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Accumulate Indraprastha Gas; target of Rs 368: Dolat Capital

November 23
05:42 2017

Dolat Capital’s research report on Indraprastha Gas

IGL came out with a positive surprise on volume and margin front. IGL reported volume growth of 14% to 5.22 MMSCMD.  Lower gas cost enabled margin expansion and operating leverage ensured operating margin expansion. Going forward, we believe, IGL can deliver double-digit volume growth for next couple of years.  The increase in the number of CNG stations would propel CNG volumes. Increase in the industrial activity can further propel industrial volumes. CNG segment, which constitutes nearly 76.4% of volumes, delivered a growth of 9%. This traction is expected to continue driven by increased number of CNG stations and government thrust to control pollution. Cluster bus addition will further boost the volumes. The volume growth in the PNG segment was significantly better than expected at 18%. Operating expenses have increased due to the implementation of GST and increase in minimum wages in Mar’17. With CNG segment getting assured domestic gas supply, CNG economics as compared to alternative fuels (petrol and diesel) is driving the growth. CNG is cheaper by nearly 50% as compared to petrol and 30% cheaper as compared to Diesel.  IGL has undertaken marketing initiatives to promote Domestic PNG connections. IGL is ramping up compression capacity at existing CNG stations, especially which are in the DTC depots.  With recent authorization for a part of the high potential Gurugram region and Rewari ramp up on the schedule, we believe that IGL has key growth enablers in place from a long-term perspective. IGL has been able to tap industrial potential by passing on the benefits of low-cost LNG to consumers.

Outlook

IGL is expected to deliver low double-digit growth in FY18. We are positively surprised by the growth traction and expect this to continue. Margin expansion was another surprise. We feel the margins to be under marginal pressure, however, on an annual basis, there would be margin expansion.   CNG, which has 76% of volume share is expected to grow strongly driven by a rise in a number of CNG stations and government thrust to control pollution. No new diesel taxis will be registered, hence all new demand will come for CNG driven taxis. We believe this will give a sharp spike to the volumes. Domestic PNG segment will continue to grow strong and so is the Commercial PNG segment. In the industrial segment, growth seems to be picking up and we expect this to improve.   With volume growth outlook getting better driven by new areas and increase in volume potential of existing regions and confirmed availability of domestic gas for CNG and Domestic PNG segment, we believe that profitability growth can be in double digits. CUGL and MNGL are going strong with expected profit growth in the range of around 15%. We retain ACCUMULATE with a TP of ` 368

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