BackIndraprastha Gas share price jumps 19% in 2023 but brokerages have a bearish outlook on the stock; here's what they say
IGL share price: Adverse pricing, high gas prices, electric vehicles and project delays as key headwinds for Indraprastha Gas.
PremiumShares of Indraprastha Gas (IGL) have strongly outperformed the benchmark Sensex this year so far but many analysts and brokerage firms believe the road ahead may not be smooth for the stock. IGL stock is up 19 per cent in the year so far (as of May 15 close) against a two per cent gain in the benchmark Sensex.
IGL announced its Q4FY23 results on May 12, reporting a net profit of ₹329.13 crore - a decline of 8 per cent compared to ₹363.08 crore in the corresponding period last year. At ₹3,687.2 crore, the company's revenue from operations registered a sharp increase of 53 per cent in the January-March quarter, compared to ₹3,711 crore in the year-ago period.
Read more: Indraprastha Gas Q4 Results: Net profit falls 8% to ₹329 crore, revenue up 53%
The stock traded over a per cent lower around 10:30 am IST.
Limited upside potential
Most brokerage firms have negative views on IGL stock as they see adverse pricing, high gas prices, electric vehicles and project delays as key headwinds.
Brokerage firm Kotak Institutional Equities has downgraded the stock to a 'reduce' from a 'buy', cutting the target price to ₹465 from ₹515.
"Our FY2024/2025 EBITDA estimates reduce by 3-4 per cent. We have revised our fair value (target price) to ₹465 from ₹515, as concerns are higher on long-term volume and margin growth. In our view, recent strength is an opportunity to exit," said Kotak.
"IGL’s Q4 EBITDA (9 per cent QoQ, 1 per cent below our estimates) was weaker versus Mahanagar Gas (MGL) (EBITDA 52 per cent QoQ). Overall volumes are up just 1.7 per cent QoQ. For CNG, the second half of FY23 volumes were up just 1.3 per cent versus the first half of FY23, as high prices impacted demand."
"As we noted for MGL, in our view, the new APM formula provides only short-term respite and demand may not revive much. As CGD (city gas distribution) gas costs for the priority segment rise, price arbitrage (versus petrol/diesel) will gradually erode. The EV (electric vehicle) threat is more potent now; IGL is more vulnerable versus MGL to the rising EV threat, in our view," Kotak added.
Kotak has moderated its volume and margin assumptions both in the near term and short term on weaker demand, reducing arbitrage versus petrol/diesel and the rising EV threat.
Emkay Global Financial Services also downgraded the stock to a 'hold' from a 'buy', cutting the target price to ₹500 from ₹485.
"We value IGL on a DCF-SoTP basis. Our Mar-24E target price of ₹500 from ₹485 earlier implies a 15.3 times Mar-25E consolidate target P/E (price-to-earnings ratio). Adverse pricing, margin and currency scenarios, high gas prices, open access, EVs and project delays are the key risks," said Emkay.
Brokerage firm Motilal Oswal Financial Services has maintained a 'sell' call on the stock with a target price of ₹345, implying a 30 per cent downside.
Motilal highlighted IGL’s management commentary which indicated that almost half of the incremental volume in the next two years is likely to come from the industrial segment, which would not only pressure IGL’s EBITDA/scm, but also make it more volatile.
Motilal believes while the company has a strong volume growth potential in the near term, the long-term volume growth remains a challenge due to the threat from electric vehicles. The brokerage firm underscored that the loss of potential volumes from the Faridabad and Gurugram geographical areas due to PNGRB’s (Petroleum and Natural Gas Regulatory Board) recent order is also negative.
However, HDFC Securities has faith in the stock as it has a buy call on the stock with a target price of ₹575.
"Our BUY recommendation on IGL with a target price of ₹575 is based on (1) strong volume growth at nearly 12 per cent CAGR over FY23-25E, (2) robust margins with the government allocating gas from the HPHT (high-pressure, high-temperature) fields to the priority sector, and (3) a strong portfolio of new geographical areas (GAs) ensuring volume growth visibility," said HDFC Securities.
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Disclaimer: The views and recommendations given in this article are those of the brokerage firms. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
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