Why IGL is this week's stock pick

Sales volumes of Indraprastha Gas (IGL), natural gas distributor in the National Capital Region (NCR) fell during the first quarter of 2020-21. However, IGL has started showing volume improvements in the second quarter. Its compressed natural gas (CNG) volumes crossed 80% of pre-Covid levels in July and have reached 85-90% levels in August. Despite the fact that a number of CNG buses are still off the road owing to the reduced public transport activities, its CNG volumes recovery is being led by the shift towards private vehicles.Not only CNG, but the piped natural gas segment is also on a road to recovery now. While domestic PNG consumption continues to be well above pre-Covid levels, industrial PNG volumes have reached pre-Covid levels in August. Commercial PNG, the only segment that is dragging volume growth now, may also get normalised once places like malls and restaurants get operational.Analysts believe that the current weakness in its share price is a good entry point since the shift towards natural gas is still intact. A shift towards low cost and low polluting natural gas is happening all over India and will continue in the coming years as well. However, IGL is in a sweet spot now as the pollution level in Delhi is acute, barring the lockdown exceptions and therefore, this shift may happen faster here. The shift to private vehicles from metros and public buses, due to Covid fears should also increase CNG consumption. Volumes will also get a short term boost because the recent tax hikes on petrol and diesel by the government has increased price competitiveness of natural gas.To benefit from the structural growth story, IGL is taking steps to improve its infrastructure in existing areas and to bid for the nearby areas. IGL is planning to establish more than 80 new CNG stations in 2020-21; mostly in new geographical areas such as Rewari, Gurugram and Karnal, which should help IGL to augment its volume in the coming years. The fear of new entrants threatening established players like IGL may also not happen because over the years, these incumbents have built a significant moat in terms of retail distribution network and pipeline infrastructure.Improvement in its gross margin, due to lower input gas price under administered price mechanism (APM) and sharp drop in spot LNG prices, is another reason for analyst’s bullishness. IGL management is also very careful about margin and will try to protect it by increasing prices whenever necessary. 78074500 78074510Selection MethodologyWe pick up the stock that has shown the maximum increase in “consensus analyst rating” during the last 1 month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (ie 5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search will be restricted to stocks with at least 10 analysts covering it.(Graphics by Abdul Shafiq/ET Prime)

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