Risk of competition in lockdown-hit FY21E
Indraprastha Gas’ (IGL) Q4FY20 standalone EPS is up 12% YoY despite flat volumes, driven by jump in EBITDA margin and lower tax rate. Q4 consolidated EPS rise is stronger at 27% YoY as share of profit of associates is up 208% YoY. We expect IGL to be badly hit by the lockdown in FY21. We are assuming 19% YoY decline in FY21E volumes, which has led to 27% YoY cut in FY21E EPS (down 15% YoY). We are assuming volume driven earnings recovery in FY22E (EPS up 26% YoY), but a gradual fall in margins from FY22E. Margin decline may be earlier and steeper than estimated if competition is allowed. Reiterate SELL.
* Q4FY20 EPS up despite flat volumes, driven by rise in EBITDA margin and fall in tax rate: Q4FY20 standalone EPS is up 12% YoY despite 1% YoY fall in sales volumes, driven by 13% YoY rise in EBITDA margin to Rs6.64/scm and lower tax rate of 25%. Q4FY20 CNG volumes were down 1% YoY (impacted by lockdown), but domestic PNG volumes were up 17% YoY and industrial & commercial up 9% YoY. Q4FY20 consolidated EPS rise was stronger at 27% YoY as share of profit of associates rose 208% YoY. FY20 standalone and consolidated recurring EPS are both up – by 36% and 41% YoY. Standalone EPS rise was driven by 11% YoY rise in EBITDA margin, 9% YoY rise in volumes and fall in tax rate to 25% from 34%.
* Cut FY21E EPS and target price: We are assuming decline in CNG volumes by 20% YoY and industrial and commercial volumes by 25% YoY, but 15% YoY rise in PNG volumes implying 19% YoY fall in total gas volumes. Steep volume estimate cut has meant 27% cut in FY21E EPS. We estimate FY22E EPS to be up 26% YoY driven by 25% YoY higher volumes. We assume gradual fall in EBITDA margin from Rs6.45/scm in FY21E to Rs5.71/scm in FY24E. These changes have meant 7% cut in target price to Rs340 (28% downside). Decline in margin and profit would be earlier and steeper than estimated if competition is allowed.
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