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Muted performance

Our ADD recommendation on Indraprastha Gas with a target price of INR 588 is premised on (1) robust volume growth led by its quasi-monopolistic position in Delhi/ NCR with regulatory support in the form of prioritized gas allocation and (2) portfolio of mature, semi-mature and new geographical areas (GA). 3QFY21 EBITDA/APAT was 10/14% below our estimates, owing to higher-than-expected operating expenses, lower-than-expected other income and higher-than-expected tax rate.

* Volumes: Blended volume stood at 6.3mmscmd (vs 5.5/6.7mmscmd QoQ/YoY). Volumes were up as CNG demand (72% of volume mix in 3Q) started to recover post un-lock. CNG/PNG volumes stood at 4.5/1.8mmscmd in the quarter.

* Margins: Per unit gross spread expanded by INR 0.8/2.8 QoQ/YoY to INR 14.6/scm. This is attributable to part retention of the benefit of falling RMC. Subsequently, per-unit EBITDA grew by INR 0.7 QoQ and 2.3 YoY to INR 8.7/scm, offset by a higher per-unit opex.

* Outlook on volumes: We believe that CNG volumes should decline by ~11% YoY to 4.2mmscmd in FY21E, dragging overall volumes to 5.9mmscmd from 6.4mmscmd in FY20. However, we expect CNG volumes to rise ~20% YoY to 5.1mmscmd in FY22E, leading to a 19%YoY jump in the total volumes to 7.1mmscmd.

* Outlook on per unit EBITDA: Per-unit EBITDA should rise by 22% YoY to INR 7.9/scm in FY21E. Subsequently per unit EBITDA should correct to INR 7.5/scm in FY22E (-4% YoY). Consolidated EBITDA should grow 12% YoY in FY21E to INR 17bn and 14% YoY in FY22E to INR 19bn driven by a robust volume outlook and healthy per-unit margins.

* DCF-based valuation: Our target price is INR 588 (WACC 10%, Terminal growth rate 3.0%). The stock is trading at 26.3x FY22E EPS.

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