Indraprastha Gas Ltd - Images.moneycontrol
Stock UpdateIndraprastha Gas LtdQ1 volumes miss mark, long-term growth story intactOil & GasPowered by the Sharekhan 3R Research Philosophy3R MATRIX Right Sector (RS)üRight Quality (RQ)ü Positive ü Neutral- Negative What has changed in 3R MATRIXOldNew RSRQRVReco/ViewChangeReco: Buy CMP: Rs. 535 Price Target: Rs. 650áUpgrade MaintainâDowngradeCompany detailsMarket cap:Rs. 37,440 cr52-week high/low:Rs. 595 / 364NSE volume:(No of shares)28.5 lakh532514NSE code:IGLFree float:(No of shares)38.5 crShareholding (%)Promoters45.0FII23.9DII14.8Others16.3Price chart600525450375Aug-21Mar-21Nov-20300Jun-20Q1FY22 PAT of Rs. 244 crore (down 26.2% q-o-q) missed our estimate due to lower-thanexpected volume of 5.3 mmscmd (down 22.1% q-o-q), slight miss in EBITDA margin at Rs. 7.9/scm (down 1.7% q-o-q) and lower other income.CNG/Industrial-Commercial PNG/third-party sales/domestic-PNG volumes declined by25%/18%/20%/4% q-o-q amid COVID-led lockdown; higher per unit opex offset benefit ofincrease in gross margins to Rs. 14.4/scm (up 5.5% q-o-q).Recent recovery in CNG volumes to pre-COVID levels and hike in CNG/D-PNG prices in Julybodes well for strong earnings revival. Long-term volume growth outlook remains intactsupported by gradual shift towards gas-based economy; management has been guiding for a10-12% volume CAGR in the next four years.IGL’s recent underperformance to Gujarat Gas presents an investment opportunity given strongearnings growth outlook. Hence, we maintain a Buy on IGL with an unchanged PT of Rs. 650.At CMP, the stock trades at 23.6x its FY23E EPS.Indraprastha Gas Limited’s (IGL) Q1FY2022 standalone operating profit of Rs. 381 crore (down22.6% q-o-q) was 6% below our estimate of Rs. 405 crore due to: 1) lower-than-expected gas salesvolume of 5.3 mmscmd (down 22.1% q-o-q versus expectation of a 19% q-o-q decline) and 2) slightmiss in EBITDA margin at Rs. 7.9/scm (down 1.7% q-o-q) as higher operating cost (per unit opexup 15.7% q-o-q due to decline in volume) offset 5.5% q-o-q rise in gross margins to Rs. 14.4/scm.The second wave of COVID-19 hit gas sales volumes across categories with a 25%/18%/20%/4%q-o-q volume decline in CNG/Industrial-Commercial PNG/third party sales/domestic-PNG to 3.6mmscmd/0.8 mmscmd/0.4 mmscmd/0.5 mmscmd. PAT of Rs. 244 crore (down 26.2% q-o-q) was9% below our estimate of Rs. 268 crore due to a miss in gas sales volumes, lower-than-anticipatedother income and marginally higher effective income-tax rate of 26% (versus our assumption of25.2%). IGL’s CNG volume is believed to have reached pre-COVID-19 level in July after the recentrelaxation of COVID-19 restrictions on vehicle movement and overall gas sales volumes has alsorecovered fully. The company’s management is upbeat on volume growth and has been guidingfor a 10-12% volume CAGR over next 4 years and that gives us confidence with respect to longterm volume growth potential. Expansion of new GAs of Rewari, Karnal, and Gurugram, anddevelopment of three new GAs (won under the 10th CGD bidding round) could further acceleratevolume growth in the coming years. We expect high EBITDA margin to sustain for CGDs players asfavourable economics of CNG versus petrol would help them pass on a potential hike in domesticgas prices (50-60% rise likely from October). We remain confident of volume-led strong earningsgrowth and expect a 26% PAT CAGR over FY2021-FY2023E for IGL. Hence, we maintain a Buy onIGL with an unchanged PT of Rs. 650. At CMP, the stock is trading at 23.6x its FY2023E EPS and21.3x its FY2024E EPS.Key positives Better-than-expected gross margin at Rs. 14.4/scm (up 5.5% q-o-q).CNG/Domestic PNG price of Rs. 1/kg