• Pricing in the Growth: IGL’s strong stock performance over the last
year now largely factors in the high volume growth trajectory of the
company, in our view. We downgrade the stock to Underweight, as we
believe IGL's geographical growth will be constrained beyond the NCR
region and the stock is pricing in an optimistic 15% volume CAGR over
FY10-15E.
• Commonwealth boost will moderate: We believe the volume growth
trajectory for IGL will moderate to c.12% CAGR over the medium term
post the boost from CWG. We build in a moderation in margins to
c.30%; though marketing margins are not regulated, excessive margins
would attract regulatory scrutiny.
• Pricing power is positive...: IGL has repeatedly demonstrated its ability
to pass through input cost increases. We think the recent 25% hike in
CNG (main business segment) will more than offset the input cost rise
and will support robust operating profits in FY11E. We forecast strong
EBITDA CAGR over FY10-13E of 16%.
• …but valuations are stretched: IGL currently trades at 19.6x FY11E
EPS. On our DCF model, the company is pricing in 15% volume CAGR
over FY10-15E, which we believe is optimistic.
• Price target, valuation, key risks: Our Sep-11 price target for IGL is
Rs305, based on a three-stage DCF model which we believe captures the
period of high growth in CGD volumes. Key upside risks to our negative
view are better-than-expected volume growth, and access to new growth
geographies.
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