ProfitNama

ProfitNama

Indraprastha Gas Limited – A City Gas Distribution Leader : Stock Analysis November 2023

Disclaimer:

The analysis and opinions provided above are for educational and informational purposes only. They should not be construed as specific investment, accounting, legal or tax advice. Individual situations and current events may differ from case to case basis, so readers and viewers are advised to consider analysis that aligns with their portfolio risk, investment goals and unique situation before making any investment or financial decision.

Company Name: Indraprastha Gas Limited

 

IGL, SDMC ink pact to set up waste-to-energy plant for fuelling CNG-run vehicles | Mint

Company Overview for Layman or Retail Investors:

Indraprastha Gas Limited (IGL) is the leading City Gas Distribution (CGD) company in India supplying CNG to over 1.1 million vehicles and PNG to over 1.4 million households in Delhi and adjoining areas. IGL has high operating margins of 19%, low debt to equity ratio of 0.01, and robust cash reserves of ₹1,515 cr. Promoters like GAIL and BPCL hold 45% stake. Dividend yield is good at 3.34%. Key financial ratios like ROCE, ROE are quite healthy. Overall, IGL has a strong market position being the dominant CGD player in a fast growing industry.

Vital Company Ratios for a Layman

RatioValue
High OPM15.4%
Debt to Equity Ratio0.01
Cash Equivalents₹1,515 Cr.
CWIP₹1,488 Cr.
Promoter Holder45.0%
Pledged Percentage0.00%
EPS₹22.6
Difference Between Stock CMP and Book Value₹277.60
High Dividend Yield3.34%
IndicatorValue
CMP₹390
50 DMA₹416.10
200 DMA₹449.80

IGL has an operating profit margin of 19% indicating it is quite profitable in its gas distribution business. The debt to equity ratio is negligible at 0.01 times highlighting that it operates on a asset-light business model funded largely by internal cash accruals rather than debt. Return on capital employed is 26.7% showcasing efficient utilisation of capital for expansion needs. Cash & cash equivalents are robust at ₹1,515 cr imparting good liquidity position. Dividend yield stands at 3.34%.

Whether CMP Is More or Less Than 50 DMA and 200 DMA :

The current market price of ₹390 is lower than the 50 DMA of ₹415 and 200 DMA of ₹447 indicating the stock has corrected recently and is available at relatively cheaper valuations.

Industry Analysis

The gas distribution industry is expected to grow at a CAGR of 10% over the next five years. This growth is being driven by the increasing demand for natural gas as a cleaner and more efficient fuel.

Short Term Analysis

The stock is currently trading below its 50 DMA and 200 DMA. This is a bearish signal and suggests that the stock may continue to decline in the short term. However, the stock is still above its book value and has a high dividend yield, which are both positive signs.

Long Term Analysis

The company has a strong track record of profitability and a healthy balance sheet. The company is also well-positioned to benefit from the growth of the gas distribution industry. As a result, I believe that the stock has the potential to grow significantly over the long term.

Is This Stock Overvalued or Undervalued?

Given the healthy revenue growth of 25% over 5 years along with operating margins exceeding 15%, net profit margins of around 11% coupled with high RoE of 20%, the stock appears to be available at reasonable valuations with 1-year forward P/E of around 17.5x. Factoring the leadership position in a fast growing CGD industry and strong cash flows, the valuations seem justified. However, competition is increasing from entities like Adani Total Gas.

Should You Buy This Stock?

I believe that Indraprastha Gas is a good long-term investment. The company has a strong track record of profitability, a healthy balance sheet, and is well-positioned to benefit from the growth of the gas distribution industry. However, the stock is currently trading below its 50 DMA and 200 DMA, which is a bearish signal. As a result, I would recommend waiting for the stock to pull back before buying.

This stock can be bought from a 2-3 year perspective considering IGL is the market leader in a fast expanding CGD industry underpinned by rising natural gas consumption. Its strong supplier tie-ups, extensive distribution network, sizable customer base and high margins lend strong competitive advantage. Initiatives like use of LNG trucks, tie-up with digital rupee platform also aid growth. Valuations seem reasonable for a utility company that generates healthy RoE and pays attractive dividends.

Should You Sell This Stock?

If you are a short-term investor, you may want to consider selling Indraprastha Gas. The stock is currently trading below its 50 DMA and 200 DMA, which is a bearish signal. However, if you are a long-term investor, I believe that the stock has the potential to grow significantly over the long term. Investors should not consider selling this stock at current levels looking at the healthy business fundamentals. Competitive intensity has gone up but IGL still retains dominant market position in core Delhi and adjoining geographies. Concerns on volume growth due to higher gas prices seem temporary that may normalize gradually. Stock valuations have moderated to quite reasonable levels for a utility company of this size having leadership position. Also offers good dividend yield which aids returns.

How Is the Industry of This Company Growing?

The City Gas Distribution (CGD) industry in India is witnessing strong growth driven by rising share of natural gas in energy consumption, focus on using cleaner fuels, government push for PNG/CNG, new geographical areas awarded under CGD bidding rounds. IGL being the dominant player is well placed to tap this potential having long-standing presence, extensive infrastructure and strong supplier relationships. Factors like use of LNG trucks, tie-ups for digital payments also help growth.

Is This Stock Overvalued or Undervalued?

I believe that Indraprastha Gas is currently undervalued. The stock is trading at a P/E ratio of 17.2, which is higher the industry P/E ratio of 14.2. The stock is also trading at a discount to its book value.

How This Company Is Going to Perform Long Term

IGL is expected to deliver healthy long term growth supported by its strong market position in the fast expanding CGD industry. Dominance in core Delhi/NCR region having sizable addressable opportunity, strong supplier relationships with GAIL, BPCL and gas availability position it well to tap volume/customer addition potential. Initiatives in new technologies also aid growth. Gradual normalization of gas prices will support volume uptick over long run. Operating margins are also expected to remain healthy. Stock can deliver good upside supported by consistent double digit earnings growth.

Conclusion

We believe that Indraprastha Gas is a good long-term investment. The company has a strong track record of profitability, a healthy balance sheet, and is well-positioned to benefit from the growth of the gas distribution industry. However, investors should be aware that the stock is currently trading below its 50 DMA and 200 DMA.

error: Content is protected !!
Scroll to Top

Subscribe to Profitnama to access all articles, explanations, stock analysis
Already a member? Sign In Here