and Rs. 1.3/scm respectively in July 21 to support grossmargins.Key negativesBSE code:Price performance(%)Result UpdateSummary- Right Valuation (RV)Sharekhan code: IGL1m3m6m12m-55-138-9-9-8-8AbsoluteRelative toSensexSharekhan Research, BloombergAugust 13, 2021 Higher-than-anticipated effect of COVID-19 on gas sales volume with 25%/18% q-o-q decline inCNG/I/C volumes in Q1FY2022.Our CallValuation – Maintain Buy on IGL with an unchanged PT of Rs. 650: We maintain our FY2022FY2023 earnings estimate as we expect a strong volume recovery in the coming quarters and havealso introduced our FY2024 earnings estimates in this report. The recent under-performance of IGL(stock price is down 1% versus 71% rise in stock price of Gujarat Gas in the last six months) providesan opportunity to invest in the stock as the long-term growth outlook remains intact supported bystructural theme of gradual shift towards gas-based economy. Moreover, IGL is focused on enteringthe EV segment with recent announcement to set-up battery swapping stations in Delhi/NCR regionin partnership other companies. Overall, we expect a 16% CAGR in volumes (led by growth in existingGAs and expansion into new GAs) and sustained high margins to drive a strong earnings CAGR of 26%over FY2021-FY2023E along with high RoE of 21.8% in FY2023E. Hence, we maintain a Buy rating onIGL with an unchanged PT of Rs. 650. At CMP, the stock is trading at 23.6x its FY2023E EPS and 21.3xits FY2024E EPS.Key RisksLower-than-expected gas sales volume due to COVID-19 led slowdown. Delay in development ofnew GAs, a sharp rise in LNG prices and adverse regulatory changes (revision in APM gas-pricingformula) could impact outlook and valuations. OMC demand of high dealer commission would remainan overhang on IGL until it is resolved.Valuation (Standalone)ParticularsRevenuesOPM (%)Adjusted PAT% YoY growthAdjusted EPS (Rs.)P/E (x)P/B (x)EV/EBITDA (x)RoNW (%)RoCE 33.21,58613.622.723.64.815.221.827.9Rs urce: Company; Sharekhan estimates1
Stock UpdatePowered by the Sharekhan3R Research PhilosophyPAT missed our estimate on lower-than-expected gas sales volume and other incomeIndraprastha Gas Limited’s (IGL) Q1FY2022 standalone operating profit of Rs. 381 crore (down 22.6% q-o-q)was 6% below our estimate of Rs. 405 crore due to: 1) lower-than-expected gas sales volume of 5.3 mmscmd(down 22.1% q-o-q versus expectation of a 19% q-o-q decline) and 2) slight miss in EBITDA margin at Rs. 7.9/scm (down 1.7% q-o-q) as higher operating cost (per unit opex up 15.7% q-o-q due to decline in volume) offset5.5% q-o-q rise in gross margins to Rs. 14.4/scm. The second wave of COVID-19 hit gas sales volumes acrosscategories with a 25%/18%/20%/4% q-o-q volume decline in CNG/Industrial-Commercial PNG/third partysales/domestic-PNG to 3.6 mmscmd/0.8 mmscmd/0.4 mmscmd/0.5 mmscmd. PAT of Rs. 244 crore (down26.2% q-o-q) was 9% below our estimate of Rs. 268 crore due to a miss in gas sales volumes, lower-thananticipated other income and higher effective income-tax rate of 26% (versus our assumption of 25.2%).Results (Standalone)ParticularsRevenueTotal ExpenditureOperating profitOther IncomeEBITDAInterestDepreciationExceptional income/(expense)Reported PBTTaxReported PATEquity Cap (cr)Reported EPS (Rs)Margins (%)OPMNPMTax 3955583311142680441232700.5Y-o-Y 0Q4FY211,5511,059492285204760440109331704.7Rs crQ-o-Q 1.721.324.8-26.2BPS-142.4-191.8118.8Y-o-Y %95.54.8133.5126.150.9Q4FY216.813.68.04.92.0Q-o-Q %-22.15.5-1.7-25.1-14.6Y-o-Y s in mmscmd)Q4FY21Q-o-Q 81720100Source: Company; Sharekhan ResearchKey operating metricsParticularsTotal volume (mmscmd)Gross margin (Rs/scm)EBITDA margin (Rs/scm)CNG volume (mmscmd)PNG volume (mmscmd)Source: Company; Sharekhan ResearchVolume break-up by categoriesParticularsCNGPNG domesticI/C PNGNatural gasTotal volumeVolume mixCNGPNG domesticI/C PNGNatural gasTotalSource: Company; Sharekhan ResearchAugust 13, 20212
