Shares of Indraprastha Gas were languishing in the red on Wednesday after the stock received a downgrade from analysts at a global brokerage.

What Happened: Brokerage firm UBS has downgraded Indraprastha Gas from “buy” to “sell” and revised its target price to ₹400 per share from the earlier ₹630.

The downgrade is due to concerns about the growth trajectory for fiscal years 2023 to 2026, projected at a 6% compound annual growth rate (CAGR). UBS also highlighted the impact of the potential electrification of fleets, casting a shadow on Indraprastha Gas’ valuation.

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UBS’ Indraprastha Thesis: Despite positive shifts in gas pricing and network expansion, Indraprastha’s compressed natural gas (CNG) growth has not met expectations. UBS suggests factors such as slower growth in new areas, stagnant volumes in existing regions or a combination of both. Additionally, the transition to electric vehicles (EVs) in Delhi has raised uncertainties about the long-term prospects of Indraprastha’s CNG business.

Recent pricing actions may aid in maintaining current margins, but UBS believes that the current stock valuation doesn’t fully account for short-term volume challenges and the potential influence of EVs on long-term growth.

IGL’s CNG volume growth has not kept pace with its infrastructure expansion, despite a substantial increase in CNG volume and the expansion of stations and pipelines. UBS lowered volume estimates for FY24-26 by 11%-16%, falling below market consensus by 2%-5%.

The report did acknowledge certain positive factors, including increased visibility on domestic gas prices, existing liquefied natural gas (LNG) contracts and recent CNG pricing initiatives. However, UBS foresees limited potential for margin expansion beyond FY24 due to the narrowing price discount of CNG to gasoline.

Price Action: Indraprastha Gas’ share price was down 2.8% at ₹417 in afternoon trade on Wednesday.

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