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Volatile quarter; outlook hinges on Kirit Parikh panel’s revised pricing

IGL’s Q2FY23 operating numbers were weaker than estimated (albeit on expected lines due to volatility in the gas mix as well as higher gas costs during the quarter). Volume at 8.09mmscmd was in-line, but gross margin saw a 5% miss as unit gas cost was 4% above our estimate. EBITDA/scm, hence, came in at a 7% miss at Rs7.1, and overall EBITDA was 6% lower than our estimate. However, PAT was in-line, led by higher Other Income (on dividend from CUGL-MNGL). IGL’s near-term outlook is contingent on the Kirit Parikh Committee’s recommendations, with expectations of rationalisation in the domestic gas-pricing formula to a level where CGD economics remain reasonably attractive for conversions and a >Rs7/scm EBITDA is sustainable. IGL has maintained its target of ~10mmscmd volume by FY25, though current margins are weak on limited price hikes post the October APM gas-price raise. We slightly reduce our FY23/24/25E earnings by 2%/5%5%, as we build-in an EBITDA/scm profile of Rs7-7.5 vs >Rs7.5 earlier. Consequently, we cut our Sep-23E DCF-based target price by 3% to Rs450/share, but maintain our BUY rating on the stock owing to valuation upside and in anticipation of a favorable pricing formula by the Parikh Committee.

Results summary: IGL’s Q2FY23 standalone EBITDA/APAT of Rs5.28/Rs4.16bn (down 15%/1% QoQ; down 1%/up 4% YoY) came in 6% below/in-line with our estimates, led by a 5% miss on unit gross margins on account of higher-than-expected gas costs. Gas sales volume rose 12% YoY/3% QoQ to 8.09mmscmd. CNG sales were 4% higher than expectations (up 4% QoQ/15% YoY), while PNG sales missed by 3% (up 3% each QoQ/YoY). Domestic/I-C PNG volume rose 6%/3% QoQ, while trading volume was largely flat. Gross margin fell 11% QoQ to Rs12.7/scm, with net realization up 2% and unit gas-cost rising by 16%. Unit opex was 2% lower than our expectation at Rs5.6/scm (down 1% QoQ/flat YoY). Hence, EBITDA/scm was down 18% QoQ/11% YoY at Rs7.1. IGL’s CNG realization rose 6% QoQ; PNG realization was also up, by 11%. Depreciation increased by 7% QoQ to Rs914mn, while Other Income was up 42% YoY to Rs1.1bn (at a 25% beat). Tax rate stood at 23.4% in Q2. PAT for CUGL/MNGL rose 30% YoY/15% QoQ to Rs1.4bn. H1FY23 capex was ~Rs6.7bn. What we liked: Steady volume performance; CUGL-MNGL reporting strong numbers; opex under control. What we did not like: Rise in gas costs affecting margins.

Management guidance: IGL would incur Rs16bn of capex in FY23, with plans to add 125 CNG stations. Gas volume target for FY23 is 8-8.5mmscmd, and is ~10mmscmd for FY25. Sixty EV battery swapping stations would be commissioned in FY23. IGL is mulling acquisitions and diversification. It has commenced sales from MRUs and one LNG station has been commissioned. Current margins are weak, as the CNG RSP lift was much lower than required. Company awaits the Parikh Committee’s report, before taking further steps in pricing. Current APM pricing is challenging for the sector. IGL aspires for >Rs7/scm EBITDA.

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