Volumes plunged amidst lockdown; FY21e EPS down 10% due to slower recovery and lower margins; ‘Sell’ retained.
IGL’s Q1FY21 results were well below our estimates reflecting lower-than-expected volumes amid extended lockdowns in Delhi and surrounding regions. We remain wary of medium-term risks to (i) CNG margins from imminent enabling of open access for CGD networks; (ii) and CNG volumes from plausible shift towards electric mobility for buses and three-wheelers segment as targeted by the recently notified Delhi electric vehicle policy. Sell stays with Fair Value of Rs 380.
Volumes plunged amid lockdown; higher gross margins offset by negative operating leverage Ebitda declined 77% y-o-y to Rs 834 mn in Q1FY21 reflecting 57% y-o-y decline in volumes to 2.7 mcm/d amid lockdown in Delhi/NCR and 46% y-o-y reduction in unit Ebitda to Rs 3.4/scm impacted by negative operating leverage, which offset improvement in gross margins. Net income declined 85% y-o-y to Rs 318 mn (EPS of Rs 0.5) further impacted by higher depreciation and lower other income, which was partly offset by lower tax rate at 26.9%. Income from associates, CUGL and MNGL, declined 82% y-o-y to Rs 60 mn in Q1FY21.
Sharp decline in volumes: IGL’s volumes declined 57% y-o-y to 2.7 mcm/d in Q1FY21 reflecting 66% decline in CNG volumes and 30% decline in overall PNG volumes. Volumes declined 40% y-o-y for I&C segment and 63% y-o-y for other CGD entities in Gurugram and Faridabad, which was partly offset by a robust 39% growth in domestic PNG segment.
Improvement in gross margins offset by negative operating leverage: Gross margins increased 7% q-o-q to Rs 13.7/scm reflecting a decline in domestic gas and LNG prices. Unit Ebitda reduced 46% q-o-q to Rs 3.4/scm impacted by large negative operating leverage.
Medium-term risks to CNG margins and volumes from open access regulations and EV policy
We see material risks to CNG segment margins, if PNGRB is able to enforce open access of CGD network through an enabling regulatory framework. In our view, OMCs may consider sourcing domestic gas volumes through an open-access CGD network to supply directly to the customers through their retail outlets rather than continuing to sell it on behalf of licensed CGD entities like IGL—the former will allow OMCs to earn a higher share of margins. Similarly, state transport units such as DTC and UPSRTC may consider sourcing domestic gas directly for their captive consumption through an open-access network at an effectively lower cost by paying modest network tariffs. OMCs and STUs together operate ~72% of IGL’s CNG outlets.
We also see medium-term risks to volumes from plausible adoption of electric mobility for buses and three-wheelers segment in Delhi, given meaningful incentives offered under the recently notified electric vehicle policy.
Cut FY2021e EPS by 10%; retain SELL with unchanged FV of Rs 380
We cut our FY2021e EPS by 10% to Rs 14.4 factoring in slower recovery in volumes, lower unit Ebitda margins amid negative operating leverage and other minor changes; our FY2022-23 EPS estimates remain largely unchanged. We retain Sell rating on the stock, which is trading above our unchanged DCF-based Fair Value of Rs 380, even after the recent de-rating.