HDFC Securities Pick of the Week 21st Dec'25: Indraprastha Gas Ltd

HDFC Securities has selected Indraprastha Gas Ltd. (NSE: IGLLTD) – a leading city gas distribution (CGD) company with dominant presence in the National Capital Region—as its Pick of the Week. The brokerage recommends buying the stock in the ₹190–199 range and adding on declines in the ₹170–178 band. HDFC Securities has assigned a base case fair value of ₹215 and a bull case fair value of ₹237 over a 2–3 quarter time horizon, supported by steady volume growth, infrastructure-led expansion, and margin stabilisation despite gas cost volatility.

Q2FY26 Result: Margin Pressure, Volumes Remain Resilient

Indraprastha Gas reported mixed operating performance in Q2FY26. While volumes remained healthy, profitability came under pressure due to higher natural gas procurement costs following a structural reduction in APM gas allocation.

Key Q2FY26 highlights:

• Revenue: ₹4,023 crore, up 2.8% YoY and 8.8% QoQ

• EBITDA: ₹443 crore, down 13.5% YoY; EBITDA margin at 11.1%

• Net Profit (PAT): ₹373 crore, up 4.7% YoY

• Average daily sales volume:9.31 mmscmd (+3% YoY, +2% QoQ)

• Revenue mix: CNG ~77%, PNG ~23%

Sequential volume growth was driven by the CNG segment and industrial–commercial PNG, while domestic PNG volumes moderated during the quarter.

Strategic Growth Drivers and Key Strengths

1. Dominant Position in NCR CGD Market
   • IGL enjoys infrastructure and marketing exclusivity in Delhi and surrounding NCR regions, including Noida, Greater Noida and Ghaziabad.
   • The company operates 954 CNG stations, 12,049 industrial-commercial PNG connections, and 30.7 lakh domestic PNG connections as of March 2025.
   • Around 74% of revenue is derived from CNG, providing stable demand visibility from the transport segment.
2. Consistent Volume Growth Visibility
   • Total sales volumes grew 6.1% YoY to 9 mmscmd in FY25.
   • Blended volumes are expected to grow at a ~7% CAGR over FY25–33E, supported by new geographical areas (GAs) and expanding vehicle penetration.
   • Management targets an exit run-rate of ~10 mmscmd in the medium term.
3. Capex-led Expansion and New Geographical Areas
   • Capex in FY26E is guided at ₹1,200–1,400 crore, split between CNG (55%) and PNG (45%).
   • Expansion across authorised GAs in Haryana, Uttar Pradesh and Rajasthan is expected to sustain medium-term growth.
   • Investments in pipeline networks, compressor stations and marketing infrastructure strengthen long-term entry barriers.
4. International Opportunity via Saudi Arabia JV
   • IGL has entered a JV with MASAH Construction Company, Saudi Arabia, to develop gas distribution networks in industrial cities.
   • Phase I targets five industrial cities, each with 1–1.5 mmscmd demand potential, translating into 4–5 mmscmd volume opportunity over time.
   • The project benefits from lower capex intensity due to existing trunk pipelines, with operations likely from CY27.
5. Margin Stabilisation Measures Underway
   • EBITDA margins declined due to higher LNG and RLNG costs, but management expects margins to trend towards ₹7/scm by Q4FY26.
   • Benefits are expected from VAT-to-CST tax changes on Gujarat-sourced gas, two-zone tariff implementation, and operational efficiencies.
   • A ₹1/scm reduction in input cost from procurement restructuring effective October 2025 is expected to offset currency headwinds.

Valuation & Recommendation

HDFC Securities’ Estimates:

• Base Case Fair Value: ₹215 (14x Sept’27E EPS)
• Bull Case Fair Value: ₹237 (15.5x Sept’27E EPS)
• CMP (19 Dec 2025): ₹193.96
• Time Horizon: 2–3 quarters

Recommendation:

Buy in the ₹190–199 range and add on dips at ₹170–178.

At current levels, the stock trades at ~12.7x Sept’27E EPS, offering a reasonable risk–reward given IGL’s leadership position and strong balance sheet.

Risks & Considerations

• Gas Cost Volatility: Sustained high LNG prices or further INR depreciation may pressure margins.
• Regulatory Risk: Changes in gas allocation policy or tariff frameworks could impact profitability.
• EV Adoption: Delhi’s phased EV policy may moderate CNG demand over the medium term.
• Execution Risk: Delays in GA rollouts or overseas JV execution could affect growth timelines.
• Margin Sensitivity: Lower-than-expected benefits from tax and tariff reforms remain a key monitorable.

HDFC Securities View

Indraprastha Gas combines market leadership in NCR, a robust infrastructure moat, and visible volume growth from new GAs and international opportunities. While near-term margins remain sensitive to gas costs, structural reforms, procurement optimisation, and operational efficiencies are expected to support stabilisation. The stock offers a steady medium-term opportunity for investors seeking exposure to India’s urban energy transition with controlled balance sheet risk.