Indraprastha Gas (IGL IN)

Rating: BUY | CMP: Rs557 | TP: Rs662

February 10, 2021 Record margins, volume recovery drive earnings

Q3FY21 Result Update Quick Pointers:

☑ Change in Estimates | ☑ Target |  Reco . Q3 volume recovery continues to gather pace; record margins due to benign gas prices drive earnings beat. Change in Estimates Current Previous . Move towards private vehicle ownership to drive increase in CNG volumes. FY22E FY23E FY22E FY23E Rating BUY BUY Target Price 662 603 We increase our FY21-23e earnings estimate by 22%/10%/8% to factor in Sales (Rs. m) 69,650 80,887 69,650 79,013 higher margins and volume assumptions. IGL remains an enviable business % Chng. - 2.4 EBITDA (Rs. m) 21,966 24,491 20,213 22,832 model with high volume growth due to geographical expansion and addition % Chng. 8.7 7.3 of new buses and taxis. Also, shift to private vehicle ownership post Covid EPS (Rs.) 21.3 23.1 19.4 21.3 % Chng. 9.5 8.4 pandemic to drive CNG volumes. IGL remains a play on rising pollution concerns as ban on competing industrial fuel is a major positive. Reiterate Key Financials - Standalone “BUY” with a three-year DCF-based PT of Rs662 (Rs603 earlier). Y/e Mar FY20 FY21E FY22E FY23E Sales (Rs. m) 64,853 46,420 69,650 80,887 . Volumes recovery continues: Indraprastha Gas’ (IGL’s) Q3FY21 volumes EBITDA (Rs. m) 15,197 15,490 21,966 24,491 improved sharply from H1 levels as economic activity gathers pace and were Margin (%) 23.4 33.4 31.5 30.3 PAT (Rs. m) 11,366 10,789 14,889 16,185 at 576mscm (-6% YoY). For Q3FY21, CNG and PNG volumes were at 289m EPS (Rs.) 16.2 15.4 21.3 23.1 kgs (-9% YoY) and 164mscm (flat YoY), respectively. For 9MFY21, overall Gr. (%) 44.5 (5.1) 38.0 8.7 DPS (Rs.) 3.3 3.1 4.3 4.6 volumes were at 1,329mscm (-26%YoY) with CNG and PNG volumes at 649m Yield (%) 0.6 0.6 0.8 0.8 kgs (-31% YoY) and 461mscm (-11% YoY), respectively. RoE (%) 24.7 21.0 25.7 23.0 RoCE (%) 27.6 24.7 31.9 28.7 . Q3 EBITDA and PAT of Rs5.0bn (+28%YoY; PLe: Rs4.4bn) and Rs3.3bn EV/Sales (x) 5.7 7.9 5.2 4.4 EV/EBITDA (x) 24.2 23.7 16.5 14.5 (+18%YoY; PLe: Rs3.2bn). For Q3, EBIDTA/scm was at record levels of Rs8.7 PE (x) 34.3 36.1 26.2 24.1 (FY20 Rs6.5; PLe Rs7.5). Margin expansion was due to benign domestic and P/BV (x) 7.7 7.5 6.1 5.1 spot LNG gas prices.

Key Data IGAS.BO | IGL IN . Rising preference for private transport to fuel CNG demand: IGL’s Q3FY21 52-W High / Low Rs.581 / Rs.284 volumes recovered due to shift to private vehicles. We model -17%/+50% Sensex / Nifty 51,309 / 15,107 Market Cap Rs.390bn/ $ 5,347m volumes for FY21/22E. Also, benign domestic gas and stabilizing spot LNG Shares Outstanding 700m prices will support earnings; we factor in EBIDTA/scm of Rs7.9/7.5/7.4 for 3M Avg. Daily Value Rs.3701.08m FY21/22/23E vs Rs6.8/6.9/6.9 earlier.

