Reiterate ‘outperform’ on Indraprastha Gas (IGL) and raise target price to R479 per share. The company has seen volume growth decline while margins have stayed strong over the last 8 quarters, which has helped offset volume decline. This quarter sees some re-balancing in this strategy, with a decline in gross spreads being accompanied by the best y-o-y growth in CNG volumes since Q3FY13. Despite the miss this quarter we have raised FY15, FY16, and FY17e EPS by 9.6, 5.9, and 5.1% respectively to factor lower depreciation and higher volumes.
We believe that the management is responding to the decline in other transportation fuels and keeping CNG prices competitive, which should augur well for volume growth even as gross margins may compress a bit as a result. On the whole we continue to like IGL’s prospects over the medium term, with higher domestic gas allocation and LNG price drop likely to support volumes and profitability over FY16-17e.
We believe that the management is looking at retaining market share in transportation segment and therefore is likely to keep pricing competitive, with diesel and petrol pricing softening in line with crude prices. So, while spreads may not reach R9.5 per scm levels anytime soon, higher volume growth will offset the damage. In this respect the decision of the SC on the ongoing appeal by PNGRB against Delhi HC decision (The HC ruled in favor of IGL) would be the key monitorable.
IDFC Institutional Securities
