Indraprastha Gas: Strong Q3, healthy volume growth to continue

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Ruchi Agrawal
Moneycontrol Research

Highlights
- Higher than expected volume growth
- CNG segment continues to outperform
- Domestic PNG demand seeing strong growth
- Price hike helps improve realisations and protect margin
- New geographical areas to aid volume in the medium term
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Indraprastha Gas Ltd (IGL) reported another quarter of better-than-expected performance with strong growth in revenue and profit, driven by a healthy volume uptick, especially in the compressed natural gas segment. CNG remains at an attractive discount to other automotive fuels, due to which the volume growth is expected to continue in coming quarters.

Key positives
 -Strong topline growth driven by a healthy (12.2 percent year-on-year) volume and realisation (13.6 percent) growth

-Growth in CNG volume remained strong (at 13.1 percent) due to the substantial difference with the pieces of other auto fuels

-Domestic piped natural gas (PNG) volumes were healthy, with a 10 percent uptick. Within the PNG segment, industrial and commercial volumes were up 13 percent YoY (down sequentially), leading to a nine-month volume growth of 22 percent YoY

-High other income contributed to a 22 percent uptick in profit before tax (PBT)

Other observations
- The company has seen some margin pressure due to higher operating costs. It follows a cost plus basis of pricing and the management expects the margin to remain stable

- The management remains positive of achieving double-digit volume growth even in upcoming quarters. Expansion in Gurugram, Meerut, Muzaffarnagar and Shamli is expected to drive volume growth. Rewari and Karnal are expected to drive incremental industrial volumes

- There has been a hike in trade commissions charged by oil marketing companies (OMCs) in the past few months. IGL expects the rise (8-9 percent per year) to continue in the coming year, given inflation and wage costs expenses by OMCs. There has been a recent momentum in dealer owned, dealer operated (DODO) model and upcoming growth is expected to flow from this model

- The company has bid for 15 geographical areas (GA) in the latest city gas distribution (CGD) bidding round and expects to win around 3-4 GAs, which would drive growth. Given this, the management expects a capex of around Rs 3,000-5,000 crore, which is expected to be funded through internal accruals

OutlookIGL has displayed strong performance in the last few quarters and the stock has seen a 27 percent uptick from its 52-week lows, but is still 15 percent below its 52-week high. The counter is now trading at FY20 estimated price-to-earnings of 18.7 times and is strong candidate to accumulate on any market weakness.

We expect the robust performance to continue, with rising demand and deeper penetration in existing geographies. The company has seen a strong volume uptick and we expect volume growth to remain healthy. Allocation of new GAs in the tenth round of CGD bidding would be an additional growth driver for the future.

While there is some scepticism of limited pricing power in coming months, given the upcoming general elections, the recent correction in crude oil prices would keep input costs under control. With a substantial differential between the price of mainstream auto fuels and CNG, we expect the healthy volume growth to continue in coming quarters.

With the fundamental growth story intact and sector outlook positive, we believe in the long-term growth journey of this company.

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Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here