ADD on Indraprastha Gas - Blip in volume growth - HDFC Securities

Mr. Harshad Katkar & Mr. Nilesh Ghuge, Institutional Research Analyst, HDFC Securities.

Indraprastha Gas (Q4FY20): Blip in volume growth. ADD
(TP Rs 520, CMP Rs 474, MCap Rs 332 bn)

Our ADD recommendation on Indraprastha Gas with a TP of INR 520 is based on (1) Volume growth of ~4.7% CAGR over FY20-22E, (2) Portfolio of mature, semi-mature and new Geographical Areas (GA) and (3) Pricing power as evident in 3.9% CAGR growth in per unit EBITDA over FY17-20 to INR 6.5/scm.

View on the result: Volumes and EBITDA were in-line with our estimates

Volumes: IGL's total volume grew merely 0.5% YoY to 6.2mmscmd (estimated 6.0mmscmd), dragged by 1.4% YoY drop in CNG vols to 4.5mmscmd. This is the first instance in 4 years that YoY volume growth has fallen to single digits. PNG volumes increased to 1.7mmscmd (+6.0% YoY). Volumes were adversely affected by the lockdown in the last week of March.

Margins: Per unit gross spread expanded by INR 1.5 YoY to INR 12.8/scm. This is attributable to part retention of the benefit of falling RMC. Consequently, per unit EBITDA expanded by INR 1 YoY to INR 6.6/scm (vs. INR 6.5/5.8 per scm in FY20/FY19).

Outlook on volumes: We expect volume to dip by 10.0% YoY to 5.8mmscmd in FY21 given a poor CNG volume outlook in 1HFY21. Thereafter, blended volumes should recover to 7.1mmscmd in FY22 (+21.7% YoY).

Outlook on margins/EBITDA: Per unit EBITDA should dip marginally by 5.8% YoY from the current levels to INR 6.1/scm in FY21 with the fall in volumes. Subsequently, per unit EBITDA should bounce back to INR 6.5/scm in FY22 (+7.7% YoY). In-line with per unit EBITDA and volumes, absolute consol EBITDA should dip 15.4% YoY in FY21 to INR 13bn and subsequently grow 31.1% YoY in FY22 to INR 17bn driven by a robust volume outlook and healthy per unit margins.

View on the balance sheet: IGL's cash/bank jumped 15.2% YoY to INR 22bn. Although the excess cash is dragging RoE and RoCE, it puts the company in comfortable position to meet its financial commitments and capex needs.

Change in estimates: We raise our FY21 EPS estimate by 9.7% to INR 12.7 driven by higher than estimated (1) Per unit EBITDA margin (+2.4% to INR 6.1/scm), and (2) Volumes (+7.4% to 5.8mmscmd) as recovery in CNG volumes would be faster in 2HFY21. For FY22, we cut our EPS estimate by 27.5% to INR 17.0/sh led by a gradual recovery in volumes and per unit margins.

DCF based valuation: Our TP is INR 520 (WACC 10%, Terminal growth rate 3.0%). The stock is trading at 24.8x FY22 EPS.

Shares of INDRAPRASTHA GAS LTD. was last trading in BSE at Rs.475 as compared to the previous close of Rs. 473.85. The total number of shares traded during the day was 56106 in over 1710 trades.

The stock hit an intraday high of Rs. 480.55 and intraday low of 471.8. The net turnover during the day was Rs. 26707792.

Source : Equity Bulls

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