Securing New Henry Hub-Linked Gas Contracts Will Strengthen Future Prospects

Key Takeaways

• Successful gas contracts and increased supply enhance sales volumes and revenue growth, supporting improved net margins.
  
• Strategic expansion and diversification, including geographic growth and joint ventures, foster long-term revenue growth and enhance profit margins.
  
• Declining APM gas supply and rising costs threaten profitability and revenue as market competition and EV adoption shape future challenges.

Catalysts

Engages in the distribution and sale of natural gas in India.

• The successful negotiation of new long-term gas supply contracts at competitive prices, linked to benchmarks like the Henry Hub, indicates potential stabilization and growth in future gas procurement, positively impacting revenue and possibly improving net margins if cost management is effective.
  
• The partial restoration of domestic gas allocation and addition of new well gas enhances supply security, allowing for increased sales volumes in the CNG and PNG segments, which can lead to higher revenue growth and possibly improved earnings.
  
• Significant sales growth in new geographical areas outside the Delhi NCR, with reported increases of over 30%, demonstrates promising expansion efforts that could drive future revenue growth and support increased earnings.
  
• Anticipated increases in average sales volumes from 9.5 mmscmd to 10.5 mmscmd over the next year reflect strategic efforts to boost output and meet higher demand, likely leading to revenue growth and potentially improved profit margins.
  
• The company's diversification strategy, including potential inorganic acquisitions and the development of joint ventures in compressed biogas and LNG refueling, outlines a roadmap for long-term growth which could enhance future revenue streams and improve net margins.

Indraprastha Gas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Indraprastha Gas's revenue will grow by 8.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.7% today to 9.9% in 3 years time.
• Analysts expect earnings to reach ₹18.5 billion (and earnings per share of ₹13.21) by about February 2028, up from ₹17.0 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹22.1 billion in earnings, and the most bearish expecting ₹14.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.0x on those 2028 earnings, up from 16.0x today. This future PE is greater than the current PE for the IN Gas Utilities industry at 18.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.15%, as per the Simply Wall St company report.

Indraprastha Gas Future Earnings Per Share Growth

Risks

• The reduction in APM gas supply presents a challenge for future gas procurement, potentially increasing costs and impacting net margins.
  
• Higher input costs resulted in a 36% year-on-year decline in EBITDA, affecting profitability and earnings.
  
• The competitive nature of securing additional gas volumes at market rates may place pressure on maintaining current revenue growth.
  
• Potential future cuts in domestic APM gas allocation or shifts to costlier new well gas could increase operational costs, affecting net margins.
  
• The ongoing transition to electric vehicles may reduce demand for CNG, impacting revenue from this segment.

Valuation

• The analysts have a consensus price target of ₹224.75 for Indraprastha Gas based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹400.0, and the most bearish reporting a price target of just ₹150.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹187.5 billion, earnings will come to ₹18.5 billion, and it would be trading on a PE ratio of 24.0x, assuming you use a discount rate of 12.2%.
  
• Given the current share price of ₹194.21, the analyst's price target of ₹224.75 is 13.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.