ADD on Indraprastha Gas - Margins drive profitability - HDFC Securities

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

Our ADD recommendation on Indraprastha Gas with a target price of INR 475 (earlier INR 423) is premised on (1) robust volume growth led by its quasi- monopolistic position in Delhi/ NCR with regulatory support in the form of prioritized gas allocation and (2) portfolio of mature, semi-mature and new geographical areas (GA). 2QFY21 EBITDA was 15% above our estimates, owing to lower-than-expected employee costs and operating expenses. APAT was 30% above our estimates, owing to higher-than-expected other income and lower-than-expected tax rate.

Volumes: Blended volume stood at 5.5mmscmd (vs 2.7/6.6mmscmd QoQ/YoY). Volumes were up as CNG demand (71% of volume mix in 2Q, versus 59% in 1Q) started to recover post lockdown. CNG/PNG volumes stood at 3.9/1.6mmscmd in the quarter.

Margins: Per unit gross spread was flattish QoQ, while it expanded by INR 2.2 YoY to INR 13.8/scm. This is attributable to part retention of the benefit of falling RMC. The per-unit EBITDA grew by INR 4.7 QoQ and 1.6 YoY to INR 8.1/scm as operating leverage resulted in the decline in per-unit opex.

Outlook on volumes: We believe that CNG volumes should decline by~11% YoY to 4.2mmscmd in FY21E, dragging overall volumes to 5.9mmscmd from 6.4mmscmd in FY20. However, we expect CNG volumes to rise ~20% YoY to 5.1mmscmd in FY22E, leading to a 19%YoY jump in the total volumes to 7.1mmscmd.

Outlook on per unit EBITDA: Per-unit EBITDA should rise by 2.2% YoY from the current levels to INR 7.9/scm in FY21E. Subsequently per unit EBITDA should correct to INR 7.5/scm in FY22E (-4% YoY). Consolidated EBITDA should grow 12% YoY in FY21E to INR 17bn and 14% YoY in FY22E to INR 19bn driven by a robust volume outlook and healthy per-unit margins.

Change in estimates: We raise our FY21/22 EPS estimates by 24.8/9.5% to INR 18.0/21.1/sh, led by (1) better-than-anticipated per-unit margins in the quarter, and (2) increased per-unit EBITDA estimates going forward.

DCF-based valuation: Our target price is INR 475 (WACC 11%, Terminal growth rate 3.0%). The stock is trading at 21.3x FY22E EPS.

Shares of INDRAPRASTHA GAS LTD. was last trading in BSE at Rs.436.1 as compared to the previous close of Rs. 438.05. The total number of shares traded during the day was 69205 in over 1524 trades.

The stock hit an intraday high of Rs. 446.7 and intraday low of 434.7. The net turnover during the day was Rs. 30398288.

Source : Equity Bulls

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