RLNG And Solar Projects Will Boost Performance Despite EV Risks

Key Takeaways

• Strategic agreements and diversification efforts enhance revenue stability and margins amid market volatility and external cost pressures.
  
• Significant sales growth in PNG and CNG, supported by infrastructure expansion, positions the company for increased revenue and earnings.
  
• Potential competition from electric vehicles and domestic gas volatility could pressure Indraprastha Gas's profitability and future growth in the CNG sector.

Catalysts

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

• Indraprastha Gas has secured term agreements for RLNG, which enhances its gas sourcing stability amidst volatility in domestic gas allocation, potentially leading to improved revenue from consistent supply.
  
• The company witnessed robust double-digit growth in PNG sales and overall volume growth, which is likely to positively impact future revenue and earnings given the expectation of a 10% sales volume increase in FY '25-'26.
  
• There is an ongoing diversification effort with the approval of a 500-megawatt solar plant project, expected to provide returns and potentially reduce operational costs, thereby improving net margins.
  
• The significant growth in CNG vehicle conversions, along with the commissioning of new CNG stations, is set to drive higher CNG sales volumes, supporting increased revenue and earnings.
  
• The company's strategic measures and contracts aim to mitigate the impact of gas cost increases, potentially stabilizing or improving net margins despite external pricing pressures.

Indraprastha Gas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Indraprastha Gas's revenue will grow by 8.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 11.5% today to 8.7% in 3 years time.
• Analysts expect earnings to reach ₹16.7 billion (and earnings per share of ₹11.95) by about May 2028, down from ₹17.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹19.8 billion in earnings, and the most bearish expecting ₹11.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.9x on those 2028 earnings, up from 15.7x today. This future PE is greater than the current PE for the IN Gas Utilities industry at 19.6x.
• 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 12.53%, as per the Simply Wall St company report.

Indraprastha Gas Future Earnings Per Share Growth

Risks

• Volatility in the allocation of domestic gas, especially reductions in APM, could put upward pressure on gas sourcing costs, negatively impacting net margins.
  
• Increased gas sourcing costs, as seen with a 13% increase in the past year, have already put pressure on profitability, evidenced by the impact on earnings despite an operational profit margin.
  
• The transition towards electric vehicles, particularly in the DTC segment, which is shifting to EVs, could diminish CNG sales and affect future revenues and growth projections.
  
• The necessity of managing PR to combat market misperceptions indicates reputational risks, which, if unaddressed, might negatively impact investor confidence and, consequently, stock performance.
  
• Potential competition from electric vehicle adoption and government EV policies could pose risks to ongoing CNG vehicle sales, which may affect future revenue and market share in the transport sector.

Valuation

• The analysts have a consensus price target of ₹225.683 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 ₹648.0, and the most bearish reporting a price target of just ₹144.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹191.6 billion, earnings will come to ₹16.7 billion, and it would be trading on a PE ratio of 26.9x, assuming you use a discount rate of 12.5%.
  
• Given the current share price of ₹192.59, the analyst price target of ₹225.68 is 14.7% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.