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Expect strong volume growth trajectory, going ahead

About the stock: Indraprastha Gas (IGL) is one of India’s largest city gas distribution companies and primarily operates in the NCT of Delhi. As per FY22 AR, the company has 711 CNG stations and provided PNG connections to ~20 lakh households and 7715 commercial & industrial consumers.

* CNG sales contribute 75% of its total sales volume

* Overall, sales volume grew at ~9% CAGR in FY18-23

Q4FY23 Results: IGL reported Q4FY23 results that were marginally higher than estimates on the profitability front.

* Revenue grew 53% YoY to | 3687.2 crore due to higher realisation as well as volume, in line with I-direct estimate of | 3742 crore. Sales volume grew 6.6% YoY to 8.25 mmscmd

* Gross margin was down 6% YoY to | 11.8/scm (I-direct estimate: | 12.8/scm). EBITDA was at | 466.3 crore, down 6.8% YoY (up 8.8% QOQ) against I-direct estimate of | 495 crore

* PAT came in at | 329.8 crore, down ~8.8% YoY, up 19% QoQ, marginally higher than I-direct estimate of | 312 crore

What should investors do? IGL plans to achieve sales volume growth of 1 mmscmd every year in FY24 and FY25. On the sourcing front, domestic gas prices have been revised from US$8.57/mmbtu to US$6.5/mmbtu, which has brought down the procurement cost and the company passed on the benefit to customers by reducing CNG and PNG prices. Along with this, spot LNG price have also further softened to ~US$12/mmbtu from US$17/mmbtu seen in the previous quarter

* We maintain our BUY rating on the stock

Target Price and Valuation: We value IGL at | 590 (standalone at | 540 i.e. ~21x P/E on FY25E EPS and investments at | 50 per share).

Key triggers for future price performance:

* Continued capex and presence in new geographical areas to improve volume growth

* IGL will continue to benefit from stricter environmental regulations in NCR and India’s aim to increase the share of natural gas in the energy mix

* Gas sourcing costs will be key monitorable in the near term

Alternate Stock Idea: Apart from IGL, in our oil & gas coverage we also like MGL.

* Mahanagar Gas (MGL) is a city gas distribution company and operates in Mumbai, its adjoining areas and Raigad district, Maharashtra

* The company has historically reported high gross margins and return ratios

* BUY with a target price of | 1300

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