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Buy Indraprastha Gas Ltd For Target Rs.635

Higher opex leads to margin miss; volumes cross 7mmscmd in July

* IGL reported Q1FY22 standalone EBITDA/PAT of Rs3.81/2.44bn, down 23%/26% qoq (up 4.6x/7.7x yoy) and 7%/9% below our estimates primarily due to 6% EBITDA/scm miss. Margin miss was on the back of higher unit opex. ETR was also slightly higher at 26%.

* Gas sales volumes rose 96% yoy/fell 22% qoq to 5.32mmscmd. CNG/PNG volumes rose 126%/51% yoy but fell 25%/15% qoq. I/C PNG volume rose 81% yoy/fell 18% qoq, while trading was up 2x yoy/down 20% qoq. Domestic volumes were up 3% yoy/down 4% qoq.

* Net realization was up 3% qoq, while unit gas costs remained flat. Hence, the gross margin expanded by 5% qoq to Rs14.4/scm (in line). However, opex/scm was up 16% qoq (10% above est.), leading to EBITDA/scm of Rs7.9, down 2% qoq (up 133% yoy).

* We raise our FY22-24E revenues by 5-17%, building in higher gas prices, but keep EPS largely unchanged as a slight cut in margins is offset by higher volumes. We increase the TP to Rs635 from Rs610 as we roll over to Sep’22E from Mar’22E. Retain Buy/OW.

Highlights: IGL’s volumes were largely inline. CNG realization was up 4% qoq, on account of the full benefits of the Mar’21 price hike. PNG realization rose 1%. Absolute opex was up 23% yoy/down 9% qoq at Rs3.15bn (9% above est). Employee costs rose 19% yoy/9% qoq to Rs374mn (16% above est.), while other expenditure was up 23% yoy/down 11% qoq at Rs2.77bn (8% above). Depreciation rose 2% qoq to Rs778mn (in line), while interest costs fell 19% to Rs29mn. CUGL/MNGL PAT was up 5.7x yoy/down 24% qoq at Rs673mn.

Guidance: IGL touched 7.05mmscmd volumes in Jul’21 and management retained the target of reaching 10mmscmd in the next 2-3 years. Industrial PNG has recovered and CNG conversions are currently at 10,000 per month. New bus addition process has been slower though. The school bus segment (0.1mn kg/day volumes) is yet to recover as schools are mostly shut in the region (only Class 9-10 open). Q1 capex was Rs3bn, while the FY22 target is Rs15bn. CNG RO addition was virtually nil in Q1 due to second wave lockdowns but should catch up to the annual target of ~100 in the ensuing quarters. EBITDA/scm guidance is around Rs8. IGL will try to pass on the increase in domestic gas prices, but take a balanced view.

Valuation: We value IGL on a DCF-SoTP basis and maintain our Buy rating with an OW stance in EAP. Our Rs635 TP implies 22.9x Sep’23E target consolidated PE multiple. Key risks: adverse pricing, margin and currency scenarios; high gas prices (incl. APM gas pricing reforms); open access competition; promoter issues (relating to BPCL divestment); EVs; and project delays.

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