Buy Indraprastha Gas Ltd for the Target Rs.250 by Motilal Oswal Financial Services Ltd
Steady 1Q performance
* In 1QFY26, IGL’s EBITDA margin of INR6.2/scm came in below our est. of INR6.8/scm. Volumes at 9.13mmscmd stood in line with our estimate. Adj. realization increased by ~INR0.7/scm QoQ, while gas cost/opex declined by INR0.4/INR0.5 per scm QoQ. Resulting EBITDA stood 10% below our estimate at INR5.1b (-12% YoY).
* Our earnings assumptions are conservative: We build in EBITDA/scm of INR6.3/INR6.5 in FY26/FY27 vs. medium-term guidance of INR7-8. Further, we estimate 7% YoY volume growth in both FY26/FY27 vs. 10% YoY growth guided by management. Upside risks: 1) strong growth in new GAs (growing at 30%+ YoY), 2) majority of the GAs now reaching EBITDA positive levels, and 3) margin expansion led by change in zonal tariff regulation.
* Valuation at 15.9x FY27E SA P/E looks attractive: IGL currently trades at par with 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%/10% in EBITDA/PAT over FY25-27E. We value IGL at 16x FY27E SA P/E, and add INR48/sh as value of JVs to arrive at our TP of INR250/sh. At 2.6% FY27E dividend yield and 10% EPS growth, we believe the valuation is attractive. Reiterate BUY.
Guidance maintained; Margin expansion ahead
* In the 1QFY26 earnings call, IGL’s management maintained its EBITDA margin guidance of INR7-8 per scm in the long term. Management believes that the change in taxation in Rajasthan and UP and the change in zonal tariff regulation will support margins. Moreover, management stated that IGL could hike prices if required. IGL 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 an exit rate of 10mmscmd in FY26 and maintains its long-term volume growth target of 10% YoY, driven by strong CNG PV sales, development of CNG infrastructure (102 CNG stations to be added in FY26) and augmentation of existing stations.
* Other key takeaways from the 1Q earnings call: 1) The company will incur a core capex of INR14-15b p.a. in FY26/FY27 (INR2.9b spent in 1Q). 2) CNG volume grew 8-9% YoY (excluding the impact of DTC buses), and Industrial/Commercial PNG volumes increased by 8%/14% YoY; 3) The 0.5mmscmd YoY increase in volumes for IGL was driven by a regional split of ~15%/45%/40% from Delhi/Noida, Ghaziabad, etc. /other GAs; 4) Currently, 87% of D-PNG and CNG volumes fall under Zone 2; the upcoming regulatory change is expected to result in an EBITDA margin benefit of INR0.7-1.3/scm. 5) Gas sourcing split stood at: APM/other domestic/RLNG: 3.1/1.8/4.2 mmscmd.
Miss due to lower-than-estimated EBITDA/scm margin; volumes in line
* Total volumes were in line with our estimate at 9.13mmscmd (our est.: 9.16mmscmd), up 6% YoY.
* Both CNG and PNG volumes came in line.
* EBITDA/scm came in 10% below our est. at INR6.2.
* Adj. realization increased ~INR0.7/scm QoQ, while gas costs/opex declined INR0.4/INR0.5 per scm QoQ.
* Resulting EBITDA was 10% below our estimate at INR5.1b (-12% YoY).
* IGL’s PAT came in 7% below our est. at INR3.6b (-11% YoY), as other income stood above estimate.
Valuation and view
* IGL trades at 15.9x FY27E SA P/E, at par with 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 INR6.3/INR6.5 per scm and volumes to grow 7% YoY in FY26/FY27. Resultant EBITDA/PAT are estimated to clock a CAGR of 11%/10% over FY25-27E.
* We value IGL at 16x FY27E consol. P/E, and add INR48/sh as a value of JVs to arrive at our TP of INR225/sh. At a 2.6% FY27E dividend yield and 10% EPS growth, we believe the valuation is attractive. Hence, we maintain our BUY rating on the stock, with a TP of INR250.
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