• Net sales at Rs8.7bn were lower than estimates owing to weaker than expected CNG realizations

• CNG volumes at 194mn kgs were higher by 1.6% yoy and 1.4% qoq. PNG volumes were at 83scm a fall of 3.5% yoy and 9.1% qoq

• Gross margins/unit increased by 6.4% yoy and 14.9% qoq to Rs11.8/unit. This was better than our expectations owing to decline in LNG prices and hike in CNG prices

• OPM at 24% came in higher than our expectations and was higher by 250bps yoy and 413bps qoq, margins were highest since Q2 FY13

• Maintain BUY with a revised price target of Rs446

Revenues lower than expected

Indraprastha Gas Ltd (IGL) reported net sales of Rs8,687mn, much below our estimates for Q1 FY15. The revenues were lower by a 3.8% yoy and 10.3% qo. CNG volumes at 194mn kgs were higher by 1.6% yoy and 1.4% qoq. PNG volumes were at 83scm a fall of 3.5% yoy and 9.1% qoq. CNG realizations were at Rs36.4/kg a fall of 7.7% yoy and 10.8% qoq owing to price cuts implemented in the month of February 2014. PNG prices were higher by 6.9% yoy but were lower by 3.1% qoq. While CNG volumes were in line with expectations realizations were lower than estimates. PNG volumes were lower than projected while realizations also were below estimates.

Strong operational performance

OPM at 24% came in much higher than our expectations and was higher by 250bps yoy and 413bps qoq. The improvement in OPM was possible on the back of lower 358bps yoy and 765bps qoq improvement in gross margins. Gross margins/scm improved by 6.4% yoy and 14.9% qoq to Rs11.8/scm. However, these gains were offset by increase in staff costs and overheads owing to operating deleverage. Higher than expected gross margins were on the back of 1) lower LNG prices and 2) proactive increase in CNG prices.

Depreciation was seen lower by 30.7% yoy and 33.9% qoq owing to implementation of the provisions under the Companies Act 2013. While interest costs were lower by 28.7% yoy, other income more than doubled. Resultantly, PAT was recorded at Rs1,140mn, implying a growth of 30.2% yoy and 26% qoq. This was much higher than our estimates of Rs902mn.

Maintain BUY with a revised price target of Rs446

The pending Supreme Court verdict on the case filed by PNGRB regarding compression and marketing charge levied by the company continues to concern the markets. While charges were a concern, larger issue was a possibility of retrospective implementation. The probability of retrospective implementation, we believe, is now minimal. Furthermore, the new Government, considering their state wide implementation of city gas projects in Gujarat, is expected to lay stress on CGD projects across the country. IGL is trading at a P/E of 10.8x FY16E EPS of Rs35.7 much below its historical average. We maintain our BUY rating with a revised price target of Rs446.