igl

1. Strategy focused on NCR, geographical expansion to drive volume-led growth: IGL is focused on
developing and maintaining infrastructure in NCR and adjoining areas to increase natural gas usage
for energy needs. High barriersto entry and lack of competitionin focus areas together with strong
government support will drive growth.
Government’s plan to increase natural gas usage; environmental concerns to drive conversion to
CNG,PNG:The governmenthasrepeatedlyindicateditsintentiontoshifttonatural gasasapreferred
fuel for energy. To improve growth in compressed natural gas or CNG and piped natural gas or PNG
(residential),government supplies natural gas at a competitive rate to make it cheaper relative to
other alternative fuels.
3 year earnings CAGR (FY18-20E) of 23% based on volume growth at CAGR of 11%: We expect the
earningsgrowthof 23% duringF18-20E basedon the expectedsalesvolume growthof 11%. The key
driver for the earnings growth is expected to be volume since the company expects to be maintain
EBITDA/scm within a range.
Strong balance sheet despite capex for sustained growth gives comfort: Despite high capex to
improve the infrastructure network for CNG and PNG, the company has a debt-free balance sheet.
Capex for the past five years has been met consistently from internal accruals.
Strong operational cash flow supported by negative working capital: IGL has consistently shown a
healthy positive operational cash flow which has provided for the annual capex and a consistent
positive free cash flow. Consequently, IGL has been able to pay of its debt.The capex is expected to
rise to Rs6bn from FY18, but we believe the company will be able to meet the requirement from
internal accruals.The companyhas consistentlymaintainednegative workingcapital because of high
payables relative to inventory and receivables.
RecommendBuyratingonIGL witha targetprice of Rs340: Our valuationof IGLis basedon 22xFY20E
earnings.Despite FY18-FY20EearningsCAGRof 23%, we have valuedthe stockat 22x FY20E earnings
because of: 1) Strong probability of higher-than-expected earnings growth following the recent
Supreme Courtannouncementbanningthe usageof petcoke andfurnace oil.2) Strongbalance sheet
withnet cash position.3) Strong operational cashflow togetherwithnegative workingcapital which
is expected to provide for future capex. 4) Strong monopolistic situation in NCR region ensuring
earningsvisibility.5) Government’sfocusongrowthinnatural gasas the preferredmode formeeting
energyneedswill aidindrivingsales.6) Risingenvironmental concernsinNCR have addedto strong
focus of the government on pushing natural gas as the preferred energy provider.