Stock UpdatePowered by the Sharekhan3R Research PhilosophyOutlook and Valuationn Sector view – Regulatory push and low gas price to drive gas demand in India and benefit CGD playersLong-term gas demand potential for India is very strong, given regulatory support to curb pollution and lowdomestic gas prices. Additionally, the government’s aim to increase the share of gas in India’s overall energymix to 15% by 2025 (from 6% currently) would substantially improve gas penetration in the country and boostgas consumption. Thus, we expect sustainable high single-digit growth in India gas demand for the next 4-5years. CGD companies’ (with exposure towards CNG) margins are expected to remain strong given weakdomestic gas prices.n Company outlook – Long-term volume growth outlook intactWe believe that IGL is well-placed to benefit from rising gas consumption in India and thus we model 16%volume CAGR over FY2021-FY2023E led by a sustained high growth in existing geographical areas (GAs),expansion into new GAs of Rewari, Karnal and Gurugram and development of three new GAs (won under the10th CGD bidding round). EBITDA margin is expected to stay high, given IGL’s ability to pass on any increasein domestic gas price given favourable economics of CNG versus petrol. Hence, we expect a strong EBITDA/PAT CAGR of 25%/26% over FY2021-FY2023E.n Valuation – Maintain Buy on IGL with an unchanged PT of Rs. 650We maintain our FY2022-FY2023 earnings estimate as we expect a strong volume recovery in the comingquarters and have also introduced our FY2024 earnings estimates in this report. The recent under-performanceof IGL (stock price is down 1% versus 71% rise in stock price of Gujarat Gas in the last six months) providesan opportunity to invest in the stock as the long-term growth outlook remains intact supported by structuraltheme of gradual shift towards gas-based economy. Moreover, IGL is focused on entering the EV segmentwith recent announcement to set-up battery swapping stations in Delhi/NCR region in partnership othercompanies. Overall, we expect a 16% CAGR in volumes (led by growth in existing GAs and expansion intonew GAs) and sustained high margins to drive a strong earnings CAGR of 26% over FY2021-FY2023E alongwith high RoE of 21.8% in FY2023E. Hence, we maintain a Buy rating on IGL with an unchanged PT of Rs. 650.At CMP, the stock is trading at 23.6x its FY2023E EPS and 21.3x its FY2024E EPS.One-year forward P/E (x) band40.035.0P/E (x)30.025.020.015.010.05.0P/E (x)Avg. P/E (x)Peak P/E -11Apr-110.0Trough P/E (x)Source: Sharekhan ResearchAugust 13, 20213
Stock UpdatePowered by the Sharekhan3R Research PhilosophyAbout companyIGL is a dominant CGD player in NCR (Delhi, Noida, Greater Noida, and Ghaziabad), with gas sales volume of6.8-7 mmscmd currently. IGL derives 71% of its volume from CNG, 14% from domestic PNG (including sales toother CDG companies) and remaining from commercial/industrial PNG. The entire gas requirement for CNGand domestic PNG is met through domestic gas supply and the remaining is met through imported re-gasifiedliquefied natural gas (R-LNG).Investment themeThe government’s aim to increase the share of gas in India’s energy mix to 15% by 2030 (from 6% currently)and the thrust to reduce air pollution in the NCR region provide a regulatory push for strong growth in CNGand domestic PNG volumes for IGL. Moreover, the development of new GAs of Rewari, Karnal, and Gurugramand recent awarding of three new GAs in the 10th