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-      Indraprastha Gas’ (IGL) EBITDA came in below our est. at INR5.6b in 3QFY24, primarily due to lower-than-expected EBITDA/scm of INR7.2 (vs. our est. of INR8.5). Volumes increased 4% YoY to 8.5mmscmd.

-      EBITDA/scm declined 14% sequentially, primarily on account of APM gas allocation declining 78% in 3QFY24 from 87% in 2QFY24. The management expects APM allocation to decline over the long run as APM production has remained stagnant over the past few years despite a significant increase in demand from priority sectors.

-      The company is focusing on converting ICE dumpers in its GAs to CNG in order to drive volume growth since dumpers consume ~80-100kg of CNG per day. The company may also consider launching schemes similar to MAHGL’s CNG Mahotsav to drive further growth. However, the company would focus on setting up adequate infrastructure before launching such schemes.

-      The company is also taking measures to convert long-haul state buses to CNG. Uttar Pradesh has agreed to commission 60 long-haul CNG buses, while Uttarakhand has agreed to commission 45 busses and Rajasthan has initiated a pilot project of 20 CNG buses.

-      We expect IGL’s volumes to register a CAGR of 7% over FY24-26, as against an 11% CAGR over FY16-23, owing to multiple headwinds. We value the stock at 12x Dec’25E adj. EPS of INR25 and add value of JV at 25% holding company discount to arrive at our TP of INR350. We reiterate our Sell rating.

Volumes in line with expectations

-      Total volumes were in line with our estimate at 8.48mmscmd (up 4% YoY)

·CNG volumes at 6.33mmscmd (up 4% YoY) and PNG volumes at 2.15mmscmd (up 5% YoY)

-      EBITDA/scm came below our est. at INR7.2 (vs. our est. of INR8.5 and INR8.6 in 2QFY24)

·Gross margin came in at INR12.9/scm (vs. INR14.1/scm in 2QFY24)

·Opex came in at INR5.7/scm (vs. INR5.5 in 2QFY24)

·Resulting EBITDA was below our estimate at INR5.6b (our est. of INR6.7b, up 32% YoY)

-      PAT was below est. at INR3.9b (est. of INR4.6b, up 41% YoY)

-      IGL’s share in CUGL and MNGL added INR858m to its consol. profit (up 54% YoY) in 3QFY24.

-      For 9MFY24, EBITDA was up 18% YoY to INR18.6b, with EBITDA/scm of INR8.1 (up 14% YoY). PAT was up 22% YoY to INR13.7b.

·Total volumes were up 4% YoY at 8.33mmscmd, with CNG at 6.25mmscmd (up 4% YoY) and PNG at 2.08mmscmd (up 4% YoY).

-      IGL’s share in CUGL and MNGL added INR2.6b to its consol. profit (up 40% YoY).

Valuation and view

-      We anticipate a sluggish volume growth trajectory in the near to medium term, as PNG supply growth faces constraints.

·I/C PNG volume growth is expected to come to a standstill amid competition from alternative fuels

·The D-Haryana segment has witnessed stagnant volume growth over the past few quarters due to limited investment and an ongoing dispute.

·The single unit nature of landed house in Delhi/new geographical areas (unlike skyscrapers in Delhi) makes it difficult to maintain high volume growth rates in D-PNG.

-      These three categories account for 2mmscmd (~25% of volumes) and are a drag on growth. As such, while IGL’s volumes registered a CAGR of 11% over FY16-23, we are building in 7% CAGR over FY24-26. Lastly, we believe EBITDA/scm may remain under pressure, owing to reduction in APM allocation.

-      We value the stock at 12x FY25E adj. EPS of INR25 and add value of JV at 25% holding company discount to arrive at our TP of INR350 and reiterate our sell rating on the stock.

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