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Volume growth to moderate amid multiple headwinds

* Indraprastha Gas (IGL)’s 2QFY24 EBITDA, at INR6.6b, came in line with our estimate. However, its PAT, at INR5.3b, delivered 24% beat. Volumes rose 3% YoY to 8.3mmscmd during the quarter.

* Management expects that ~15% of IGL’s volume may be hit due to the implementation of the recently approved Delhi Motor Vehicle Aggregator and Delivery Service Provider Scheme. Although management has kept its volume guidance unchanged at 9mmscmd as of end-FY24, the outlook for FY25 remains uncertain due to the implementation of the aforementioned scheme.

* Lack of adequate infrastructure and paucity of credible EV options (Tata Tiago being the only credible option in sub-INR1m category) remain the key challenges in implementation of the scheme. However, given the upcoming elections in Delhi in 2025, we believe the policy noise around EVs will remain high in Delhi, thereby capping the valuation upside.

* Owing to stronger-than-expected margins in 1HFY24, we raise our EBITDA/scm assumption to INR8 from 2HFY24 onwards. Subsequently, we raise our EBITDA/PAT estimates by 3%/7% for FY24 and by 13%/14% for FY25.

* We expect IGL’s volumes to grow at 5%/8% in FY24/FY25, as against an 11% CAGR during FY16-23, owing to multiple headwinds. We value the stock at 12x FY25E adj. EPS of INR25.1 and add value of JV at 25% holding company discount to arrive at our TP of INR350. We reiterate our Sell rating.

EBITDA in line but IGL delivers a beat on PAT

* Total volumes were in line with our estimate at 8.3mmscmd (up 3% YoY).

* CNG volumes stood at 6.25mmscmd (up 3% YoY) ? PNG volumes stood at 2.06mmscmd (up 3% YoY)

* EBITDA/scm came in at INR8.6 (vs. our est. of INR8 and INR8.6 in 1QFY24)

* Gross margin came in at INR14.1/scm (vs. INR14.4/scm in 1QFY24)

* Opex stood at INR5.5/scm (vs. INR5.8/scm in 1QFY24)

* Resulting EBITDA was in line at INR6.6b (up 25% YoY)

* PAT was above our est. at INR5.3b (up 29% YoY) due to higher-thanestimated other income at INR1.3b (vs. INR457m in 1QFY24)

* IGL’s share in CUGL and MNGL added INR902m to its consol. profit (up 29% YoY) in 2QFY24.

* For 1HFY24, EBITDA was up 13% YoY to INR13b, with EBITDA/scm at INR8.6 (down 7% YoY). PAT was up 16% YoY to INR9.7b during the period.

* Total volumes were up 3% YoY to 8.3mmscmd,

* with CNG at 6.2mmscmd (up 3% YoY) and

* PNG at 2mmscmd (up 3% YoY).

* IGL’s share in CUGL and MNGL added INR1.7b to its consol. profit (up 41% YoY) during the period.

Valuation and view

* The volume growth trajectory in the near-to-medium term will remain slow as PNG supply faces constraints, in our opinion:

* I/C PNG volume growth is coming to a standstill amid competition from alternative fuels

* Stagnant volume growth in D-Haryana segment over the past few quarters amid limited investment and ongoing dispute

* The single-unit nature of landed house in Delhi / new geographical areas (unlike skyscrapers in Mumbai), 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 reported 11% CAGR over FY16-23, we are building in 5%/8% growth in FY24/FY25E. Lastly, we believe EBITDA/scm may have peaked in 1HFY24 and could decline going forward.

* We value the stock at 12x FY25E adj. EPS of INR25.1 and add value of JV at 25% holding company discount to arrive at our TP of INR350. We reiterate our Sell rating

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