IGPL is trading at inexpensive valuations. It is a Buy for 44% upside

[Ravi]

The company reported very poor operating performance because of unplanned shutdown, on account of natural gas integration in the plant, leading to lower volumes. PAN-Ox spreads remained much lower than estimates led by higher Ox prices. Revenue de-grew by ~20% YoY/~2% QoQ because of much lower volumes & slight lower realizations. Gross margins contracted by steep 317bps YoY & 783bps QoQ to ~19.4% in Q1FY26 led by lower PAN-Ox spreads. The company’s PAN-Ox spreads are quoting lower than the normalized range, however, current month spreads have witnessed improvement from Q1 levels which is a slight relief sign that spreads have marginally improved from last quarter levels. During the quarter, there was EBITDA loss owing to M2M losses included in other expense to the tune of Rs150mn. Adjusting for the same, EBITDA margin stood at 3.5% but still stood lower because of steep dip in gross. The company’s new leg of greenfield capacity expansion for addition of advance plasticizers of 75K tons capacity with a capex of Rs1.65bn is in construction stage in Taloja plant & is expected to be completed by December 2025. This expansion will boost non phthalic business revenue share to 27-30% of revenues by FY28E (vs ~7.5% of Q1FY26 & ~7.5% of FY25 revenue) & will provide some stability in the margins. The company has announced its new venture into Compressed Biogas (CBG) plant with a pilot project of setting up 5 tonnes per day with an investment of Rs320mn by Dec 25E. As per our analysis, PAN-Ox spreads have witnessed steep downturn from last quarter & in times of high volatility & muted demand will likely keep the spreads under check, hence we materially cut our spreads estimates for the next year. The growth in the subsequent year FY27E would be largely led by new plasticizer business coupled with volume uptick in PAN business. The current demand environment remains weak led by weak consumer uptick, trump tariff uncertainty & geopolitical tensions coupled with lower MAN realizations than PAN. We have steeply cut our spreads estimate & slight volume assumptions for the next 2 years which led to steep cut on EBITDA & PAT. We also cut our target multiple by ~15% to 11x (earlier 13x) as weak operational numbers will likely weigh on financial parameters. Despite cut in numbers & forward P/E multiple for the next 2 years, we maintain BUY rating on the stock

Q1 reported muted volumes, visibility of volume growth in sight led by ramp up of PA5, next leg of capex to start by the end of CY25

▪ The company reported lower volumes in Q1FY26 because of unplanned shutdown owing to integration of natural gas. The PA5 capacity of 53,000 TPA will gradually ramp up & optimum utilization will be achieved in the next 2 years. ▪ At peak utilization levels, this capacity will generate Rs4.5-5bn revenue. But post commercialization of plasticizer capacity approx. 32-35K tonnes of volumes will be used captively. Netting the captive requirement, the net revenue addition from PA5 will be Rs1-1.5bn at peak utilization levels.

▪ For the greenfield expansion of plasticizers with a capacity 75K tonnes, the company has started construction in Taloja & expect commercialization by Dec 25E. This will incrementally add Rs8-9bn to the topline at peak utilization levels.

PAN-Ox spreads declined steeply in Q1, expect gradual improvement going ahead

▪ The company reported gross margin contraction by steep 317bps YoY & 783bps QoQ to 19.4% in Q1FY26. The margin contraction was due to much lower PAN-Ox spreads, largely led by higher Ox prices.

▪ Volatility in spreads of PAN-Ox spreads has been the most in the recent months as crude oil prices & demand conditions remain volatile. In Q1, PAN-Ox spreads have steeply declined and are quoting much lower than the normalized average. We expect gradual improvement for FY26E from Q1 levels, although we steeply cut our PANOx spreads estimate for the next 2 years.

▪ Management believes that PAN-OX spreads average between $150-250/ton in the long term, however it remains volatile & depends on demand, supply & other factors.

▪ Valuation

▪ IGPL is a near net cash company with strong foothold in domestic market focussing on forward integration, diversified clientele set, long decadal experience & growth focussed management. We cut our PAT estimates for the next 2 years by ~59%/24% in FY26E/27E led by lower PAN-Ox spreads, PAN & MAN realization & slightly lower volumes.

▪ Currently, the stock is trading at March 27E P/E of ~7.6x which looks inexpensive considering the growth trajectory from FY27E. We cut our target multiple by 15% to 11x (earlier 13x) as stated negatives will likely weigh on financial parameters and arrive at a target price of Rs 609, thereby, which offers upside of ~44% from current valuations. Hence, we maintain BUY rating on the stock.