Indraprastha Gas - Margins improve but volume growth stays weak - Edelweiss

Indraprastha Gas (IGL) Q1FY14 revenue at INR9bn was higher than our INR8.8bn estimate led by higher CNG volumes. However, volume growth was muted, both in CNG (4.6% YoY) and PNG (7.5% YoY) reflecting the impact of high prices on demand. Led by softening spot LNG prices, EBITDA margins improved to INR5.67/scm. CNG growth is expected to be low at 5% as addition of a new fleet of buses offsets lower car conversions. While commercial PNG customer addition continues, volume growth in the near term could be weak due to economic slowdown. In the near term, IGL will have to strike a balance between further price hikes to offset INR depreciation and weak demand. Maintain 'BUY' with a TP of INR350.

Weak volume growth in PNG, CNG continues

CNG volume at 254mmscm (estimate 249mmscm) increased 4.6% YoY but was low compared to the 12.2% YoY averaged in the last 10 quarters. Of the CNG volumes, we estimate cars to contribute 55% while buses only 25%. Thus, while addition of ~6500 lastmile buses in Delhi will aid CNG growth, conversion of cars remains the key driver. FY13 saw addition of 101k cars to Delhi CNG fleet (28% growth), while the number of buses on CNG remained nearly flat. PNG volume at 86mmscm, while up 7.5% YoY, posted its first ever quarterly decline (down 2.3% QoQ). Customer addition though continues with 141 new PNG commercial connections and 18k new PNG domestic connections.

EBITDA margin rises to INR5.67/scm due to lower spot LNG prices

Gross margin was INR9/scm (INR8.8/scm QoQ). Opex has risen 18% YoY to INR3.3/scm mainly due to higher internal consumption cost on the back of lower INR. Blended LNG prices have fallen from INR38/mmbtu to INR35/mmbtu QoQ due lower spot prices. However, INR depreciation could reverse this in Q2FY14. IGL hiked CNG prices by INR2/kg and domestic PNG by INR1/scm towards quarter end. Capex rate has come down to INR700mn in Q1FY14 vis-à-vis annual target of INR4.5bn due to weak volume growth.

Outlook & valuations: Valuations attractive; 'BUY'

Key headwinds are INR depreciation, macro weakness and APM price hike next year. Also, continued price hikes are needed for IGL to maintain margins. Key near term positive trigger remains a favorable decision by Supreme Court in the case against PNGRB. Valuation is attractive at FY15E P/CEPS of 6x. Maintain 'BUY/Outperformer'.

Source : Equity Bulls

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