Urbanization And Decarbonization Will Drive Clean Fuel Demand

Key Takeaways

• Aggressive network expansion, regulatory cost savings, and urban clean-fuel demand are set to drive multi-year volume and revenue growth beyond analyst expectations.
  
• Strategic moves into solar and LNG retailing will diversify earnings, reduce costs, and unlock new high-margin business opportunities for sustained profitability.
  
• Shifts to electric vehicles, volatile input costs, expansion inefficiencies, rising competition, and regulatory uncertainties threaten revenue growth, profitability, and margin stability.

Catalysts

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

• While analyst consensus expects improved margins due to transmission tariff rationalization, the actual financial impact is likely to be far more significant, as management is postponing price hikes to fully capture future cost reductions-this could drive a step-change in EBITDA and net margin, especially with 83% of CNG and domestic PNG volumes currently invoiced at higher rates.
  
• Analyst consensus sees 10% annual volume growth as robust, but this figure could be materially exceeded given accelerating CNG passenger vehicle adoption (37% year-on-year in some markets) and aggressive network expansion into new geographies, setting the stage for a multi-year revenue growth trajectory above current expectations.
  
• Massive urbanization and pollution-driven clean fuel adoption in India are rapidly enlarging IGL's addressable customer base, which will translate into sustained double-digit CAGR in connections for both PNG and CNG, supporting outsized long-term growth in sales and earnings well beyond short-term projections.
  
• Pending reductions in state VAT in major markets and potential excise tax rationalization represent underappreciated upside levers, as they could unlock ₹1 to ₹1.5 per standard cubic meter in cost savings on up to 20% of company-wide volumes, driving immediate and structural enhancement in profitability.
  
• Strategic diversification, including the planned 500 MW solar project and LNG retailing for heavy vehicles, will not only reduce input and operating costs but also open new high-margin business segments, accelerating net margin expansion and providing a multi-year uplift to consolidated earnings.

Indraprastha Gas Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Indraprastha Gas compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Indraprastha Gas's revenue will grow by 11.3% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 10.9% today to 10.5% in 3 years time.
• The bullish analysts expect earnings to reach ₹22.2 billion (and earnings per share of ₹18.61) by about August 2028, up from ₹16.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 36.0x on those 2028 earnings, up from 17.0x today. This future PE is greater than the current PE for the IN Gas Utilities industry at 16.2x.
• Analysts expect the number of shares outstanding to decline by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.73%, as per the Simply Wall St company report.

Indraprastha Gas Future Earnings Per Share Growth

Risks

• The growing transition of public transport buses in Delhi from CNG to electric vehicles is already leading to reduced CNG volumes for IGL, which if replicated across other fleet segments and regions, could result in persistent declines in core CNG demand, directly impacting long-term revenue growth.
  
• The company's rising exposure to imported RLNG, in the context of India's declining domestic gas production, raises input cost risks, as a higher proportion of volumes are subject to global price volatility, potentially eroding net margins and profitability over time.
  
• IGL's strategy of rapid network expansion into new geographical areas involves significant capital expenditure, but lower initial capacity utilization in these regions results in operational inefficiencies and higher costs per unit, which could weigh on earnings if demand does not ramp up as forecast.
  
• Intensifying competition in the city gas distribution sector from alternative fuel providers, potential new entrants including oil majors, and the risk of price-sensitive industrial/commercial customers shifting to other fuels could slow customer additions and pressure market share, thereby capping future revenue and earnings growth.
  
• Regulatory and policy uncertainties-including ongoing rationalization of gas transmission tariffs, changes in state tax regimes, and exposure to government-controlled gas pricing-could limit IGL's ability to fully pass on input cost increases to customers, resulting in margin compression and unpredictable earnings volatility.

Valuation

• The assumed bullish price target for Indraprastha Gas is ₹399.8, which represents two standard deviations above the consensus price target of ₹234.8. This valuation is based on what can be assumed as the expectations of Indraprastha Gas's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• 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 ₹155.0.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be ₹211.3 billion, earnings will come to ₹22.2 billion, and it would be trading on a PE ratio of 36.0x, assuming you use a discount rate of 12.7%.
  
• Given the current share price of ₹202.17, the bullish analyst price target of ₹399.8 is 49.4% 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.