Our recent meeting with the IGL management provided comfort on volume growth trajectory in the medium term, as the company expands its presence in new areas. However, we remain wary of the regulatory risks and threat to long-term growth from India’s aspired transition to electric vehicles, the impact from latter is difficult to quantify but certainly warrants a caution at 25X FY2019E EPS. ‘Sell’ stays with a revised TP of Rs 1,185. IGL expects volumes from the existing areas in NCR to grow by 8% over the next few years driven by increasing conversions of private vehicles and taxis, under a favourable policy environment; the company also expects to benefit from addition of 1,000 CNG buses in the near term. IGL expects to further benefit from expanding its presence in newer authorized areas including a portion of Gurugram, Rewari and Karnal.
The company estimates Gurugram to add 0.4 mcm/d of volumes over the next 3-4 years, while Rewari and Karnal potentially scaling up to 0.5 mcm/d and 0.3 mcm/d of volumes over the next five years. We remain wary of long-term risks to margins for CGD business and volumes for existing entities, as and when the government considers (1) a deregulated pricing and allocation policy across the entire gas value chain and/or (2) a regulatory framework to effectively enable competition.
We also see a possibility of slowdown in CNG volume growth in the long term led by the government’s policy prerogative of encouraging electric vehicles in the country – it is worth noting that Energy Efficiency Service (EESL), a PSU JV, has recently issued a global tender for procuring 10,000 electric cars for the government departments, presumably to be used in NCR region.
Potential adoption of electric vehicles in the long run, particularly for public transport, could pose a material threat to the long-term volumes for CNG business in India – we acknowledge that the impact is difficult to quantify at this stage, but it cannot be ignored at current rich valuations of CGD stocks.