ICICI Securities has given a buy call on Indraprastha Gas with a target price of Rs 540. Key takeaways:
Kirit Parikh Committee recommendations are mostly positive: The recommendations to fix a first year price ceiling of US$6.5/ mmbtu is a material positive for gas costs, with an annual escalation of US$0.5/mmbtu, a manageable price increase for IGL. In the near term, with current level of prices, IGL may be able to pass on Rs 4.3/kg in CNG and ~Rs 4.7/scm reduction for the domestic segment which can potentially improve price competitiveness in the near term. However, the bigger monitorable remains the percentage of APM gas provided for the priority sector which has been declining steadily. If this percentage keeps declining due to stagnating domestic supply and rising volumes for IGL, the cost advantage derived from lower APM price will likely be more than offset by higher costs of LNG used to backfill the gap.
Stellar volume growth: Q2FY23 volumes at 8.1mmscmd were up 11.8% y-o-y and 2.5% q-o-q. Despite higher sales prices across segments, volume growth has remained resilient, with CNG conversions sustaining at 15k p.m. currently. With some respite in gas costs over the next few months, management guidance of 11-12% sustainable growth overall for FY23 estimates-FY24 estimates remains intact. We estimate 12% CAGR over FY22-FY24 estimates on the back of (i) moderation in gas costs, (ii) renewed conversions for CNG and delta from Rewari, Ajmer, Muzzafarnagar and Karnal and (iii) continued regulatory support in NCR .
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We revise volume estimates up, margins moderate marginally; Buy remains intact: In our view, the 10% dip in the stock price over the past one year ignores the long-term prospects in favour of the near-term stress on margins. We have raised volume estimates for FY23E/FY24E by 3.9/1.4%, respectively, to factor stronger actuals and higher guidance in H1FY23.Key risks: Inability to pass on domestic gas price increases, a downward movement in petrol/ diesel/LPG prices, and further delays in Gurugram CGD allocation.Valuations: The gradual increase in volumes from NCR is complemented by the potential addition from Gurugram as and when legal issues get resolved.