Standalone EPS CAGR of 16% likely over FY18-21e; multiple triggers exist for medium-term growth; TP revised to Rs 389 from Rs 381.
The Delhi Cabinet aims to introduce 1,000 electric buses by Jun’20. This is in addition to CNG buses (500 low-floor and 500 normal). We note that Energy Efficiency Services Ltd (EESL) has not progressed much with the earlier order for 10,000 electric cars. More so, the recent tender for an additional 10,000 cars has been quashed indefinitely.
Multiple medium term triggers exist in the form of (a) intercity/highway travel on CNG, (b) higher conversion of LCVs, (c) increasing differential of diesel vehicles v/s petrol/CNG post BS-VI implementation, (d) increasing launches from OEMs, (e) newer applications, (f) stricter enforcement of pollution norms in industries, and (g) growth in existing and newer areas.
Electric vehicles not ready to take off
EESL floated its first tender for 10,000 EVs in Aug’17, with the first phase of 500 cars to be delivered by Nov’17 and the rest by Jun’18. The tender was closed after much delay in Jan’18, with revised delivery deadline of Mar’19. Only 10% of the contracted EVs were delivered by end-Dec’18, extending the timeline further to Sep’19. EESL’s tender in Nov’17 for 250 charging stations was finally awarded after cancellation of the first tender (Sept’17) and the follow-on snap-bid (Oct’17). The second tender for additional 10,000 EVs in Apr’18 got cancelled as automobile companies awaited government policies on specifications for the charging infrastructure.
Expect insignificant impact on volumes in the medium term
Hence, we believe that EVs may have an impact only in the longer run. In the short-to medium-term, new areas like Rewari, Karnal and Muzzafarnagar would add 0.2mmscmd capacity each in the next 3-4 years. Haryana City Gas sells 0.4mmscmd; of this, it sources 0.25mmscmd from IGL with margins to IGL being minimal. Post the takeover, IGL may increase sales volume to 1-1.5 mmscmd within three years. Newly awarded geographical areas in the tenth round would further add to growth in the medium term.
Valuation and recommendation
We do not expect EVs to be a threat to IGL in the short-to medium-term. We expect volume growth to stay strong at 12/11% in FY20/21. In the short term, Ebitda/scm may increase due to the INR appreciation. However, we remain conservative with estimate of Rs 5.8/5.9 in FY20/21. Both IGL’s subsidiaries—MNGL and CUGL —have been growing at a steady pace. We expect RoEs of 20.1/19.9% in FY20/21. The stock is trading at 23.4x FY20 standalone EPS of Rs 12.7. We expect standalone EPS CAGR of 16% during FY18-21. We move our valuation from Dec’20 to FY21, valuing IGL at 24x (unchanged) FY21 standalone EPS of Rs 14.6, adding the contribution from its JVs. With a target price of Rs 389 (earlier: Rs 381), we reiterate Buy rating.