Buy Indraprastha Gas Ltd For Target Rs. 225 by Motilal Oswal Financial Services Ltd
Margin expansion ahead; valuation looks attractive
* In 4QFY25, IGL’s adj. EBITDA margin of INR4.6/scm came in below our est. of INR5/scm. Volumes stood at 9.18mmscmd, slightly lower than our est. of 9.29mmscmd. Realization increased sharply by ~INR3/scm QoQ primarily on account of a provision reversal of INR1.14b, while gas cost/opex rose by INR0.5/INR0.8 per scm QoQ, leading to ~INR1.7/scm QoQ expansion in EBITDA margin.
* We upgrade our rating on IGL to BUY considering the following factors:
* EBITDA margin bottoming out: We believe IGL’s current EBITDA margin is at the bottom, and the following factors should drive margin expansion: 1) the recent CNG price hike of INR1/INR3 on 7th Apr’25 will support margins. Moreover, with only INR1/kg price hike taken in Delhi since Jun’24, IGL could increase CNG prices further in Delhi, if necessary; and 2) raw material costs have declined in 1QFY26’td. Lower crude oil and Henry Hub index prices, coupled with INR appreciation QoQ, should reduce gas costs going forward.
* Our earnings assumptions are conservative: We build in EBITDA/scm of INR6.2/INR6.5 in FY26/FY27 vs. medium-term guidance of INR7/INR8. Further, we estimate 7% YoY volume growth in both FY26/FY27 vs. 10% YoY growth guided by management in FY26. Upside risks: 1) strong growth in new GAs (growing at 30%+ YoY), and 2) majority of the GAs now reaching EBITDA positive levels.
* Valuation at 16.9x FY26E SA P/E looks attractive: IGL currently trades slightly above its 1yr. fwd. mean – 1 S.D. P/E. However, we believe that earnings have bottomed out now. We now estimate a CAGR of 11%/9% in EBITDA/PAT over FY25-27E. We value IGL at 15x FY27E consol. P/E, and add INR44/sh as value of JVs to arrive at our TP of INR225/sh. At 2.7% FY27E dividend yield and 9% EPS growth, we believe the valuation is attractive. Hence, we upgrade our rating to BUY from Neutral.
Raw material costs set to decline; 10% YoY volume growth guided
* In the 4QFY25 earnings call, IGL’s management guided for EBITDA margin of INR6-7 per scm in the near term (till 1HFY26) and maintained its long-term EBITDA margin guidance of INR7-8 per scm. Management believes that INR appreciation, NW gas allocation, and lower R-LNG costs will support margins. Moreover, management stated that IGL could hike prices if required. IGL now has no exposure to spot LNG, which will reduce margin volatility. Additionally, the majority of its R-LNG term contracts are linked to HH prices, further enhancing stability.
* Management expects volume growth of 10% YoY in FY26, driven by expected growth of ~8%/13% in CNG/PNG volumes.
* Other key takeaways from the 4Q earnings call: 1) the company will incur a capex of INR20b p.a. in FY26/FY27, with INR13-14b to be spent on core business and the rest on solar project/other areas; 2) CNG 3Ws account for ~7-8% of IGL’s volumes; 3) MNGL’s volumes/PAT grew 19%/7% YoY in FY25; and 4) CNG conversions rose to 18k per month in FY25 from 15.5k in FY24.
Both adj. EBITDA margin and volume growth below estimates in 4Q
* Total volumes were in line with our estimate at 9.18mmscmd (our est.: 9.29mmscmd), up 5% YoY.
* Both CNG and PNG volumes came in line with estimates.
* EBITDA/scm came in above our est. at INR6. However, adjusted EBITDA/scm came in at INR4.6 (our est. INR5).
* Realization increased by ~INR3/scm QoQ, while gas cost/opex rose by INR0.5/INR0.8 per scm QoQ.
* Increase in realization (~INR1.4scm) was on account of the reversal of provisions amounting to INR1.14b, based on negotiations with OMCs w.r.t trade margins.
* Resulting EBITDA stood 20% above our estimate at INR5b (-5% YoY).
* IGL’s PAT came in 18% above our est. at INR3.5b (-9% YoY).
* In FY25, IGL’s net sales grew 7% to INR149b, while EBITDA/PAT declined 17%/16% YoY to INR19.8b/INR14.7b.
* We note that spot LNG prices were elevated, averaging USD14/mmbtu in 4Q (flat QoQ). However, spot LNG prices have corrected in 1QFY26 so far, with the current price at ~USD12/mmbtu. On 25th Nov’25, IGL implemented CNG price hikes of ~INR1.5 to INR4 per kg, which impacted ~30%-35% of the regions where IGL’s CNG business operates (excluding Delhi). Further, on 7th Arp’25, IGL increased CNG prices by INR1/INR3 per kg in Delhi/other regions.
Valuation and view
* IGL trades at 16.9x FY26E SA P/E, slightly above its 1yr. fwd. mean – 1 S.D. P/E. However, we believe that earnings have bottomed out now. We estimate EBITDA margin to improve to INR6.2/INR6.5 per scm and volumes to grow 7% YoY in FY26/FY27. Resultant EBITDA/PAT are estimated to clock a CAGR of 11%/9% over FY25-27E.
* We value IGL at 15x FY27E consol. P/E, and add INR44/sh as a value of JVs to arrive at our TP of INR225/sh. At 2.7% FY27E dividend yield and 9% EPS growth, we believe the valuation is attractive. Hence, we upgrade our rating on the stock to BUY from Neutral, with a TP of INR225.
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