round of CGD bidding would drive volume growth beyondits existing areas of operations. The company’s margins are expected to remain strong, given domestic gasprices. Moreover, the recent sharp CNG recovery indicates normalisation of overall volume much faster thanexpectation.Key Risks Lower-than-expected gas sales volume in case of delayed recovery due to COVID-19 led slowdown anddelay in development of new Gas Any change in domestic gas allocation/pricing policy, depreciation of Indian rupee, higher spot LNG priceand any adverse regulatory changes could affect margins and valuations. OMC demand of high dealer commission would remain an overhang on MGL until resolved.Additional DataKey management personnelArun Kumar SinghAK JanaBimal Ram NagarChairmanManaging DirectorChief Financial OfficerSource: Company WebsiteTop 10 shareholdersSr. No. Holder Name1Life Insurance Corp of India2FMR LLC3Kotak Mahindra Asset Management Co4Vontobel Holding AG5VONTOBEL FUND6Vanguard Group Inc/The7BlackRock Inc8DSP Investment Managers Pvt. Ltd.9SBI Life Insurance Company Limited10Schroders PLCHolding (%)7.13.12.42.42.11.81.31.21.11.0Source: BloombergSharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.August 13, 20214
Understanding the Sharekhan 3R MatrixRight SectorPositiveStrong industry fundamentals (favorable demand-supply scenario, consistentindustry growth), increasing investments, higher entry barrier, and favorablegovernment policiesNeutralStagnancy in the industry growth due to macro factors and lower incrementalinvestments by Government/private companiesNegativeUnable to recover from low in the stable economic environment, adversegovernment policies affecting the business fundamentals and global challenges(currency headwinds and unfavorable policies implemented by global industrialinstitutions) and any significant increase in commodity prices affecting profitability.Right QualityPositiveSector leader, Strong management bandwidth, Strong financial track-record,Healthy Balance sheet/cash flows, differentiated product/service portfolio andGood corporate governance.NeutralMacro slowdown affecting near term growth profile, Untoward events such asnatural calamities resulting in near term uncertainty, Company specific eventssuch as factory shutdown, lack of positive triggers/events in near term, rawmaterial price movement turning unfavourableNegativeWeakening growth trend led by led by external/internal factors, reshuffling ofkey management personal, questionable corporate governance, high commodityprices/weak realisation environment resulting in margin pressure and detoriatingbalance sheetRight ValuationPositiveStrong earnings growth expectation and improving return ratios but valuationsare trading at discount to industry leaders/historical average multiples, Expansionin valuation multiple due to expected outperformance amongst its peers andIndustry up-cycle with conducive business environment.NeutralTrading at par to historical valuations and having limited scope of expansion invaluation multiples.NegativeTrading at premium valuations but earnings outlook are weak; Emergence ofroadblocks such as corporate governance issue, adverse government policiesand bleak global macro environment etc warranting for lower than historicalvaluation multiple.Source: Sharekhan Research
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q-o-q volume decline in CNG/Industrial-Commercial PNG/third party sales/domestic-PNG to 3.6 mmscmd/0.8 mmscmd/0.4 mmscmd/0.5 mmscmd. PAT of Rs. 244 crore (down 26.2% q-o-q) was 9% below our estimate of Rs. 268 crore due to a miss in gas sales volumes, lower-than-anticipated
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