Buy Indraprastha Gas; target of Rs 510: Sharekhan

Sharekhan's research report on Indraprastha Gas

Q3FY2023 operating profit of Rs. 278 crore (down 33% q-o-q) missed our estimate of Rs. 300 crore due to lower-than-expected EBITDA margin and marginal miss in volume at 8.1 mmscmd (flat q-o-q). Although gross margin of Rs. 11.3/scm (down 11% q-o-q) was slightly above our estimate of Rs. 11.1/scm, EBITDA margin of Rs. 5.7/scm (down 19% q-o-q) missed our estimate by 5% due to higher-than-expected per unit opex. CNG/I-C PNG volume was largely flat q-o-q at 6.1 mmscmd/1 mmscmd, while D-PNG volume grew by 11% q-o-q to 0.6 mmscmd. A likely capping of APM gas price (Kirit Parikh committee recommendations expected to get approved by March 15, 2023) would reduce gas cost and remove high gas cost overhang for CGDs with potential recovery in margin/volume from FY2024. Management aims 10 mmscmd of volume by FY2025, which implies an 11% volume CAGR over FY2023E-FY2025E and has guided for EBITDA margin improvement to Rs. 7-8/scm versus Rs. 5.7/scm in Q3FY2023.

Outlook

We maintain Buy on IGL with an unchanged PT of Rs. 510, given our expectation of earnings recovery (expect 15%/13% EBITDA/PAT CAGR over FY2022-FY2025E) and attractive valuation of 18x its FY2024E EPS (at a steep discount of 25% to its five-year average one-year forward PE multiple of 24x).

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