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Exceeding expectations on EBITDA/scm

IGL’s revenue grew 67% YoY & 4% QoQ to Rs37.1bn (1% below our estimate). Revenue growth is backed by higher price realization (58% YoY) & volume growth of 6% YoY to 8.1mmscmd (2% below our estimate). EBITDA declined by 9% YoY & 19% QoQ to 4.3bn (14% above our estimate). Fall in EBITDA on account of (1) increase in APM gas price and (2) insufficient CNG/PNG (D) price hikes. IGL posted EBITDA/scm of Rs5.7 (above our Rs5) vs. Rs6.7 in 3QFY22. PAT declined 10% YoY and 33% QoQ to Rs2.8bn (3% below our estimates). Board declared an interim dividend of Rs3/share (implies ~1% yield). In long run, IGL is expected to benefit from (1) new geographical areas will contribute 18% to projected volume growth; and (2) CNG vehicle addition given Auto OEMs are launching CNG variants in PV and CV segments; Thus, we expect IGL to post volume CAGR of 12% over FY22-25E, while IGL’s earnings to clock 11% CAGR. We maintain BUY with a SoTP based Target Price of Rs510. EBITDA/scm to recover sharply in Q4 due to CNG price hike + falling non APM price

EBITDA/scm to recover sharply in Q4 due to CNG price hike + falling non APM price

IGL has surprised street on unitary EBITDA of Rs5.7/scm (vs. Rs5 ours), mainly due to spot LNG blending to priority segment sales at only 4% to 5% at ~US$20/mmbtu. Our calculation suggests IGL’s gross margins improved sequentially PNG (C) segment which supported unitary EBITDA. We expect IGL’s unitary EBITDA is likely to improve in Q4FY23 mainly due to 1) Rs1/kg price hike in CNG Dec’22; 2) a fall in input cost of gas/crude link LNG/spot LNG; 3) rupee appreciation; and 4) blending of RIL’s upcoming gas to priority segment volume can sharply cut input cost of gas (our estimates of Rs2/scm at ~5% blending). Along with this, propane's future Feb’23 price is at US$730/tonne (19% jump MoM) which implies a scope of gross margins improvement for PNG (I/C) segment. Based on our calculations, IGL is likely to post a unitary EBITDA of RS6.5/scm in Q4FY23.

All eyes on implementation of panel recommendations, boost to margins in FY24

IGL has surprised street on unitary EBITDA of Rs5.7/scm (vs. Rs5 ours), mainly due to spot LNG blending to priority segment sales at only 4% to 5% at ~US$20/mmbtu. Our calculation suggests IGL’s gross margins improved sequentially PNG (C) segment which supported unitary EBITDA. We expect IGL’s unitary EBITDA is likely to improve in Q4FY23 mainly due to 1) Rs1/kg price hike in CNG Dec’22; 2) a fall in input cost of gas/crude link LNG/spot LNG; 3) rupee appreciation; and 4) blending of RIL’s upcoming gas to priority segment volume can sharply cut input cost of gas (our estimates of Rs2/scm at ~5% blending). Along with this, propane's future Feb’23 price is at US$730/tonne (19% jump MoM) which implies a scope of gross margins improvement for PNG (I/C) segment. Based on our calculations, IGL is likely to post a unitary EBITDA of RS6.5/scm in Q4FY23.

All eyes on implementation of panel recommendations, boost to margins in FY24

The draft submitted by Dr. Parikh panel is under review, we expect, it to be implemented by Arp’23. If Govt. accepts the recommendation of gas price cap then the input cost will decline by US$2/mmbtu which will most likely remain in the range of US$6.7/mmbtu for the period of FY24E. This suggests a CNG/PNG domestic price cut of ~Rs10 per kg/Rs7 per scm. As guided by management, IGL will pass on partial benefits to consumers and is likely to maintain the unitary EBITDA in the range of Rs7 to Rs7.5/scm for FY24E. Hence, we maintain a unitary EBITDA of IGL to Rs7.5/scm for FY24E. Savings on the usage of CNG fuel to improve by Rs0.5/km, can lead to higher addition/conversions of CNG vehicles. The panel has also suggested the inclusion of natural gas under GST. If gas comes under the ambit of GST, IGL benefits from the input tax credit

Inexpensive valuation; Reiterate BUY

IGL’s valuation is inexpensive, as we believe the stock does not reflect the >10% volume CAGR over FY22-25E. The stock is trading at a P/E of 17.5x FY24E and EV/EBITDA of 11.3x FY24E (vs. Bloomberg’s 3-year average of 22x –PE/ 14x-EV/EBITDA). We value IGL’s standalone business at Rs444 (DCF basis), and its 50% stake in MNGL and Central UP Gas at ~Rs66 (18x of FY24E EPS). We maintain BUY & SoTP-based Target Price of Rs510.

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