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Indraprastha Gas: How low can it go? - Views on News from Equitymaster
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Indraprastha Gas: How low can it go?
Oct 13, 2008

Bull market valuations i.e. very high multiples to optimistic future earnings are now a thing of the past. In fact, with stock prices plummeting, the question everyone is now asking is “ How low can it go?” Let us try to answer the question with respect to one of our recent recommendations – Indraprastha Gas (IGL).

How Benjamin Graham would approach IGL
Benjamin Graham’s works contain several examples where he looks at the track record of a company to ascertain the ballpark value of its shares. Applying a similar approach, we observe that IGL has average earnings per share (EPS) of around Rs 8. It also has an average free cash flow (FCF) per share between Rs. 7 to Rs 8.

Rs/share FY04 FY05 FY06 FY07 FY08 Average
Earnings 6 7 8 10 12 8
FCF* 3 8 5 12 10 8
FCF** 2 7 5 11 8 7
* As per our calculations, ** As per the company

The company can be given an earnings multiple of 10 to 12. Its free cash flow can also be given a similar multiple. Hence, the intrinsic value per share on an extremely conservative basis could range from Rs 7*10= Rs 70 to Rs 8*12= Rs 96.

We also know that IGL is a monopoly utility in the national capital region. Hence, there is very little chance of a rapid deterioration of its business. It is also a debt free company. Moreover, we have used past earnings and cash flow figures, which do not include any future growth. It may be noted that, we have taken an average and not the highest figure from the past record. As such the intrinsic price is likely to be in the upper range of the Rs 70 to Rs 96 band. With the stock currently quoting at Rs 102, we believe any decline caused by a broad based sell off will make the stock an extremely attractive value-pick.

  • Also read - Our recommendation on IGL 

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