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Margin risks arise as APM shortage rises

* Indraprastha Gas (IGL)’s 2QFY25 earnings performance was marked by volumes exceeding our expectations but a miss at the EBITDA/scm level. With elevated spot LNG costs, continued APM de-allocation, and elections in Delhi in 4QFY25, we believe EBITDA/scm margin may remain under pressure in 2HFY25. We believe the management’s guided target of average 9.5mmscmd in volumes in 2HFY25 is tough to achieve. IGL is most impacted by the recent APM gas de-allocation among the three CGDs in our coverage given: 1) its lower base margins (vs. MAHGL), 2) lower volume growth runrate (vs Gujarat Gas), and 3) state elections being some time away (vs MAHGL), leading to price hike uncertainty lingering for longer.

* IGL’s 2QFY25 EBITDA came in 9% below our estimate at INR5.4b (-18% YoY), primarily due to lower realization and higher gas cost. Volumes increased 10% YoY to 9.03mmscmd and came above our estimates.

* Key takeaways from the conference call: 1) INR5-6/kg price hike is required to meet the current EBITDA/scm run rate; 2) the company might implement price hike post the festive season; 3) the management guided for a robust 8- 10% YoY CNG volume trajectory; 4)INR17b is planned to be incurred in FY25 (INR5b already incurred in 1H), of which 45%-55% shall be toward Delhi.

* Owing to the 21% APM de-allocation announced by IGL recently, we reduce our EBITDA/scm estimate for FY25 to INR7 (vs. previous est. of INR7.4). Additionally, we reduce our EBITDA/scm estimate for both FY26 and FY27 to INR7 (vs. previous est. of INR7.5/INR7.7 for FY26/FY27), leading to a 9%/11% cut in earnings in FY26/FY27.

* We reduce our valuation multiple to 13x P/E (15x P/E earlier). We value the stock at 13x Dec’26E adj. EPS and add value of JV at 25% holding company discount to arrive at our TP of INR375. We reiterate our Sell rating.

Miss on EBITDA amid the lower-than-estimated margin

* Total volumes were in line with our estimate at 9.02mmscmd (+10% YoY).

* CNG volumes stood at 6.78mmscmd (+9% YoY) and PNG volumes stood at 2.24mmscmd (+9% YoY).

* EBITDA/scm came in 11% below our est. at INR6.5 (est. INR7.3).

* Gross margin came in at INR11.9/scm (vs. INR14.1/scm in 2QFY24).

* Opex was INR5.5/scm (vs. INR5.5 in 2QFY24).

* Resulting EBITDA stood 9% below our estimate at INR5.4b (-18% YoY), primarily due to lower realization and higher gas cost.

* Other income came in at 1.5b, 2.1x of our estimate.

* Resulting PAT came in 7% above our estimate at INR4.3b (-19% YoY).

* The Board has declared an interim dividend of INR5.5/sh (FV: INR2/sh)

* In 1HFY25, IGL’s net sales/EBITDA/PAT grew 5%/17%/21% YoY to INR72b/24b/17.5b. In 2HFY25, we estimate net sales/PAT to decline 9%/12% YoY, while EBITDA to grow 7% YoY.

Valuation and view

* Recently, IGL announced a 21% reduction in APM gas allocation for its CNG and D-PNG businesses, respectively, effective 16th Oct’24. While IGL’s volumes posted a 9.8% CAGR in FY16-24, we estimate a 7% CAGR in FY24-27.

* We reduce our valuation multiple to 13x P/E (15x P/E earlier). We value the stock at 13x Dec’26E adj. EPS and add value of JV at 25% holding company discount to arrive at our TP of INR375. We reiterate our Sell rating on the stock.

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