IGI Logo

* CNG and domestic PNG volumes for listed CGDs (IGL, MAHGL, GUJGA & ATGL) reported a 7% CAGR over the past four years, while gas production from nominated fields declined at 3% CAGR during the same period.

* The supply-demand imbalance is likely to continue, thereby increasing the proportion of expensive non-APM volumes in sourcing mix for CGDs. This should further lead to structural margin challenges going forward.

* For Indraprastha Gas (IGL), we estimate that the 20% penetration of EVs in sales of new CNG vehicles over the next three years would result in a decline in average CNG sales volume growth to 9% from 12% in our base case. Prospects of long-term high volume growth remain even bleaker for the company. Considering both these headwinds, we reiterate our Sell rating on the stock with a TP of INR340.

Margin pressures imminent

*During FY18-22, CNG and domestic PNG sales volumes for listed CGDs rose to 11.9mmscmd from 9.1mmscmd. During the same period, gas production from nominated fields declined to 64.4mmscmd from 72.1mmscmd.

* To keep up with the increasing demand from priority sectors of CNG & PNGdomestic, the government had periodically tried to increase APM allocation to the CGD sector at the expense of other sectors. Despite government’s efforts, the proportion of non-APM gas is likely to rise in the volume mix for CGDs going ahead as supply-demand dynamics might remain tight owing to commissioning of GAs awarded in project bidding rounds 9-11.

*While government’s recent order to provide HPHT gas to CGDs ahead of other sectors provides some relief, increased proportion of HPHT gas in volume mix may lead to margin pressure. This is because, on an average, HPHT celling has been ~115% higher than APM gas since implementation of ceiling price in 2016.

* Additionally, IGL’s management has indicated that half of the expected incremental volumes of ~2mmscmd over FY24-25 will be contributed by the industrial PNG segment that might further impact margins adversely.

Threat of EVs to escalate in the medium to long term

*We assessed the impact of accelerated EV adoption on IGL’s CNG volumes over FY24-25E. For our base case we assumed that CNG vehicle population in the National Capital Region (NCR) region, over the next couple of years, grows at a similar rate as observed in FY22.

* Our calculations revealed that if EVs capture 20% of incremental CNG vehicles, IGL’s CNG growth rate may decline to 12%/9% from 14/11% in base case, in FY24/FY25, respectively. Whereas, if EVs capture 30% of incremental CNG vehicles, the growth rate may decline to 10%/8% during FY24/25.

* Additionally, a sustained 20% penetration of EVs in sales of new CNG vehicles over three consecutive years may result in a decline in average CNG sales volume to 9% from 12% in our base case.

To Read Complete Report & Disclaimer Click Here

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412

Above views are of the author and not of the website kindly read disclaimer