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Strong growth visible; maintaining a Buy on attractive valuations

Indraprastha Gas was hit by lower CNG volume growth in Q3 due to higher gas prices. The gross margin was hit by higher APM gas prices, which the company was unable to pass on to maintain volumes. The company was expecting the Kirit Parikh Committee to reduce APM gas prices; this did not come through. It hiked prices in Oct’22 (from Rs75.61 kg to Rs78.61) and in Dec’22 (to Rs79.56), which, with falling crude and spot LNG prices, would improve spreads in Q4. We retain a Buy rating on the stock with a TP of Rs 570, at 18x FY25e EPS.

Weak performance on lower volumes. The Q3 FY23 Rs4.3bn EBITDA (in line with consensus) was down 8.8% y/y, 18.8% q/q, while the Rs2.8bn PAT was down 9.8% y/y, 33.1% q/q, less than the consensus’ Rs3bn, hurt by lower spreads and higher tax (28.5%). Volumes peaked at 8.12mmscmd (9M FY23 8.03mmscmd), up 6.1% y/y, flat q/q. CNG volumes were 6.07mmscmd (9M FY23 6.03mmscmd), up 7.8% y/y, flat q/q. The gross margin was Rs11.34/scm down 3.9% y/y, 10.7% q/q. The EBITDA spread at Rs5.74/scm (at an 11-quarter low) was down 14% y/y, 19.1% q/q, on higher APM prices which the company was unable to pass on. The Board declared an interim dividend of Rs3/sh. The contribution of PAT (from CUG and MNG, 50% each) Rs558m, 15.8% y/y, 19.9% q/q.

Outlook, Valuation. We expect EBITDA spreads of Rs7.7/scm in FY24 and Rs7.8 in FY25. We prefer Indraprastha Gas to Maharashtra Gas and Gujarat Gas and believe it to benefit from possible lower gas prices. The stock trades at 16.3x/14.9x FY24e/FY25e PER. We maintain a Buy, with a target of Rs570 (Rs65 from MNG, Rs20 from CUG). Risks: Slower volume growth, margin compression on lower differences vs alternatives, regulatory changes, higher LNG prices, slower infrastructure rollout, competition from alternative fuels like electricity for vehicles.

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