Shareholding Pattern (%) . Limited threat from new players: We see limited threat to IGL’s dominance Promoter’s 45.00 from new players in light of concept paper released recently by PNGRB. Foreign 23.22 Domestic Institution 16.08 Incumbents have over the years built a significant moat in terms of retail Public & Others 15.70 distribution network and pipeline infrastructure. Our calculation suggests that Promoter Pledge (Rs bn) - new players have to compensate IGL at Rs8.5/scm for usage of infrastructure, which will negate earnings hit for the company due to volume loss. Stock Performance (%) 1M 6M 12M Absolute 1.1 43.1 8.5 Relative (3.9) 6.5 (13.4)

Avishek Datta [email protected] | 91-22-66322254

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Q3FY21 Result Overview (Rs mn) Y/e March Q3FY21 Q3FY20 YoY gr. (%) Q2FY21 9MFY21 9MFY20 YoY gr. (%) Net Sales 15,951 18,374 (13.2) 14,407 37,284 54,543 (31.6) Operating Costs 10,336 14,802 (30.2) 10,336 27,371 43,114 (36.5) Material Costs 6,069 9,410 (35.5) 6,097 15,157 28,532 (46.9) Personnel Costs 375 437 (14.2) 313 1,001 1,167 (14.2) Other Overheads 3,012 2,878 4.7 2,574 7,832 8,200 (4.5) Excise duty 1,489 1,732 (14.0) 1,353 3,382 5,216 (35.2) EBITDA 5,007 3,918 27.8 4,071 9,912 11,429 (13.3) Other Income 259 508 (49.0) 657 1,223 1,251 (2.3) PBDIT 5,266 4,426 19.0 4,728 11,135 12,680 (12.2) Depreciation 750 641 16.9 711 2,143 1,867 14.7 Interest 31 20 51.7 23 77 55 41.7 Pre-tax Profit 4,485 3,764 19.2 3,994 8,915 10,758 (17.1) Tax 1,137 926 22.8 915 2,169 1,926 12.6 Profit After Tax 3,349 2,839 18.0 3,079 6,746 8,832 (23.6) Source: Company, PL

IGL quarterly details Sales volume Q3FY18 Q4FY18 Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 CNG - mn kg 257.0 256.0 273.0 290.0 291.5 294.0 305.0 320.0 317.8 291.0 105.0 255.0 289.0 PNG - mmscm 126.0 124.0 129.0 136.0 138.3 149.0 145.0 152.0 163.8 158.0 101.0 146.0 164.0 Total mscm 484.0 482.0 505.0 542.0 543.4 567.0 569.0 605.0 616.0 567.0 247.0 506.0 576.0 Sales Rs mn CNG 9,890 10,220 10,760 11,740 12,480 12,630 13,400 14,380 12,477 12,477 3,750 9,440 10,290 PNG 3,050 3,250 3,420 3,900 4,130 4,310 3,980 4,280 4,129 4,129 2,580 3,550 4,090

Realisation CNG Rs/kg 38.5 39.9 39.4 40.5 42.8 43.0 43.9 44.9 39.3 42.9 35.7 37.0 35.6 PNG Rs/scm 24.2 26.2 26.5 28.7 29.9 28.9 27.4 28.2 25.2 26.1 25.5 24.3 24.9

Cost of gas (Rs/scm) 13.9 14.0 14.7 15.5 16.7 16.0 16.2 16.4 15.3 14.6 12.1 12.0 10.5 Opex (Rs/scm) 5.1 5.1 5.0 5.0 5.2 5.4 5.2 5.1 5.4 6.2 10.4 5,7 5.9 EBITDA (Rs/scm) 5.4 6.0 5.8 5.7 5.8 5.8 6.3 6.5 6.4 6.6 3.4 8.0 8.7 Gross margin (Rs/scm 13.1 13.7 13.5 13.4 13.9 14.0 14.5 14.6 14.6 15.6 15.9 16.4 17.2 Source: Company, PL

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Financials

Income Statement (Rs m) Balance Sheet Abstract (Rs m) Y/e Mar FY20 FY21E FY22E FY23E Y/e Mar FY20 FY21E FY22E FY23E Net Revenues 64,853 46,420 69,650 80,887 Non-Current Assets YoY gr. (%) 12.5 (28.4) 50.0 16.1 Cost of Goods Sold 36,794 20,263 33,188 39,918 Gross Block 42,299 47,224 62,224 74,224 Gross Profit 28,059 26,157 36,463 40,969 Tangibles 42,299 47,224 62,224 74,224 Margin (%) 43.3 56.3 52.4 50.6 Intangibles - - - - Employee Cost 1,517 1,745 2,006 2,247 Other Expenses - - - - Acc: Dep / Amortization 8,132 10,952 14,399 18,697 Tangibles 8,132 10,952 14,399 18,697 EBITDA 15,197 15,490 21,966 24,491 Intangibles - - - - YoY gr. (%) 20.9 1.9 41.8 11.5 Margin (%) 23.4 33.4 31.5 30.3 Net fixed assets 34,167 36,272 47,824 55,526 Tangibles 34,167 36,272 47,824 55,526 Depreciation and Amortization 2,523 2,820 3,448 4,298 Intangibles - - - -

