On the back of the likely rise in gas prices as well as the electric vehicle (EV) policy of the Delhi government, domestic brokerage house InCred Equities has downgraded Indraprastha Gas to ‘reduce’ from ‘add’ and cut its target price by 22.2 percent to ₹419 from ₹539 earlier. The new target indicates a downside of 12 percent for the gas stock.
According to Incred, the expected increase in gas costs driven by higher APM (Administrative Price Mechanism) prices and rising Henry Hub (HH) prices will offset the impact of lower LNG prices. As a result, earnings per share (EPS) are projected to decline after peaking in FY25F.
Moreover, the electric vehicle policy of the Delhi government poses a challenge, but a projected 9 percent compound annual growth rate (CAGR) in CNG vehicle sales is expected to drive a 7.4 percent CAGR in sales growth from FY24 to FY31F.
Incred has valued the stock at 16.3x FY26F EPS to set its target price at ₹419, leading to a downgrade recommendation to REDUCE.
Stock price trend
Indraprastha Gas stock has been completely flat for the last year, down 0.04 percent but has gained almost 14 percent in 2024 YTD, giving positive returns in 4 of the 6 months of the current calendar year. It jumped 7.5 percent in June so far, after a 5.8 percent fall in May. Before that, the scrip advanced 8.9 percent in April and 1.1 percent in March after declining around a percent in February. In January 2024, the stock added 2.84 percent.
Currently trading at around ₹475, the stock is just 5 percent away from its 52-week high of ₹501.35, hit on July 7, 2023. Meanwhile, it has risen over 26 percent from its 52-week low of ₹375.80, hit on November 11, 2023.
Rationale
Delhi’s EV policy impact: According to Incred, the Delhi government’s electric vehicle initiatives, including the EV and EV 2.0 policies, aim to convert 3,200 DTC buses to electric by FY25F, affecting 13.3 percent of total CNG demand. The phased replacement of CNG vehicles, including 4,200 DIMTS buses, represents a significant transition, with about 50 percent of CNG buses already decommissioned by FY23.
In addition, the Delhi Motor Vehicle Aggregator and Delivery Service Provider Scheme 2023 mandates a complete shift to electric vehicles for fleets with more than 25 vehicles by 2030F, impacting 19 percent of current CNG demand. Despite these policy challenges, the growth in CNG vehicle additions at 9 percent annually and a 13 percent year-on-year increase in PNG volumes due to new connections and robust expansion are expected to drive a 7.4 percent CAGR in sales from FY24 to FY31F.
Low APM availability: Incred further informed that IGL currently sources its gas through a diverse strategy, with 75 percent coming from the Administered Pricing Mechanism (APM), 14 percent from long-term contracts (a mix of Henry Hub (HH) and Brent crude oil pricing), 3 percent from High-Temperature and High-Pressure (HTPT) sources, and 8 percent from spot purchases. Looking forward, IGL plans to increase its reliance on long-term contracts and spot purchases as the availability of APM gas decreases. By 2030F, the sourcing mix is expected to shift significantly towards Re-gasified Liquefied Natural Gas (R-LNG), reducing the share of low-cost APM gas to around 45 percent.
Despite potential cost reductions from anticipated lower global LNG prices, the impact could be offset by rising Henry Hub (HH) prices, affecting approximately 60 percent of total long-term contract pricing linked to HH rates, predicted the brokerage. This strategic shift reflects IGL’s proactive approach to adapting its sourcing strategy amidst evolving market dynamics, it said.
EPS likely to fall
Incred anticipates that due to persistently higher gas costs, along with lower margins and regulatory challenges, IGL will likely see its EPS peak in FY25F, followed by a projected decline at a 14.4 percent rate from FY24 to FY27F.
Looking beyond FY26F, growth prospects are expected to moderate unless there are significant policy interventions by the government. An upside risk noted is any potential change in the Administered Pricing Mechanism (APM) formula, it added.
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