to carry out a detailed feasibility study of the new area over next week, our preliminary analysis suggests volume potential of 0.2-0.3 mmscmd over long term. Moreover, 50% of Gurugram is still unauthorised for CGD operations and potential award in ensuing years could further drive volumes. The move bolsters our confidence in sustainable high growth outlook for IGL.
Net growth avenue in high potential market: Gurugram has high CGD volume potential of 2 mmscmd over long term. Currently, Haryana City Gas (HCG) operates in 25% of Gurugram and does volume of 0.2 mmscmd. With HCG failing to build the required infrastructure, IGL was awarded the new area between West Sohna and NH-8. Initially, it will set up 5-6 CNG stations over next 1-2 years and 10,000 domestic PNG connections.
Internal accruals to fund capex: IGL will add 35 CNG stations in Delhi in FY18/19. We believe the capex of Rs 4-5 bn p.a. in existing regions and investments in Gurugram will be comfortably met via internal accruals. Outlook and valuations: Following the record 14% volume growth last year, we estimate robust 10% volume CAGR over FY17-20, translating into EPS/FCF CAGR of 14%/12% and robust RoE of 22%. At CMP, the stock trades at 19x FY19e PER. Our target price is based on DCF (for NCR) in addition to 12x FY19E PER for associates. We maintain Buy/So ’, with target price of Rs 1,251.