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Margin falls, as expected; however, volume also weak

IGL’s 3QFY23 standalone EBITDA at INR 4.3bn was largely in line with JMFe/consensus of INR 4.4bn/INR 4.3bn. EBITDA was down 19% QoQ due to the expected decline in margin on account of hike in domestic gas price (to USD 8.57/mmbtu for 2HFY23 vs. USD 6.1/mmbtu in 1HFY23). However, sales volume was 2.4% below JMFe at 8.1mmscmd (up 0.4% QoQ and up 6.1% YoY) as CNG sales volume was 3.2% below JMFe at 6.1mmscmd (down 0.3% QoQ and up 7.8% YoY). We maintain BUY (unchanged TP of INR 500) as we expect IGL’s pricing power and steady volume growth to sustain. However, the sustained high gas cost is a key near-term overhang.

 As expected, EBITDA declines QoQ due to fall in margin on account of hike in domestic gas price: IGL’s 3QFY23 standalone EBITDA at INR 4.3bn was largely in line with JMFe/consensus of INR 4.4bn/INR 4.3bn. However, EBITDA is down 19% QoQ due to the expected decline in margin on account of hike in domestic gas price (to USD 8.57/mmbtu for 2HFY23 vs USD 6.1/mmbtu in 1HFY23); volume was also weak and 2.4% below expectation. PAT at INR 2.8bn (down 33% YoY) was also largely in line with JMFe/consensus of INR 2.8bn/INR 2.9bn. IGL's share of CUGL and MNGL’s PAT fell to INR 558mn in 3QFY23 (vs. INR 697mn in 2QFY23). As expected, EBITDA margin dipped QoQ to INR 5.7/scm in 3QFY23 vs. JMFe of INR 5.6/scm (vs. INR 7.1/scm in 2QFY23) on account of hike in domestic gas price (to USD 8.57/mmbtu for 2HFY23 vs. USD 6.1/mmbtu in 1HFY23). In 3QFY23, the average cost of gas rose to USD 12.95/mmbtu or INR 38.3/scm (vs. USD 12.2/mmbtu in 2QFY23). This was partly offset by rise in realisation to INR 49.7/scm in 3QFY23 (vs. INR 47.8/scm in 2QFY23) due to price hike undertaken to pass on higher domestic gas price. Opex was flat QoQ at INR 5.6/scm.

* Volume 2.4% below JMFe due to weak CNG volume: Sales volume was 2.4% below JMFe at 747mmscm or 8.1mmscmd (up 0.4% QoQ/6.1% YoY) as CNG sales volume was 3.2% below JMFe at 6.1mmscmd (down 0.3% QoQ and up 7.8% YoY). However, PNG sales volume was in line at 188mmscm (up 2.4% QoQ/1.2%YoY), with domestic PNG sales volume at 51mmscm (up 10.8% QoQ/13.5% YoY) and Industrial/commercial PNG sales volume at 91mmscm (down 0.3% QoQ and down 4.0% YoY). 

* Reiterate BUY despite near-term concerns on account of high gas cost: We raised our FY23 EBITDA by 19% to align with 9MFY23 results; our FY24-25 estimate and TP of INR 500/share, however, remain unchanged. Despite near-term headwinds to margins due to the hike in domestic gas price, we maintain BUY on IGL due to its: a) robust pricing power given that CNG is 20%/30% cheaper than diesel/petrol, and b) steady volume growth story based on its existing lucrative NCR market (CNG penetration in private cars is ~20%) and expansion into new, lucrative nearby cities and intercity traffic. At CMP, IGL is trading at FY24 P/E of 17.1x (3- year avg: 23.0x) and FY24P/B of 3.1x (3-year avg: 4.5x).

* Key Risks: a) further cut in domestic gas allocation; b) sustained high price for domestic gas and LNG; and c) rise in penetration of electric vehicles.

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