Indraprastha Gas Ltd. stock has lagged behind its city gas distribution peers over the past year, advancing only 14% compared to 23-78% gains by other stocks. The main factor for this weak sentiment was the Delhi EV policy announced in October 2023, which threatened around 30% of the company’s volumes, leading to a significant de-rating of its stock.
However, brokerages now say the market has materially mispriced this EV risk, and that it is much lower than previously anticipated.
Brokerages Turn Positive
This week, UBS and Citi stated that the market has mispriced the extent of the electrification risk for the company. Citi maintained its 'overweight' rating on the counter, whereas UBS upgraded the stock's rating to a 'buy' from a 'sell'.
Here's why the EV risk stands lower.
Volume Growth And Network Expansion
Indraprastha Gas' annual volume growth in the first half of calendar year 2024 stood at 5.5%, compared to 3.5% in the same period last year. The company has also accelerated its compressed natural gas station additions to keep up with growing CNG powered vehicle fleet, while pace of electrification has lagged.
UBS expects the company's volume growth trajectory to grow further, at an 8.2% compounded annual growth rate over fiscal 2024-27.
New EV Incentive Scheme
While the latest EV incentive scheme announced by the government did make allocations for electric buses, electric two and three wheelers, it did not make any allocations for the passenger vehicle segment. This lifted concerns on the EV disruption risk for Indraprastha Gas in the segment, as per Citi.
The public transport bus segment’s contribution to the company's volumes have anyway fallen to just 3%, versus 8-10% in the past, Citi noted. The brokerage views that this limits further downside risk from these themes.
Mergers And Acquisitions To Drive Growth
Indian city gas distribution sector has entered a consolidation phase, according to both UBS and Citi. The brokerages expect this trend to continue. Indraprastha Gas, which enjoys a healthy net cash balance sheet, has already stated its intention in participating in this trend.
Against this backdrop, UBS observed that sellers are emerging in the sector due to underperformance, gas sourcing challenges, and infrastructure targets. This creates a potential opportunity for Indraprastha Gas to pursue inorganic growth, allowing access to new geographical areas that are otherwise licenced out by the Petroleum and Natural Gas Board. The market has not yet factored in this opportunity, according to UBS.
Valuations
Indraprastha Gas is trading at a price to earnings ratio of 18.25, which is higher than its five-year historical average of 15.19.
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