BackIndraprastha Gas: riding the clean fuel wave
The worsening pollution in NCR is likely to see action to curb it, which should see a further shift to gas-powered transportation
Premium
Investors of Indraprastha Gas Ltd (IGL) have reason to celebrate as the stock has appreciated 59% this fiscal. That compares quite favourably with a 4.6% rise in the benchmark Sensex.
It is not difficult to see why it has done well. The gas distributor had two reasonably good quarters in a row. Despite flat revenue on a year-on-year basis, net profit rose 44% and 42%, respectively, for the June and September quarters. Profit growth was driven by a strong improvement in operating profit margin, a jump in other income and a far slower rate of increase in depreciation costs.
But there may be a slowdown in the near term, thanks mainly to demonetization. Analysts at IIFL Institutional Equities say IGL’s December quarter volume growth may moderate to 4-5% year-on-year versus 9-10% reported in the half year ending September.
According to the brokerage, growth may moderate due to currency curbs that resulted in long queues at compressed natural gas (CNG) stations due to problems of tendering change, forcing people to choose petrol instead of CNG. Secondly, a restriction on third-party CNG kits by the Delhi government to enhance overall quality led to lower car conversions (1,000/month versus 3,500/month earlier). The impact of subdued industrial activity post-demonetization may also weigh on numbers. Lastly, smoggy days may have adversely affected traffic.
The silver lining in the smog is that things may turn out well in the longer run. The worsening pollution in NCR is likely to see action to curb it, which should see a further shift to gas-powered transportation (gas is a relatively cleaner fuel). In turn, this should boost demand for IGL. “While in the near term margins will moderate, we remain confident IGL will be able to restore its margins and pass on increased costs/discounts when it next revises prices (likely when domestic gas prices are reset on 1 April 2017)," said analysts from Nomura Financial Advisory and Securities (India) Pvt. Ltd. The brokerage expects earnings to double over FY16-19F (25% compounded average growth rate, or CAGR) against a modest 9% CAGR in the past three years.
One IGL share trades at 21 times estimated earnings for this fiscal. That is not cheap and the valuations seem to already factor in the growth upside. Unless its performance comes in much better than expected, further upsides from hereon may be limited.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
