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Volume beat expectations, but weaker EBITDA spread dampens the earnings

Indraprastha Gas Limited (IGL) reported an underwhelming Q2FY25 performance, with Rs5.4bn EBITDA being lower 18.4% YoY and 7.9% QoQ. The Rs4.3bn PAT demonstrated 19.4% YoY decline but experienced a 7.4% QoQ increase. Despite beating volume expectations, the realizations were lower than estimated and elevated gas cost led to eroding EBITDA margins. The stock witnessing a sharp correction, we upgrade our rating to ADD with a revised target price of Rs 474/share (earlier Rs 533).

Result Highlights

Performance: The Rs5.4bn EBITDA (below our and consensus estimates on weaker EBITDA spreads) was down 18.4% YoY and 7.9% QoQ, while the Rs4.3bn PAT was down 19.4% YoY but up 7.4% QoQ, below our estimates of Rs 4.6bn. Overall lower-than-expected EBITDA spreads but outpaced volumes growth on track to meet the management’s target exit of ~9.5mmsmcd by Q4FY25.

* Volumes at 9.02mmscmd was up 8.6% YoY and 4.5% QoQ. CNG volumes were at 6.78mmscmd (our est. 6.52), up 8.5% YoY, 5.1% QoQ. D-PNG volumes were at 0.65mmscmd, up 12.4% YoY but down 3.2% QoQ. Industrial and commercial sales were 1.09mmscmd, up 11.4% YoY and 7.9% QoQ. Haryana sale volumes were 0.50msmcmd, stable at peak levels.

* Gross realization at Rs44.6/scm, down 1.6% YoY and 0.6% QoQ. The CNG price was increased by the company on 22-Jun’24 by Rs 1/kg to Rs75.09/kg supporting gross realizations. The gross realizations are lower than our estimates possibly on higher discounts in CNG segment.

* The gross margin was Rs11.94/scm, down 15.4% YoY and 9.7% QoQ. The YoY decrease was due to lower realizations, decreased share of APM, also higher share of sourcing HP/HT and term which are more expensive versus APM. Opex, at Rs5.48/scm, was flat YoY and down 5.8% QoQ. The EBITDA spread, at Rs6.46/scm, was down 24.9% YoY and 12.8% QoQ (lower than our estimate of 7.65) on lower relations and higher than estimated gas cost.

* The other income at Rs 1,493mn was up 11.5% YoY and up 105.5% QoQ on dividend income from its subsidiaries – MNGL and CUGL. JV contribution of CUGL and MNGL to IGL’s PAT was Rs905.2mn in Q2, flat YoY and up 12.1% sequentially.

* H1FY25 performance: EBITDA/PAT was at Rs 11.2/8.3bn vs Rs 13/9.7bn last year. The volumes at 8.83mmscmd (vs 8.25 last year), of which CNG was at 6.62mmscmd vs 6.21. The EBITDA spread was at Rs 6.92/scm vs 8.60 last year. The OCF is higher at Rs9.35bn vs Rs8.67 in H1FY24.

* The company has declared an interim dividend of Rs 5.5/shr, ~46% dividend payout on H1FY25 earnings, the record date set at 12-Nov’24.

Valuation

We expect an 6.9% volume CAGR over FY24-FY27 with a spread of Rs6.7–6.9/scm. Delhi is growing at 1-2% annually as the volumes have been impacted by decrease in DTC buses volumes. GautamBudh Nagar and Ghaziabad growing by 10-20% and areas outside these are growing in the range of 10-20% while seeing exponential growth on lower bases. EVs are planned to take the place of the retired DTC buses (which contributes ~18% to the volumes) and it would have a negative impact on IGL volumes. The stock trades at 17.7x/15.9x/14.9 FY25e/26e/27e PER and at 14.1x/12.7x/11.9x excluding investments in CUGL and MNGL. We upgrade our rating to ADD on sharp correction in the stock price, valuing the stock on a PER basis, assigning a 15x multiple with a revised target of Rs474 (incl. value from investments in MNGL, at Rs63/sh and, in CUGL, atRs21/sh).

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