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Buy Indraprastha Gas Ltd For Target Rs.610

Volumes to recover as NCR unlocks; reiterate Buy

* We reiterate Buy rating on IGL with a TP of Rs610. As NCR starts to unlock, we expect quick recovery in CNG volumes. In Q4FY21, peers MGL and GGL have beaten expectations in CNG and guiding on a quick recovery ahead. We expect the same for IGL.

* With higher oil prices, CNG running cost currently is 65%/50% lower than petrol/diesel. Q3FY21 saw cars-taxi conversions jump to 8,333/month. We believe that despite return of public transport, Covid-led shift to personal mobility would not reverse entirely.  As per media reports, 54 new CNG stations of IGL were inaugurated recently. While 9MFY21 saw only 7 additions due to Covid hit, the current run-rate implies that the company is back to the annual rate of 50-60 additions, and it should support volumes.

* IGL’s EBITDA/scm outlook is also stable with listed peers expanding their margins by 20- 35% in FY21. BPCL divestment-open offer issue is an overhang though BPCL’s management has stated that discussions are on with SEBI and Govt for an exemption.

CNG demand to pick up as NCR starts unlocking: IGL’s Q1FY22 volumes were hit due to second wave lockdown (up to 30-35% as per our checks). However, as NCR starts to unlock, we expect IGL’s CNG volumes to recover. Based on peers MGL and Gujarat Gas’ Q4FY21 results, CNG recovery was better than expected, and IGL also indicated earlier of 5-10% yoy volume growth (7% overall growth expected by us). With continuous hikes in petrol/diesel prices, CNG is currently 65%/35% cheaper and conversions should be healthy. We believe that despite resumption of public transport, the shift to personal mobility should not reverse entirely due to caution against a third wave. Among other segments, domestic PNG has been recording strong growth, while industrial should be supported by polluting fuels ban in the NCR despite higher LNG prices. We hence expect IGL to re-enter double-digit volume growth trajectory (adjusted for the FY21 base effect). IGL has reportedly added 54 CNG stations – in line with annual trends seen in last two years.

Margin scenario stable, HCG transfer and bus additions triggers: IGL’s EBITDA/scm outlook is stable with management guiding for Rs8/scm+ and Q3 recording Rs8.7. Listed peers have seen margin expansion between 20% and 35% in FY21. Despite an expected increase in domestic gas prices in H2FY22, we believe IGL would be able to pass on it given attractive CNG economics and relatively lower retail margins than listed peers. The transfer of Haryana City Gas (HCG)’s Gurugram asset is also expected going ahead, and it should lead to immediate margin boost as currently only Rs2/scm of gross margin accrues in trading volumes. Around 1,000 buses are also expected to be added to the Delhi fleet within a year.

Valuation: We value IGL using DCF-SOTP with a consol. FY23 target PE multiple of 22x.

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