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Buy Indraprastha Gas Ltd For Target Rs.635

Stock overreacts to upcoming gas price hike; CNG economics to be in range

* IGL’s stock price corrected 13% in the last 15 days as economics vs. margin concerns resurfaced post the recent spike in global gas prices, and its impact on APM rates going ahead. PNGRB also sought comments on open access, though it was mostly a follow-up.

* Despite our bullish stance on gas prices, we find comfort in IGL’s retail model and past trends. Public-commercial vehicles in NCR are mandated to run on CNG, while 4W conversions and CNG growth have a negative 10 year correlation with petrol economics.

* We estimate CNG RSP to rise by Rs7/Rs14 per kg in Oct’21/Apr’22, assuming USD3/USD5.5 APM. But in Apr’22, CNG would still be ~50%/30% cheaper than petrol/diesel (at current Brent), similar to 9MFY20, when CNG volumes still grew by 12%.

* In our view, IGL’s expansion in contiguous northern areas and widening of the pollution ban imply steady growth and ~Rs8/scm EBITDA seems sustainable. We reiterate Buy on IGL with an OW stance and a DCF-based Sep’22 TP of Rs635 (unchanged).

Domestic gas prices seeing an upswing but higher alternate fuel prices supportive: We estimate APM gas prices to rise from USD1.79/mmbtu GCV to USD3 in Oct’21 and to ~USD5.5 in Apr’22 based on global trends so far. For every USD1/mmbtu rise in gas costs, IGL needs to increase CNG RSP by Rs4.7/kg in Delhi in order to maintain gross margins. Hence, IGL would require a total hike of Rs19.3/kg in the next two pricing cycles till Apr’22. With OMCs asking for higher commissions, another hike of Rs2/kg may be needed. Hence, CNG prices could reach Rs66.5/kg by FY23 from Rs45.2/kg currently.

However, considering Brent at USD75-80/bbl and an uptick in refining cracks, equivalent petrol/diesel prices would also rise to Rs105/Rs95 per liter by FY23 − Rs4-5/ltr higher than current levels. Under this scenario, CNG would be 52%/30% cheaper than petrol/diesel. In FY20 also (9M ex Q4 Covid impact), it was the same scenario and IGL recorded 12% yoy growth in CNG sales volume.

Growth correlation with economics low, new areas to aid volumes: Public and commercial vehicles in NCR are bound to run on CNG due to stringent pollution control norms. The conversion of 4Ws to CNG seems to be a growth driver, with the recent 15,000-16,000 conversions per month much higher than the 10-year average of 4,900 (incl taxis). However, overall CNG volume growth has a negative correlation with CNG’s pricing economics vs. petrol-diesel. IGL’s volume growth is driven by a combination of factors, such as new area expansion, more CNG outlets and availability of OEM variants.

IGL has an ambitious capex plan of Rs15bn and 125 new outlets in FY22. It aims to achieve 10mmscmd total volumes by FY24 (11% CAGR vs. FY19) with a 15% contribution from new GAs. We, hence, maintain our volume assumption of 9.3mmscmd in FY24 and EBITDA/scm of Rs8.1. We reiterate Buy on IGL with a TP of Rs635/sh. A sharp decline in oil prices and BPCL disinvestment led events are the key risk to our estimates.

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