Stock To Buy: This Gas Stock Grew 22.29% In 3 Months, Brokerage Sees Further 32% Upside

Indraprastha Gas Limited (IGL) has reported a strong topline growth of 94% (on a depressed base due to COVID) and volume growth of 12% on a YoY basis. In contrast, it posted a degrowth in EBITDA on a YoY basis (-1%). This occurred due to higher gas costs leading to a ~23% contraction in gross margins on a YoY basis.

The stock of Indraprastha Gas Limited (IGL) has been recommended for purchase by renowned brokerage firm Keynote Capitals with a target price of Rs 555 per share, offering potential gains of up to 32%. IGL is a large-cap Gas distribution company having a market cap of Rs 28,535.53 crore.

Stock Outlook & Returns Over the Years

On the NSE, the stock last traded at Rs 422.50 per share, 1.01% down from its previous close in comparison. On December 15, 2021, the stock touched its 52-week high price of Rs. 513.45. On the other hand, its 52-week low was recorded at Rs 321 on March 7, 2022.

The stock gained 10.67% in one week, however, it declined 0.46% over the past 1 month. It grew 22.29% over the previous 3 months. Whereas, in over a year, the stock fell by 8.73%, giving a negative return. However, in the past 3 and 5 years, the stock gave positive returns of 11.43% and 33.22%, respectively.

A strong volume increase

In Q2 FY23, IGL posted a sales volume of ~744 MMSCM, which grew by ~12% & 4% on a YoY & QoQ basis, respectively. Within the product mix, the company did ~560 MMSCM in CNG, ~92 MMSCM in Industrial & Commercial, 46 MMSCM in Domestic & ~46 MMSCM in Third Party Sales, which grew by 15%, 1%, 11% & 0% on a YoY basis, respectively. Due to higher gas prices, we expect volume growth to take a hit, which we expect to get normalized once APM prices come back to its average level of $3.1 per MMBTU.

Margin Contraction due to rise in RM prices

In Q2 FY23, blended gas costs rose by 2.5 times on a YoY basis leading to a 6% contraction in Gross Profit/SCM on a YoY basis. To mitigate this issue, IGL took a price hike Rs. 3/kg in CNG & 3/SCM in PNG on 8th Oct 2022. We expect IGL to face an issue to further pass on the incremental cost to their customers, leading to lower EBITDA/SCM of ~7 in FY23, compared to FY22 ~7.4.

Strong Future Growth Prospects

In the 9/10/11th bidding round, IGL has been awarded 5 GA's where IGL is expected to develop 400+ CNG stations, 1.5 Mn+ new connections, and 9,500 Km+ steel pipeline in the next few years. IGL has already commenced natural gas distribution in GA's awarded in the 9th & 10th rounds of bidding, which will likely drive future growth.

View & Valuation

Commenting on the valuation of the stock, Keynote Capitals said, "We have revised our view on Indraprastha Gas Ltd due to higher blended gas cost and lower ability to further pass on costs to customers, but maintain a BUY rating with a target of Rs. 555 (21x FY24 earnings). CGD companies are at a pivot point as 3x of the infrastructure developed in the last 20-30 years is expected to be developed in the next ten years. We expect IGL to be a key beneficiary of this structural change. IGL has a strong balance sheet, and they are one of the fastest-growing CGD company. Based on the expansion plans, we expect IGL's growth trajectory for the next decade to be completely different from the last decade."

Disclaimer

The stock has been picked from the brokerage report of Keynote Capitals. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.