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Rewarding 2QFY22, although risk-reward unfavorable

* Indraprastha Gas (IGL) reported EBITDA ahead of our estimates. This was led by better-than-estimated volumes (CNG volumes now 8% above pre-COVID peak) and higher-than-estimated EBITDA/scm (INR8, primarily supported by a CNG price hike of INR1.8/kg during the quarter).

* With an overwhelming quarterly performance, the challenges ahead for IGL are overwhelming as well:

The recent excise duty cut on petrol and diesel has reduced savings of CNG to liquid fuels.  

As highlighted in our report, Warming up to the winter ahead… Oil price rally may strengthen, although temporarily, we maintain our stance on the normalization of Brent prices by end-FY22. Falling Brent prices would lower savings, thereby impacting volume growth.

2. Also, a recent article suggests the CNG Retrofitting market is impacted by a supply crunch for cylinders and components. This comes at a time when demand for the same saw huge turnaround amid higher alternate fuel prices. We believe this would slow the estimated higher conversion rate and impact medium-term volume growth.

3. As per our calculations, the APM gas price revision for 1HFY23 could come in at USD5.5–6/mmbtu – another steep hike post the one in Oct’21 – with the likelihood of a further price increase in 2HFY23.

4. Demand by OMCs for higher single digit commissions on CNG sales would further test the ability to pass on the prices to end consumers.

5. The management expects EV buses to ply on Delhi roads over the next 2–3 years, challenging volumes growth.

* Despite the aforementioned headwinds curbing optimism, we remain confident about IGL’s near-term volumes growth prospects. Volume growth of 10%/8% is built in for FY23/FY24E at 7.7/8.4mmscmd (unchanged), with EBITDA/scm normalization at INR6.5–6.7 over the same period (unchanged). * The continued underperformance of the stock (by ~25% to the Nifty in the last six months) comes on the back of the aforementioned concerns. Despite the same, on a one-year forward PE basis, the company trades at a 47% premium to its long-term average of 19x. We maintain a Neutral rating.

Volumes and margins ahead of estimates

* Total volumes came in 14% above our estimate to 7.24mmscmd (+32% YoY, +36% QoQ) – 6% higher than the previous peak of 6.8mmscmd.

* CNG volumes were 5.3mmscmd (+45% QoQ), 8% above the pre-COVID peak. PNG volumes came in at 1.94mmscmd (+16% QoQ).

* EBITDA/scm came in at INR8 (v/s our est. of INR7 and INR7.9 in 1QFY22) on the back of lower opex.

* The gross margin came in at INR13.6/scm (v/s INR14.4 in 1QFY22), in line with our estimate of INR13.4. Opex stood at INR5.6/scm (v/s INR6.5 in 1QFY22 and pre-COVID levels of INR5.2).

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