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Wading through the perfect storm; maintain Buy

* IGL has faced multiple headwinds, including rising APM gas prices and shortfall, which led to margin concerns. Aggressive RSP hikes, in response, have led to worries about CNG economics and demand outlook amid EV-led developments in Delhi.

* Q4FY22 results were largely stable with 14% yoy volume growth, despite a ~Rs15/kg CNG RSP hike since Oct’21 and omicron. EBITDA/scm also held up at Rs7.2. Management’s guidance of a 3-year volume CAGR of 13% and Rs7-8/scm EBITDA is also reassuring.

* The newly launched guidelines and pooled gas raise commodity risks in sourcing, though our bear case of sourced gas linked 100% to oil (term LNG) implies 30% CNG savings to petrol. Diesel usage is already restricted in NCR. We believe a viable case for CNG exists.

* We retain our FY23E/FY24E EPS but lower our long term volumes and terminal growth rate in DCF, and raise CoE. We cut the TP by 30% to Rs450/sh, but maintain Buy. Correction in global gas prices (crude being stable) and volume strength are upside risks.

Expect to achieve double-digit 3-year volume CAGR; though building slowdown over long term: IGL’s management has maintained its 13% volume CAGR guidance during FY22- 25, with core Delhi growing at 6-7%. Our segment-wise vehicle parc model for Delhi implies that this is achievable and that robust growth in Noida-Ghaziabad and Gurugram is also acceptable owing to their overall rapid development as satellites. EV-related risks in Delhi, like mandatory registration for app-based cabs and vehicle age limits, would not hold in these satellites as they are located in different states. DTC buses and auto-rickshaw population can fall drastically but offset by growth in CNG cabs, LGVs and private vehicles. The I/C PNG segment should also keep growing as polluting fuel bans are expanded around NCR. IGL also expects Ajmer and Muzaffarnagar to be sizeable GAs, driven both by IPNG and CNG.

New pooled gas pricing exposes IGL to multiple benchmarks, but CNG viability to exist: New pooled gas now puts multiple benchmarks (US, NBP, term LNG, spot LNG, naphtha, FO, etc) in the mix, which lowers visibility on gas costs. This could also result in material margin volatility between periods. Although, in reality, the govt should have diverted APM gas from other sectors as per the priority policy (CGD on top). Still, the APM gas price hike to double digits in H2FY23 would again create the same issue of rising cost pressure for players. Hence, there is no permanent solution. We, however, believe as CNG/DPNG competes with crude derivatives like petrol, diesel and LPG, pooled gas should be connected to oil-linked benchmarks (like term LNG) to maintain parity and taxation should be the arbitrage tool to promote gas. Our calculation suggests, at current Brent of USD110/bbl and normalized GRMs, CNG would remain viable amid a rapidly expanding eco-system in the country. We build in Rs7.5-8.2 EBITDA/scm in our explicit DCF forecasts, up to FY35.

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