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In-line results; real challenge from APM and EVs ahead

* Indraprastha Gas (IGL) reported EBITDA in line with estimate, with volumes marginally below estimate (-5% est., at 5.32mmscmd). On the other hand, EBITDA/scm was marginally better than estimated (+5% est., at INR7.9).

* IGL reported flat EBITDA margins QoQ, while peers MAHGL and GUJGA reported margin expansion QoQ on account of a higher mix of spot LNG. On the other hand, a much lower spot LNG mix resulted in flat QoQ EBITDA margins for IGL. We reiterate that margins of CGDs with a higher mix of CNG/PNG households would be severely pressured by an expected (60%) rise in AGM gas prices in 2HFY22.

* As discussed in our report, CGDs: CNG segment faces the steepest uphill battle ever, CGDs would have to take a CNG price hike of INR4/kg (excluding taxes) to maintain margins around current levels. That said, OMCs are also asking for higher single digit commissions for selling CNG at their outlets, which would further challenge the sustainability of margins.

* The aforementioned factors would be more critical, especially at a time when Brent prices have started cooling off their peak, thereby reducing the attractiveness of CNG against petrol/diesel.

* We remain optimistic on the company’s volume growth prospects. We build in an aggressive CAGR of ~15% over FY22–24E, with margins normalizing at around INR6.5/scm over FY23–24E (v/s INR7.4–7.6 over FY21–22E). Valuing the company at 24x Sep’23E EPS, we arrive at Target Price of INR510/share and do not factor in any upside at CMP.

* Furthermore, the risk to our call is from the evolution of EV infrastructure, which is seeing huge impetus from the central and state governments in India. The recently revised EV policy for Delhi is directed largely at 2Ws and 3Ws, thus impacting 3W CNG volumes (which form ~10% of total volumes). Also, the management expects EV buses to ply on the roads of Delhi over the next 2–3 years, challenging ~45% of the total volumes currently occupied by CNG buses.

* The introduction of EVs could dent CNG demand over the long term, which is well-acknowledged by the company as well (plans to set up 50 EV battery swapping stations). Entering into such new ventures (along with LCNG stations) would ultimately result in margin dilution for CGD companies. Highlighting an EPS sensitivity of 8% for every INR0.5/scm change in EBITDA, we maintain Neutral on the stock.

EBITDA in line with estimates

* Total volumes were 5% below our estimate at 5.32mmscmd (-22% QoQ).

* CNG volumes stood at 3.65mmscmd (-25% QoQ).

* PNG volumes came in at 1.67mmscmd (-15% QoQ).

* EBITDA was in-line at INR3.8b (-23% QoQ). EBITDA/scm was INR7.9/scm (v/s our est. of INR7.5 and INR8 in 4QFY21).

* The gross margin expanded to INR14.4/scm (+INR0.75/scm QoQ) owing to an increase in realization, while gas costs remained flat QoQ.

* Opex increased to INR6.5/scm (+0.9/scm QoQ) on lower volumes.

* PAT stood at INR2.4b (-26% QoQ).

Valuation and view – maintain Neutral

* IGL could increase its sales volumes from new areas such as Rewari, Karnal, and Muzaffarnagar; 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). As per the company’s recent guidance, it targets volumes of ~10mmscmd by FY24 (which would be a tall ask of ~23% CAGR over the next two years).

* The stock trades at around 29x/25x FY23E SA/consol. EPS. On a one-year forward PE basis, the company trades at a 68% premium to its long-term average of 18.6x. Maintain Neutral.

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