Neutral Indraprastha Gas; target of Rs 406: Motilal Oswal

Motilal Oswal's research report on Indraprastha Gas

IGL reported a beat on our EBITDA estimate, driven by strong volumes (inline), which grew 48% YoY on a low base, and higher-than-estimated EBITDA margin/scm, which grew 20% sequentially. Total volumes grew 48% YoY and 2% QoQ to 7.9mmscmd, with a record high CNG volume of 5.9mmscmd (up 63% YoY) and modest PNG volumes of 1.9mmscmd (down 6% QoQ). EBITDA/scm stood at INR8.6 (est. INR6.7). With an overwhelming quarterly performance, the challenges ahead for IGL are overwhelming too: As discussed in our report titled, ‘CGD to take a breather in the near term,’ CGDs will have to raise CNG prices by ~INR4/kg (excluding taxes) for every USD1/mmBtu rise in gas prices to maintain margin around current levels. That said, OMCs are also seeking higher single-digit commissions for retailing CNG at their outlets, which will further challenge the sustainability of margin.

Outlook

The stock trades at 20x/25x FY24E standalone/consolidated EPS. We value the stock at 17x FY24 standalone EPS and add value of its investments to arrive at our TP of INR406. We maintain our Neutral rating on the stock. We arrive at our TP of INR4,210, assigning 18x EV/EBITDA on a Mar’24 basis. We maintain our Buy rating.