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Concerns outweigh; de-rating continues

* IGL reported a miss on our EBITDA estimate, although volumes were strong both YoY and QoQ. Total volumes stood at 7.7mmscmd (+22% YoY), with CNG volumes at 5.6mmscmd (+26%) and PNG volumes at 2mmscmd.

* However, the challenges remain overwhelming for IGL:

1. A recent article suggests that the draft policy warrants cab aggregators and delivery services ensure that 5%/10% of all new 4W/2W purchases to be EVs by Mar’22. It aggressively suggests that by Mar’23, the same should rise to 25%/50%. Aggregators account for 30-40% of total CNG sales for IGL.

2. Domestic APM gas prices are expected to witness another steep hike of USD2-4/mmBtu in Apr’22, followed by another, but muted, growth in Oct’22.

3. The demand by OMCs for higher single-digit commissions on CNG sales will further test its ability to pass on the higher prices to end-consumers.

* Despite the aforementioned headwinds, we remain confident on IGL’s volume growth prospects and build in a volume growth of 10%/8% for FY23E/FY24E at 7.8 mmscmd/8.4mmscmd (unchanged), with EBITDA/scm normalizing to INR6.4-6.7 over the next two years (unchanged).

* The stock has corrected 14% since our previous report in Jan’22 on the back of the aforementioned concerns. Despite the same, on a one year forward P/E basis, the company trades at a 15% premium to its long term average of 19x. We maintain our Neutral rating.

Volumes in line; margin misses our estimate

* Total volumes were in line with our estimate at 7.7mmscmd (up 22% YoY and 6% QoQ) – 6% higher than its previous peak of 7.2mmscmd.

* CNG volumes at 5.63mmscmd (up 26% YoY and 6% QoQ).  PNG volumes at 2.02mmscmd (up 14% YoY and 5% QoQ).

* EBITDA/scm stood at INR6.7 (est. INR7.5, v/s INR8 in 2QFY22). Gross margin stood at INR11.8/scm (v/s INR13.6 in 2QFY22). Opex came in at INR5.1/scm (v/s INR5.6 in 2QFY22 and pre-COVID level of INR5.1).

* EBITDA stood at INR4.7b (down 6% YoY and 11% QoQ), with PAT at INR3.1b.

* IGL’s share in CUGL and MNGL added INR662m to its consolidated profit (up 41% YoY and 24% QoQ) in 3QFY22.

* EBITDA rose 39% YoY to INR13.9b, with an EBITDA/scm of INR7.5 (flat YoY). PAT stood at INR9.5b in 9MFY22

* Growth in EBITDA was led by volumes, which rose 40% YoY to 6.7mmscmd, with CNG/PNG at 4.9mmscmd/1.9mmscmd (up 46%/26% YoY).

* IGL’s share in CUGL and MNGL added INR1.5b to its consolidated profit (+88% YoY).

Valuation and view – maintain Neutral

* IGL could increase its sales volume from new areas such as Rewari, Karnal, and Muzzafarnagar; Haryana City Gas; and the newly awarded GAs in the 10th round — a) Kaithal (Haryana), (b) Ajmer, Pali, and Rajsamand (Rajasthan), and c) Kanpur, Fatehpur, and Hamirpur (Uttar Pradesh).

* However, the introduction of EVs could dent CNG demand over the long term, which is well acknowledged by the company as well, and so it plans to set up 50 EV battery swapping stations. Its entry into new ventures (along with LCNG stations) will ultimately result in margin dilution for CGDs.

* Oil Marketing Companies (OMCs) have been demanding a doubling of commissions for sale of CNG from their premises.

* We revise down our FY22E EPS by 7% on the back of an underperformance in 3QFY22. The stock trades at 21x/17x FY24E standalone/consolidated EPS. We value the stock at 20x FY24E standalone EPS and add value of its investments to arrive at our TP of INR450. We maintain our Neutral rating on the stock. Sustainability of Brent price at current levels presents an upside risk to our call in terms of both margin and volumes.

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