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Admirable resilience

Indraprastha Gas (IGL) has delivered a resilient 1.8% YoY/6.6% QoQ improvement in EBITDA to Rs5bn and a 9/17% YoY/QoQ growth in net earnings in Q4 to Rs3.6bn despite a challenging quarter from a gas-cost perspective. Blended gas costs of Rs29.2/scm are probably the highest ever for the company, rising 87% YoY and 11% QoQ, driven by the record high spot LNG prices and the blending of ~18% of spot LNG in priority sector volumes. IGL has been aggressive in protecting its margins though, with blended sales realisations of Rs34.5/scm also rising 37% YoY. FY22 EBITDA of Rs18.8bn and PAT of Rs13.1bn have grown a robust 27% and 31% YoY, respectively. On top of the US$3.6/mmbtu increase in domestic gas cost from 1.4.22, another US$3/mmbtu increase estimated in the same from 1.10.22 are stress factors, proactive and timely pricing decisions by IGL to protect margins are encouraging. Also, with the new uniform base price (UBP) of US$8/mmbtu, implying a US$1.5-2/mmbtu reduction to overall priority sector costs, we see little downside risks to our assumptions of Rs7.5/mmbtu EBITDA/scm over FY23/24E. Economics of usage, environmental compulsions and growing addressable market will continue to support stellar volume growth over FY22-FY24E. Reiterate BUY with a revised TP of Rs540/sh, 39% upside from here.

Stellar volume growth: Volumes of 7.7mmscmd grew 13.5% YoY with 16%, 13% and 3.4% YoY growth in CNG, domestic and Industrial/Commercial volumes for Q4, respectively. The sharply higher sales prices across segments seem to have had limited impact on demand and the management guidance for 11-12% sustainable growth overall for FY23-24E remains intact. We build ~11% CAGR over FY22-24E in our estimates driven by i) favourable regulations, ii) economics of usage, iii) imminent allocation of Gurugram CGD and iv) growing penetration.

Margins improve QoQ, we expect stronger trends: Despite 87% YoY growth in blended gas costs, IGL has managed to deliver EBITDA/scm of Rs7.2/scm in Q4, implying only a 10% YoY decline. With multiple price increases since April, reduction in spot LNG prices and the new pooled gas price applicable from May 16th , we expect EBITDA/scm to sustain at Rs7.5/scm levels over FY23-24E

Strong prospects, reiterate BUY: The recent 18% dip in the stock price over the last three months belies the long-term prospects in favour of the near-term stress on margins. We see current valuations of 16x FY24E P/E / 10x EV/EBITDA offering excellent risk-reward. Our DCF-based valuation (FY23E/FY24E average) of Rs540/sh implies a material 39% upside from CMP. Reiterate BUY.

Key risks: Inability to pass on domestic gas price increases, a contra movement in petrol/diesel/LPG prices and delay in Gurugram CGD allocation.

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