The Indraprastha Gas Ltd (IGL) stock touched a 52-week high of Rs1,163.45 on the National Stock Exchange (NSE) in intraday trading on Monday. The firm announced on Friday after market hours that it has received permission to lay the city gas distribution (CGD) network in Gurugram in the area lying between west side of Sohna Road and National Highway 8 of Gurugram.
This is a positive development for the company albeit from a long-term perspective, as it offers scope for incremental volume addition. “Our preliminary analysis suggests volume potential of ~0.2-0.3 million metric standard cubic meter per day (mmscmd) over long term, primarily dominated by the piped natural gas (PNG) segment," wrote analysts from Edelweiss Securities Ltd in a report on Monday. “Moreover, ~50% of Gurugram is still unauthorised for CGD operations and potential award in ensuing years could further drive volumes."
IGL investors are a happy lot what with the stock sharply outperforming NSE’s Nifty 50 index in the past year. In the last one year, IGL shares have risen 89% compared to a 16% increase in the Nifty 50 index. Higher volume and better profitability are key reasons for investor confidence. For fiscal year 2017 (FY17), the company clocked 14.3% volume growth over the same period last year. Volume growth stood at 4.4% in FY16.
What’s more, IGL is expected to report good results for the June quarter. Kotak Institutional Equities expects 10% year-on-year Ebitda growth led by 11% growth in overall volume and higher gross margins, reflecting lower domestic gas price and a stronger rupee. Ebitda is short for earnings before interest, tax, depreciation and amortization.
For FY18, volume growth could well be slower than FY17, given the higher base. Edelweiss estimates 10% volume compound annual growth rate over FY17-20 driven by ~8-10% growth in existing markets and Rewari in Haryana. That’s not too bad really. However, the big hitch in this story is that the sharp outperformance in IGL shares suggests that investors are already capturing most of the optimism. Currently, one share trades at 22.5 times estimated earnings based on data from Bloomberg. That’s pricey.