Recovery in CNG volumes can fire up IGL’S prospects

Lower gas prices in second half will boost per unit margin

Indraprastha Gas’ (IGL’S) performance in the June quarter (Q1), as expected, was severely impacted by the nationwide lockdowns. Given the decline in vehicular traffic and commercial activities, total sales volume was down 57 per cent year-on-year (YOY) to 247 million scm (standard cubic metre) — compressed natural gas (CNG) volumes declined 66 per cent YOY, and piped natural gas (PNG) commercial/industrial volumes fell 40 per cent YOY. As CNG contributes the most to top line (73 per cent in FY20), net revenues declined 60 per cent.

Lower input gas costs partly insulated gross margins, which at ~13.7 per scm were down 20 per cent YOY. However, per unit margin (Ebitda/scm) at ~3.4 was down 76.7 per cent YOY as operating expenses remained elevated. Motilal Oswal Securities (MOSL) was expecting per unit margin of ~6.

The 13 per cent decline in operating expenses should largely have been driven by lower commission cost due to low CNG sales, whereas the level of other expenses shows that there was limited savings on power and fuel and repairs for compressors and rent, said analysts at Credit Suisse. The surprise was more because Mahanagar Gas (MGL) had seen other expenses decline 46 per cent YOY.

While the worst might be over and gas demand from industrial users has rebounded to almost pre-covid levels, IGL’S growth hinges on CNG volumes. CNG margins, too, are much better.

Schools remain closed and commuting to work is significantly down. Hence, one needs to watch out for normalisation and volume recovery for IGL. The company has told analysts that it expects volumes to start growing by the middle of Q3FY21 and is trying to achieve FY19 volumes in FY21 as a whole.

IGL, during the second half (H2) of FY21, will also benefit from reduction in price of gas under administered pricing mechanism. Nomura expects domestic gas price to reduce to $1.9-2 per mmbtu (million British thermal units) from $2.4 currently and, hence, IGL will get an opportunity to pass on costs. IGL’S per unit margins are pegged at over ~7 per scm in H2 by Nomura and ~6.3-6.5 per scm by MOSL.

Yet, earnings are expected to decline 45 per cent in FY21 before a strong rebound in FY22, says MOSL. Overall, while long-term prospects led by geographical expansion and increasing penetration remain strong, CNG volume recovery is the key trigger in the near term. Credit Suisse, MOSL, and Emkay Research maintain neutral ratings, but Nomura has a ‘buy’ rating, considering the volume recovery from FY22.