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Margins at record high, but volumes down YoY

Indraprastha Gas’ (IGL) Q3FY21 standalone EPS was up 18% YoY despite fall in volumes, due to surge in margins to a new high as fall in gas cost was not fully passed on. 9M standalone recurring EPS was down 18% YoY despite 17% YoY rise in margin, hit by 26% YoY volume fall. Consolidated Q3 EPS rise was steeper than standalone at 28% due to 60% YoY surge in share of profit of associates. We have raised FY21E volume estimate by 2% and share of profit from associates to factor-in the surprise in 9M leading to 4% upgrade in FY21E EPS. We have raised FY22E-FY24E EBITDA margin to Rs8.0/scm vs Rs7.0-6.5/scm earlier leading to upgrade in FY22E EPS by 18% and target price by 31% to Rs497 (11% downside). Upgrade to REDUCE from Sell.

* Q3FY21 EPS up 18% YoY on margin surge despite volume fall: Q3FY21 standalone EPS was up 18% YoY as surge in EBITDA margin to record high of Rs8.7/scm (up 37% YoY and 8% QoQ) made up for decline in sales volumes by 6% YoY to 6.3mmscmd. The surge in EBITDA margin was due to gas cost fall by Rs4.7/scm YoY being steeper than realisation fall and opex rise of Rs2.0-0.5/scm YoY; domestic gas cost was cut w.e.f. 1-Oct’20 by Rs1.8/scm while IGL cut CNG price by just Rs0.7/scm. CNG volumes were down 9% YoY, but industrial and domestic PNG volumes were up 2-14% YoY respectively.

* Raise FY21E-FY22E EPS and target price: We have raised FY21E volumes by 2% to 5.3mmscmd and share of profit from associates leading to upgrade in FY21E EPS by 4%. We have raised FY22E-FY24E margin to Rs8/scm vs Rs7.0-6.5/scm earlier, Rs7.5/scm in 9MFY21, Rs8/scm in FY21E and Rs5.8-6.4/scm in FY18- FY20. This has led to upgrade in FY22E EPS by 18% and target price by 31% to Rs497 (11% downside). We upgrade our rating on IGL to REDUCE from Sell.

* High margins assumed to continue; competition, or GoI order to pass on gas cost fall, are risks: We assume high margins to continue as the regulation allowing competition will take time to implement and may fail to have significant impact as, in its present form and interpretation, it limits OMCs’ ability to compete. Margins may be significantly lower if competition has more impact than expected, or GoI requires fall in gas prices since Dec’19 to be passed on. In Feb’14, when CNG was given top priority for access to domestic gas, GoI issued guidelines requiring gas cost fall to be fully passed on if CGD players wanted continued access to cheap domestic gas.

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