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Surge in gas cost & third wave risks to outlook

Indraprastha Gas’ (IGL) Q1FY22 standalone EPS was up 7.7x YoY on a low base driven by surge in margins and volumes, but down 26% QoQ due to lower volumes on lockdowns. Consolidated Q1 EPS was up 7.9x YoY with share of profit of associates up 5.7x YoY. We keep our estimates unchanged, but downside to both volumes and margins is not ruled out.

To achieve our FY22E estimate, volumes in rest of the year need to be at 6.7mmscmd; this is near pre-covid peak volume and may be tough to achieve in any case, but more so if there is a third wave. Q1 margin is slightly below our FY22E estimate and a modest fall appears likely in Q2. Margins would depend on ability to pass on likely 58% rise in APM gas price in H2FY22E and further 75-23% in H1-H2FY23E. Retain REDUCE.

* Q1FY22 EPS up 7.7x YoY on a low base; down 26% QoQ hit by volume fall: Q1FY22 EPS was up 7.7x YoY on a low base due to 2.3x YoY rise in EBITDA margin to Rs7.9/scm, and 2x YoY rise in volumes to 5.3mmscmd. However, Q1 EPS was down 26% QoQ, hit by 22% QoQ fall in volumes and 2% QoQ contraction in EBITDA margin. CNG volumes were down 24% QoQ (up 2.3x YoY) due to lockdown induced by covid second wave.

Industrial and commercial (I&C) volumes were down 17% QoQ (up 81% YoY) and PNG domestic volumes declined 2% QoQ (rose 3% YoY). The YoY surge in EBITDA margin was due to gas cost and opex fall by Rs0.5-3.8/scm YoY and realisation rise of Rs0.2/scm YoY (Rs0.7/scm QoQ) due to CNG and PNG price hikes of Rs0.51-0.91/scm w.e.f. 2-Mar’21.

* Q1 margin 2% below our FY22E estimate; Q2 may be down QoQ & H2, and FY23E estimate to depend on if cost rise is passed on: IGL’s Q1 margin at Rs7.9/scm is 1.6% below our FY22E estimate. Q2 margins may be modestly down QoQ as hit to margins on industrial and commercial (I&C) volumes due to Rasgas and spot LNG price surge is only likely to be partly made up by margin rise on CNG on price hike of Rs0.66/scm on 8-Jul’21. Margins would depend mainly on whether IGL can fully pass on the likely 58% HoH rise in APM gas price to US$3.15/mmbtu in H2FY22E and further 75% and 23% HoH rise to US$5.5-6.8/mmbtu in H1-H2FY23E.

* Downside to FY22E volumes, too: To be in line with our FY22E estimate, IGL’s volumes in rest of FY22E need to be at 6.7mmscmd, which is at pre-covid peak of 6.7mmscmd in Q3FY20 and 1.5% below peak of 6.8mmscmd in Q4FY21. These volumes are tough to achieve in any case, but would be impossible if there is a third wave of covid that leads to fresh lockdowns.

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