Blip in volume growth
Our ADD recommendation on Indraprastha Gas with a TP of INR 520 is based on (1) Volume growth of ~4.7% CAGR over FY20-22E, (2) Portfolio of mature, semi-mature and new Geographical Areas (GA) and (3) Pricing power as evident in 3.9% CAGR growth in per unit EBITDA over FY17-20 to INR 6.5/scm.
* View on the result: Volumes and EBITDA were in-line with our estimates
* Volumes: IGL’s total volume grew merely 0.5% YoY to 6.2mmscmd (estimated 6.0mmscmd), dragged by 1.4% YoY drop in CNG vols to 4.5mmscmd. This is the first instance in 4 years that YoY volume growth has fallen to single digits. PNG volumes increased to 1.7mmscmd (+6.0% YoY). Volumes were adversely affected by the lockdown in the last week of March.
* Margins: Per unit gross spread expanded by INR 1.5 YoY to INR 12.8/scm. This is attributable to part retention of the benefit of falling RMC. Consequently, per unit EBITDA expanded by INR 1 YoY to INR 6.6/scm (vs. INR 6.5/5.8 per scm in FY20/FY19).
* Outlook on volumes: We expect volume to dip by 10.0% YoY to 5.8mmscmd in FY21 given a poor CNG volume outlook in 1HFY21. Thereafter, blended volumes should recover to 7.1mmscmd in FY22 (+21.7% YoY).
* Outlook on margins/EBITDA: Per unit EBITDA should dip marginally by 5.8% YoY from the current levels to INR 6.1/scm in FY21 with the fall in volumes. Subsequently, per unit EBITDA should bounce back to INR 6.5/scm in FY22 (+7.7% YoY). In-line with per unit EBITDA and volumes, absolute consol EBITDA should dip 15.4% YoY in FY21 to INR 13bn and subsequently grow 31.1% YoY in FY22 to INR 17bn driven by a robust volume outlook and healthy per unit margins.
* View on the balance sheet: IGL’s cash/bank jumped 15.2% YoY to INR 22bn. Although the excess cash is dragging RoE and RoCE, it puts the company in comfortable position to meet its financial commitments and capex needs.
* Change in estimates: We raise our FY21 EPS estimate by 9.7% to INR 12.7 driven by higher than estimated (1) Per unit EBITDA margin (+2.4% to INR 6.1/scm), and (2) Volumes (+7.4% to 5.8mmscmd) as recovery in CNG volumes would be faster in 2HFY21. For FY22, we cut our EPS estimate by 27.5% to INR 17.0/sh led by a gradual recovery in volumes and per unit margins. DCF based valuation: Our TP is INR 520 (WACC 10%, Terminal growth rate 3.0%). The stock is trading at 24.8x FY22 EPS.
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