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MOSL: INDRAPRASTHA GAS (Neutral)-Rewarding 2QFY22, although risk-reward unfavorable

INDRAPRASTHA GAS: Rewarding 2QFY22, although risk-reward unfavorable

(IGL IN, Mkt Cap USD4.7b, CMP INR494, TP INR520, 5% Upside, Neutral)

 

• Indraprastha Gas (IGL) reported EBITDA ahead of our estimates. This was led by better-than-estimated volumes (CNG volumes now 8% above pre-COVID peak) and higher-than-estimated EBITDA/scm (INR8, primarily supported by a CNG price hike of INR1.8/kg during the quarter).
• With an overwhelming quarterly performance, the challenges ahead for IGL are overwhelming as well:

1. The recent excise duty cut on petrol and diesel has reduced savings of CNG to liquid fuels. As highlighted in our report, we maintain our stance on the normalization of Brent prices by end-FY22. Falling Brent prices would lower savings, thereby impacting volume growth.
2. Also, suggests the CNG Retrofitting market is impacted by a supply crunch for cylinders and components. This comes at a time when demand for the same saw huge turnaround amid higher alternate fuel prices. We believe this would slow the estimated higher conversion rate and impact medium-term volume growth.
3. As per our calculations, the APM gas price revision for 1HFY23 could come in at USD5.5–6/mmbtu – another steep hike post the one in Oct’21 – with the likelihood of a further price increase in 2HFY23.
4. Demand by OMCs for higher single digit commissions on CNG sales would further test the ability to pass on the prices to end consumers.
5. The management expects EV buses to ply on Delhi roads over the next 2–3 years, challenging volumes growth.