Most brokerages are, thus, bullish on the company. Out of the 22 analysts polled by Bloomberg since February 2014, 17 have a Buy, 4 have a Neutral and 1 has a Sell rating on the stock. Their average target price stands at Rs 322.9 or upsides of about 27 per cent from current levels.
PNGRB case verdict key for re-rating
The proposal to cap gas marketing margin by Petroleum and Natural Gas Regulatory Board (PNGRB) is subject to Supreme Court's verdict and is the key reason for IGL stock's under performance in the past one and a half year. Most analysts believe IGL has a strong case but a final verdict is a must for significant re-rating of the stock. Notably, analysts have started extrapolating the impact on its earnings and target price under different verdicts.
"IGL's valuation would be contingent on the Supreme Court's verdict on the PNGRB versus IGL dispute. Our discussions with industry sources suggest that the Supreme Court is working on a compromise formula, because a decision on either extreme ends of the spectrum would have profound ramifications for the sector. Our scenario analysis suggests that 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, though, rule out an extremely negative verdict for IGL. As per IGL management, 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.
"Removal of the retrospective impact is a material positive and will remove a lot of uncertainty around IGL. The freedom to determine the final selling price, if upheld, is positive for the future prospects for the company and will likely lead to a re-rating based on large earnings upgrades", says Probal Sen of IDFC Securities. IIFL analysts believe the Supreme court verdict is unlikely to have a material impact on IGL's earnings given that the case now focuses only on deciding whether PNGRB can determine network tariffs for IGL customers or only the third party sales.
CNG: Larger price gap with petrol, diesel
Following Ministry of Petroleum and Natural Gas (MOPNG) allocated 100 per cent domestic gas for city gas distribution operations (versus 80% earlier) last month, the company has cut CNG prices by 20-30%. This has widened the price differential between CNG and other auto fuels such as petrol and diesel. Post this price cut, CNG prices have become about 65% lower than petrol and about 36% lower than diesel prices in New Delhi and NCR regions that the company operates in. The IGL management believes CNG's attractiveness versus other auto fuels has increased significantly and this could trigger more car-owners converting to CNG.
"We see volume growth reverting - in short term from volumes shifting to CNG and in longer term from increase in CNG conversions", Niraj Mansingka, Associate Director - Institutional Equities - Research, Edelweiss Securities.
However, this relief could be short-lived as the domestic gas prices are set to double from 1st April 2014, following which price cuts could be revised. But given the pending cases against this price hike in Supreme Court and the upcoming elections, this price hike may get delayed.
Analysts though remain optimistic on company's volume growth. The addition of 5,000 new buses and 35,000 autos over the next couple of years would support IGL's volume growth, believe analysts. Thus, analysts expect the company to post 8-10 per cent sales volume growth in FY15 and FY16 each.
