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Long term outlook positive; costs to moderate

Indraprastha Gas Ltd. (IGL), jointly promoted by Bharat Petroleum Corporation and Gas Authority of India, processes and distributes compressed natural gas (CNG) and liquefied petroleum gas (LPG).

• In Q3FY23, its standalone revenue grew to Rs. 3,711cr (+67.5% YoY; +4.4% QoQ), supported by sustained volume increase of 6.1% YoY to 747mn standard cubic metres (SCM).

• EBITDA declined 8.8% YoY to Rs. 428cr. Also, EBITDA margin deteriorated 970bps to 11.5%, pressured by the sdcontinued high purchase price of natural gas. Profit after tax (PAT) fell 9.8% YoY as well, to Rs. 278cr.

• Going forward, we expect the company’s operational and financial performances to stabilise as gas purchase cost is expected to normalise because of policy support. Also, robust growth in sales volume is likely as demand increases. We, therefore, reiterate a BUY rating on the stock, with a rolled forward target price (TP) of Rs. 504 based on SOTP methodology.

Increase in revenue across segments supported growth

IGL’s Q3FY23 standalone revenue grew 67.5% YoY to Rs. 3,711cr (+4.4% QoQ), supported by overall sales volume growth of 6.1% YoY – average daily sales volume rose to 8.12mn SCM from 7.66mn SCM. The company posted growth across all business segments; the CNG business’ revenue rose 73.0% YoY to Rs. 2,674cr., corresponding to 7.8% YoY growth in volume to 559mn SCM. Piped natural gas (PNG) revenue grew 54.7% YoY to Rs 1,020cr with surge in volume of 1.1% YoY to 188mn SCM. Under PNG, sales volume in the domestic segment soared to 51.2mn SCM, while, in terms of industrial/commercial, volume picked up 91.5mn SCM.

Margins impacted by surge in gas costs

In Q3FY23, gross profit rose a mere 1.9% YoY to Rs. 847cr, while gross margin shrank a sharp 14.7% YoY to 22.8%, primarily due to sustained increase in purchase cost of natural gas. Consequently, EBITDA margin contracted to 11.5%. Further, PAT fell 9.8% YoY to Rs. 278cr from Rs. 309cr in Q3FY22. Also, PAT margin shrunk 640bps YoY to 7.5%.

Long-term prospects remain strong

The company is projected to post robust volume growth, supported by its presence in 11 geographical areas (GAs) across four states/union territories in North India. This, along with implementation of second phase of BS6 for CNG vehicles from April 2023, is likely to propel growth. IGL is actively pursuing scaling up of CNG buses to offset losses from electric vehicles (EVs) over the near term as well. That said, we expect margins to return to the historical average levels following stabilisation of gas purchase cost and policy support such as expected implementation of Parikh Committee recommendations.

Valuation

The company has targeted volume growth of 10% during FY23-FY25. Domestic and commercial growth will continue with penetration of pipeline infrastructure in Delhi and expansion into new GAs. Also, factors such as the decline in crude oil prices, environmental regulations, focus on offsetting losses from EVs, and growing market size are likely to continue to support strong volume growth as well, as demand increases. Hence, we maintain a positive outlook for the company and reiterate our BUY rating on the stock, with a rolled forward TP of Rs. 504 based on SOTP methodology.

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