EBIT 12,674 12,670 18,518 20,193 Capital Work In Progress 8,987 7,376 6,000 6,000 Margin (%) 19.5 27.3 26.6 25.0 Goodwill 182 - - - Non-Current Investments 2,716 2,717 2,730 2,745 Net Interest 81 110 98 98 Net Deferred tax assets (2,119) (2,267) (3,262) (4,344) Other Income 1,564 1,864 1,484 1,543 Other Non-Current Assets 694 1,037 1,141 1,255

Profit Before Tax 14,157 14,424 19,904 21,638 Current Assets Margin (%) 21.8 31.1 28.6 26.8 Investments - 6,930 6,930 6,930 Inventories 511 488 537 590 Total Tax 2,791 3,635 5,016 5,453 Trade receivables 1,704 2,425 1,830 2,125 Effective tax rate (%) 19.7 25.2 25.2 25.2 Cash & Bank Balance 21,799 15,656 19,961 27,905 Other Current Assets 329 357 393 432 Profit after tax 11,366 10,789 14,889 16,185 Total Assets 71,723 75,810 90,154 1,06,597 Minority interest - - - - Share Profit from Associate - - - - Equity Equity Share Capital 1,400 1,400 1,400 1,400 Adjusted PAT 11,366 10,789 14,889 16,185 Other Equity 49,224 50,653 62,569 75,522 YoY gr. (%) 44.5 (5.1) 38.0 8.7 Total Networth 50,624 52,053 63,969 76,922 Margin (%) 17.5 23.2 21.4 20.0 Extra Ord. Income / (Exp) - - - - Non-Current Liabilities Long Term borrowings - - - - Reported PAT 11,366 10,789 14,889 16,185 Provisions 235 263 - - YoY gr. (%) 44.5 (5.1) 38.0 8.7 Other non current liabilities 9 13 - - Margin (%) 17.5 23.2 21.4 20.0 Current Liabilities Other Comprehensive Income - - - - ST Debt / Current of LT Debt - - - - Total Comprehensive Income 11,366 10,789 14,889 16,185 Trade payables 2,250 4,146 5,902 6,854 Equity Shares O/s (m) 700 700 700 700 Other current liabilities 15,705 18,068 16,421 17,878 EPS (Rs) 16.2 15.4 21.3 23.1 Total Equity & Liabilities 71,723 77,409 90,154 1,06,597 Source: Company Data, PL Research Source: Company Data, PL Research

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Cash Flow (Rs m) Key Financial Metrics

Y/e Mar FY20 FY21E FY22E FY23E YearY/e Mar FY20 FY21E FY22E FY23E

PBT 14,157 14,424 19,904 21,638 Per Share(Rs) Add. Depreciation 2,523 2,820 3,448 4,298 EPS 16.2 15.4 21.3 23.1 Add. Interest 81 110 98 98 CEPS 19.8 19.4 26.2 29.3 Less Financial Other Income 1,564 1,864 1,484 1,543 BVPS 72.3 74.4 91.4 109.9 Add. Other - - - - FCF 25.5 4.7 10.5 16.1 Op. profit before WC changes 16,760 17,354 23,450 26,034 DPS 3.3 3.1 4.3 4.6 Net Changes-WC 16,190 (5,662) 967 2,693 Return Ratio(%) Direct tax (2,791) (3,635) (5,016) (5,453) RoCE 27.6 24.7 31.9 28.7 Net cash from Op. activities 30,159 8,057 19,401 23,274 ROIC 25.4 23.8 29.3 28.1 Capital expenditures (12,309) (4,732) (12,024) (12,000) RoE 24.7 21.0 25.7 23.0 Interest / Dividend Income - - - - Balance Sheet Others - - - - Net Debt : Equity (x) (0.4) (0.4) (0.4) (0.5) Net Cash from Invt. activities (12,309) (4,732) (12,024) (12,000) Net Working Capital (Days) 0 (10) (19) (19) Issue of share cap. / premium 253 (7,202) 5 5 Valuation(x) Debt changes - - - - PER 34.3 36.1 26.2 24.1 Dividend paid (2,293) (2,158) (2,978) (3,237) P/B 7.7 7.5 6.1 5.1 Interest paid (81) (110) (98) (98) P/CEPS 28.0 28.6 21.2 19.0 Others - - - - EV/EBITDA 24.2 23.7 16.5 14.5 Net cash from Fin. activities (2,122) (9,470) (3,071) (3,330) EV/Sales 5.7 7.9 5.2 4.4 Net change in cash 15,729 (6,145) 4,307 7,944 Dividend Yield (%) 0.6 0.6 0.8 0.8 Free Cash Flow 17,850 3,325 7,377 11,274 Source: Company Data, PL Research Source: Company Data, PL Research

