Recommend BUY on Indraprastha Gas - Higher gas cost dents profitability - HDFC Securities

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

Our BUY recommendation on Indraprastha Gas with a target price of INR 603 is premised on (1) robust volume growth, led by its quasi-monopolistic position in Delhi/NCR with regulatory support in the form of prioritised gas allocation and (2) a portfolio of mature, semi-mature and new geographical areas (GA). 4QFY21 EBITDA/APAT were 2/2% below our estimates, owing to higher-than-expected gas cost and lower-than-expected other income, partially offset by lower-than-expected other expenses.

Volumes: Blended volume stood at 6.8mmscmd (vs 6.3/6.2mmscmd QoQ/YoY). Volume was up as CNG demand (71% of volume mix in 4Q) continued to recover post un-lock. CNG/PNG volumes stood at 4.9/1.9mmscmd in the quarter.

Margins: Per-unit gross spread in 4Q was down by INR 0.9 QoQ to INR 13.6, given the fact that global supply disruption led to 10.4% higher gas cost in the quarter. Subsequently, per-unit EBITDA was down by INR 0.7 QoQ to INR 8.01, offset by lower per-unit opex.

Outlook on volume: We believe that the current COVID-19 wave would slightly delay the rebound in volume. We estimate CNG volume to increase by 24/18% YoY to 4.6/5.4mmscmd in FY22/23. Total volume is estimated to increase by 21/17% YoY to 6.4/7.5mmscmd.

Outlook on per-unit EBITDA: Per-unit EBITDA is expected to correct by 6% YoY to INR 7.2/scm in FY22E on account of higher gas cost. Subsequently, per-unit EBITDA should improve to INR 7.7/scm in FY23E (+8% YoY). Consolidated EBITDA should grow by 13% YoY in FY22E to INR 17bn and 26% YoY in FY23E to INR 21bn, driven by improvement in volumes, positive outlook, and healthy per-unit margins.

Change in estimates: We cut our FY22/23 EPS estimates by 14.5/6.9% to INR 19.1/24.0 as (1) we expect the current COVID-19 wave to delay the volume rebound in FY22 and (2) we incorporate the overall performance of FY21.

DCF-based valuation: Our target price is INR 603 (WACC 10%, Terminal growth rate 3.0%). The stock is trading at 21.4x FY23E PE.

Shares of INDRAPRASTHA GAS LTD. was last trading in BSE at Rs.532.85 as compared to the previous close of Rs. 512.45. The total number of shares traded during the day was 365949 in over 10329 trades.

The stock hit an intraday high of Rs. 544.85 and intraday low of 519. The net turnover during the day was Rs. 196324446.

Source : Equity Bulls

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