Clarity on marketing margins to trigger IGL re-rating

LPG gas for DBTAfter the government raised the allocation of domestic gas for city distribution operations last month, IGL cut CNG prices by 20-30 per cent

Uncertainty regarding its ongoing case with the Petroleum and Natural Gas Regulatory Board (PNGRB) and weaker volumes due to consistent price increases, to offset higher input costs, saw Indraprastha Gas (IGL), the Delhi-based city gas distributor, underperform the S&P BSE oil and gas index over the past year.

The stock currently trades at 9.4 times FY15 estimated earnings, a 30-plus per cent discount to its average one-year forward price/earnings ratio of about 13 times (before the PNGRB issue).  

Most analysts, however, are optimistic on the company’s prospects (strong volume outlook, its pricing power which protects margins) and believe IGL has a strong case against PNGRB. As the latter has admitted it does not have the authority to fix IGL’s marketing margins, analysts believe an extremely unfavourable verdict seems unlikely. The likely doubling of gas prices from April 1, however, is crucial and will retest IGL’s pricing power.

Of the 22 analysts polled by Bloomberg since February, 17 have a ‘Buy’, four a ‘Neutral’ and one a ‘Sell’ rating on the stock. Their average target price is Rs 323, up about 25 per cent from the current level of Rs 259.


p>Favourable verdict needed
The proposal to cap the gas marketing margin by PNGRB is subject to the Supreme Court’s verdict and is the key reason for the IGL stock’s underperformance in the past 18 months. Analysts say a favourable verdict is a must for significant re-rating of the stock. They, meanwhile, have started extrapolating the impact on IGL’s earnings and target price under different verdicts.

“IGL’s valuation would be contingent on the court’s verdict on the dispute. Our discussions with industry sources suggest the SC is working on a compromise formula, as a decision on either extreme end of the spectrum would have profound ramifications for the sector. Our scenario analysis suggests IGL’s fair value could range between Rs 205 and Rs 300, depending on the likely outcome,” says Dayanand Mittal, oil and gas analyst at Ambit Capital.

Some others, including the management, rule out an extremely negative verdict. The management says PNGRB has accepted that it does not have the right to regulate the marketing margins (final selling price). This removes a key overhang, of retrospective cuts/adjustments in IGL’s selling prices.





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