Whalesbook
Motilal Oswal Financial Services sees significant upside potential for city gas distributor Indraprastha Gas Limited (IGL). The firm reiterated its 'Buy' rating, setting a Rs 220 target price that implies a 40% jump from current levels. This positive outlook comes despite a notable 25% increase in gas procurement costs, influenced by global geopolitical events affecting liquefied natural gas (LNG) prices.
Strong Q4 Performance Despite Cost Pressures
IGL delivered a better-than-expected operational performance in the January-March quarter. Earnings before interest, taxes, depreciation, and amortization (EBITDA) per standard cubic meter (SCM) reached Rs 4.8, a 44% increase over Motilal Oswal's estimate. Profit after tax (PAT) was reported at Rs 280 crore, also exceeding expectations.
Total gas volumes grew 6% year-on-year to 9.7 million metric standard cubic meters per day (MMSCMD) in Q4 FY26, surpassing Motilal Oswal's forecast of 9.3 MMSCMD. Compressed natural gas (CNG) volumes rose 5.5% year-on-year, while piped natural gas (PNG) volumes for domestic, industrial, and commercial use exceeded estimates by 19% and 7%, respectively.
Key Drivers for Future Growth
Motilal Oswal anticipates sustained earnings growth over the next two fiscal years. This growth is expected to be driven by increasing CNG volumes and wider adoption of piped natural gas. IGL management projects CNG volumes to grow between 10% and 13% in FY27, with EBITDA margins anticipated to remain between Rs 7 and Rs 8 per SCM.
The government's PNG Drive 2.0 initiative is identified as a significant catalyst. IGL plans to add 3.5 lakh domestic PNG connections in FY27 and is targeting conversion of nearly 5 lakh inactive customers with minimal additional infrastructure investment.
Challenges and Valuation Outlook
Motilal Oswal acknowledges certain challenges, including the 25% rise in gas sourcing costs and subdued volume growth in Delhi, which saw only a 1% year-on-year increase. Factors like the saturation of CNG conversion for public transport fleets in Delhi and the impact of app-based transport services on CNG consumption are noted.
Despite these issues, IGL's valuation is considered attractive. The stock is trading at 18.3 times its one-year forward price-to-earnings ratio, which aligns with its historical average. Motilal Oswal forecasts an 8% compound annual growth rate (CAGR) for volume and an 18% CAGR for EBITDA and PAT from FY26 to FY28. The Rs 220 target price is based on a 15x multiple of December 2027 estimated standalone earnings, plus Rs 43 per share for joint ventures.