Indraprastha Gas Ltd (IGL) confronts the medium-term risk of its sales volumes being hurt to the tune of 30 percent because of three-wheelers, buses and taxi aggregators increasingly switching to the Electric Vehicle (EV) mode, says a Jefferies report.
Rising EV penetration has been a key threat to city gas distributors (CGDs), hitting sales of their Compressed Natural Gas (CNG) business.
For IGL, the CNG business, which offers motorists an alternative to fossil fuels like petrol and diesel, accounts for nearly 70-75 percent of sales volumes; domestic piped natural gas makes up 14 percent and the remainder comes from industrial or commercial gas, analysts said.
Delhi Transport Corporation (DTC) buses and three- wheelers constitute about 15 percent of IGL's overall volumes; cab aggregators form another 15 percent of the city gas distribution company’s volumes, Jefferies said.
EV penetration grew to 10 percent in the National Capital Region centred on Delhi in 2022 from 3 percent in 2018, largely driven by two- and three-wheelers. In the four- wheeler passenger vehicle segment, CNG had a market share of about 18 percent in 2022 and EVs 3 percent.
EV policy support
The Delhi government has approved a new policy that regulates cab aggregators and delivery service providers. According to the policy, these companies will need to gradually replace their vehicles with EVs.
The share of EVs in their new purchases will need to reach 100 percent within the next 4-5 years from the date of notification. By April 1, 2030, all vehicles used by these companies must be electric.
Read more | EV adoption could blow a hole in IGL’s biz in the long run
Before becoming law, the draft policy is open for public feedback until the end of June. After gathering public inputs, the government will finalise and implement the policy.
With government and regulatory support, Delhi has been aggressive in adopting alternative fuels that have low emissions given its high air pollution.
Delhi makes up about 65 percent of the total volumes for IGL and Haryana 5 percent.
Near-term earnings
Jefferies said IGL’s near-term earnings are supported by a pick-up in CNG demand after price cuts and expanding margins on feedstock cost relief.
The financial services firms estimated an 18 percent increase in IGL’s Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) in FY24.
Even as it warned of EV risk over the medium term, Jefferies maintained its ‘buy’ rating on the stock with a target price of Rs 560.
The company had acknowledged the threat from EVs in its recent conference call with analysts, but added that it did not affect near-term demand.
Any policy move favouring EVs will have some impact first on petrol and diesel and only then on CNG, it said. IGL also announced plans to install 210 EV charging stations over the next 1-1.5 years.
Expanding in and outside NCR
Jefferies has estimated 8 percent volume growth in FY24 compared with the management’s 12 percent projection, along with 40 percent incremental growth from new geographical areas.
Read more | Indraprastha Gas plans capex of Rs 1,600 crore in FY24: MD
IGL has been adding 250,000-300,000 households to its customer base and over 100 stations every year, mainly in new areas like Rewari, Karnal, Meerut, Muzaffarnagar and Shamli, Kaithal, Kanpur, Fatehpur and Ajmer, which is seen fuelling growth.
The company expanded by adding 81 CNG stations and connecting more than 300,000 households in the fiscal year 2023. In FY24, the company aims to have over 100 stations, with 50 percent of them being in new geographical areas.
To support its growth, IGL plans to invest Rs 1,500-1,600 crore over the next three years. With this, the city gas distributor hopes to boost its volume share from outside the Delhi and NCR regions to 40 percent from 15 percent currently.
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