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Weak earnings driven by both lower margins and volume

IGL’s 3QFY24 standalone EBITDA was INR 5.6bn, significantly lower than JMFe/consensus of INR 6.9bn/INR 6.5bn, due to QoQ decline in margin to INR 7.2/scm (from INR 8.6/scm in 2QFY24 and vs. JMFe of INR 8.5/scm) because of higher gas cost on account of lower allocation of APM gas. Further, sales volume was 1.4% below JMFe (up only 4.4% YoY) driven by weak CNG volume. We have cut FY24 EBITDA by 7% and FY25-26 EBITDA by 3% as we have reduced our EBITDA margin to INR 8/scm for FY24 (from INR 8.5/scm) and to INR 7.7-7.9/scm for FY25-26 (from INR 7.9- 8.1/scm) to account for impact of lower APM gas allocation; our revised TP stands at INR 470 (from INR 500). However, we still maintain BUY on valuation grounds and due to IGL’s: a) decent pricing power, and b) steady volume growth story based on its existing lucrative NCR market and expansion into new, lucrative nearby cities and intercity traffic. At CMP, IGL is trading at FY25 P/E of 13.5x and FY25 P/B of 2.8x.

EBITDA margin declines to INR 7.2/scm vs. JMFe of INR 8.5/scm due to higher average gas cost on account of lower allocation of APM gas: Gross spread was lower at INR 12.9/scm vs. JMFe at INR 13.9/scm in 3QFY24 (vs. INR 14.1/scm in 2QFY24) as average cost of gas was higher at USD 10.9/mmbtu or INR 32.7 /scm vs. JMFe of USD 10.5/mmbtu (and USD 10.5/mmbtu in 2QFY24) — this seems to be primarily due to lower allocation of APM gas. Further, opex was also higher at INR5.7 /scm vs. JMFe of INR 5.4/scm (vs. INR 5.5/scm in 2QFY24). Hence, EBITDA margin was lower at INR 7.2/scm in 3QFY24 vs. JMFe of INR 8.5/scm (and vs. INR 8.6/scm in 2QFY24).

Sales volume 1.4% below JMFe (up only 4.4% YoY) driven by weak CNG volume: Sales volume at 8.5mmscmd or 780mmscm (up 2.2% QoQ and up only 4.4% YoY) was 1.4% below JMFe; this was because CNG sales volume at 582mmscm (up 1.3% QoQ and up only 4.2% YoY) was 2.6% below JMFe. However, PNG sales volume was 2.2% above JMFe at 198mmscm (up 4.8% QoQ/5.2 % YoY), with domestic PNG sales volume at 57mmscm (up 7.1% QoQ/0.8% YoY) and industrial/commercial PNG sales volume at 95mmscm (up 6% QoQ/4.4% YoY).

TP cut to INR 470 to account for lower margins; maintain BUY on valuation grounds: We have cut FY24 EBITDA by 7% and FY25-26 EBITDA by 3% as we have reduced our EBITDA margin to INR 8/scm for FY24 (from INR 8.5/scm) and to INR 7.7-7.9/scm for FY25-26 (from INR 7.9- 8.1/scm) to account for impact of lower APM gas allocation; our revised TP stands at INR 470 (from INR 500). However, we still maintain BUY on valuation grounds and due to IGL’s: a) decent pricing power given that CNG is 45%/20% cheaper than diesel/petrol, and b) steady volume growth story based on its existing lucrative NCR market (CNG penetration in private cars is 25-30%) and expansion into new, lucrative nearby cities and intercity traffic. At CMP, IGL is trading at FY25 P/E of 13.5x (3-year avg: 19.3x) and FY25 P/B of 2.8x (3-year avg: 4.4x). Key Risks: muted volume growth and margin concerns due to rise in penetration of electric vehicles and/or cut in domestic gas allocation; and sharp hike in HPHT/spot LNG gas price.

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CIN Number : L67120MH1986PLC038784