Quarterly Financials (Rs m) Key Operating Metrics Y/e Mar Q4FY20 Q1FY21 Q2FY21 Q3FY21 Y/e Mar FY20 FY21E FY22E FY23E Net Revenue 15,525 6,386 13,054 14,462 Total sales volumes (mscm) 2,337 1,947 2,928 3,316 YoY gr. (%) 0.6 (59.5) (22.9) (13.1) CNG sales volumes (mscm) 1,718 1,352 2,131 2,407 Raw Material Expenses 8,262 2,991 6,097 6,069 PNG sales volumes (mscm) 619 595 797 909 Gross Profit 7,263 3,395 6,957 8,393 CNG retail price (Rs/kg) 39 39 37 38 Margin (%) 46.8 53.2 53.3 58.0 PNG retail price (Rs/scm) 28 24 26 27 EBITDA 3,767 834 4,071 5,007 Source: Company Data, PL Research YoY gr. (%) 13.7 (76.7) 3.7 27.8 Margin (%) 24.3 13.1 31.2 34.6 Depreciation / Depletion 655 682 711 750 EBIT 3,112 153 3,360 4,257 Margin (%) 20.0 2.4 25.7 29.4 Net Interest 27 24 23 31 Other Income 313 306 657 259 Profit before Tax 3,398 435 3,994 4,485 Margin (%) 21.9 6.8 30.6 31.0 Total Tax 865 117 915 1,137 Effective tax rate (%) 25.4 26.9 22.9 25.3 Profit after Tax 2,534 318 3,079 3,349 Minority interest - - - - Share Profit from Associates - - - - Adjusted PAT 2,534 318 3,079 3,349 YoY gr. (%) 12.3 (85.4) (19.2) (35.2) Margin (%) 16.3 5.0 23.6 23.2 Extra Ord. Income / (Exp) - - - - Reported PAT 2,534 318 3,079 3,349 YoY gr. (%) 12.3 (85.4) (19.2) (35.2) Margin (%) 16.3 5.0 23.6 23.2 Other Comprehensive Income - - - - Total Comprehensive Income - - - - Avg. Shares O/s (m) - - - - EPS (Rs) - - - - Source: Company Data, PL Research

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Price Chart Recommendation History

(Rs) No. Date Rating TP (Rs.) Share Price (Rs.) 575 1 8-Jan-21 BUY 603 540

486 2 11-Nov-20 BUY 603 448 3 7-Oct-20 BUY 590 384 398 4 26-Aug-20 BUY 590 413

309 5 20-Jul-20 BUY 597 412 6 7-Jul-20 BUY 597 416 221

7 17-Jun-20 BUY 597 474

Feb -Feb18

Feb -19 Feb

Feb -20 Feb

Feb -Feb21

Aug -18 Aug Aug -19 Aug Aug -20 Aug 8 8-Apr-20 BUY 601 436

Analyst Coverage Universe Sr. No. Company Name Rating TP (Rs) Share Price (Rs) 1 Aarti Industries BUY 1,314 1,159 2 Corporation BUY 505 422 3 GAIL () UR - 133 4 BUY 528 380 5 Corporation BUY 315 230 6 BUY 124 96 7 Indraprastha Gas BUY 603 540 8 BUY 1,275 1,117 9 NOCIL BUY 182 143 10 Oil & Natural Gas Corporation BUY 114 98 11 Accumulate 117 113 12 Petronet LNG BUY 399 260 13 BUY 2,232 2,050

PL’s Recommendation Nomenclature (Absolute Performance) Buy : > 15% Accumulate : 5% to 15% Hold : +5% to -5% Reduce : -5% to -15% Sell : < -15% Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly

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