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In a notification posted by IGL on 25th Apr’23 (link), the regulator PNGRB has clarified long-pending issues pertaining to formal CGD authorisation for the areas of Greater Noida, Faridabad and Gurugram. We note IGL already supplies gas (0.5mmscmd) to Gurugram and Faridabad for a nominal service fee of Rs2/scm, which implies an EBITDA of only Rs350mn – while for balance volumes, IGL’s EBITDA margin is at a healthy ~Rs7.7/scm (FY22 reported earnings). We note greater Noida region is
already a part of IGL’s normal business operations, and this gets formally recognised  in PNGRB’s ruling. IGL has repeatedly stated that the development of infra and penetration in all 3 GAs has lagged potential by a wide margin, and that volume
potential from Faridabad and Gurugram is material. However, the regulator has chosen to bifurcate the areas as per its assessment of infra work already under taken and regulatory eligibility.

* Greater Noida – IGL’s assessment of volumes from this region as of now is at ~1mmscmd and this is growing by 10% annually. Management has already been developing this area as part of its business operations, hence grant of formal authorisation does not change anything on the ground for IGL.

* Faridabad – PNGRB has bifurcated the GA into two sub areas – Faridabad-1 and Faridabad-2 (Faridabad-1 being the smaller area) – and has granted the larger area to AGTL, based on the material investment already done by AGTL in its area and
PNGRB’s contention that no single party completely qualifies for full authorisation (exhibit-2). For the part granted to IGL, the company can see volumes of 0.2- 0.3mmscmd in 3 years as per rough estimates, but grant of authorisation to the incumbent(or AGTL) means that service revenue of Rs175mn hitherto earned by IGL via third-party sales may cease from FY24.

* Gurugram – The regulator’s decision to also bifurcate the area between the incumbent HCG (much larger area granted) and IGL (main Gurugram area, not part of IGL authorisation) is a material negative (exhibit-3), with the earlier SC decision to allocate theentire area to IGL now altered to only give ~30-40% of the area to it (IGL had earlier guided to a volume potential of as much as ~2.5mmscmd from this region, but with only a limited area now available, they may get only 0.7-0.8mmscmd additional volumes from here by FY26E – translating to incremental margins of Rs2.2bn). Here too, the third-party sales of ~0.25mmscmd may cease and ~Rs175mn of service revenues will go away from IGL.

Overall – The loss of the high-potential area of Gurugram is a negative for IGL but, with most regulatory issues now addressed for all contiguous areas of NCR, earnings and operations visibility gets a boost. Also, with renewed MWP targets set by PNGRB for all the areas, volumes should increase with higher margins, which should easily offset IGL’s potential loss of service fees of Rs350mn. Overall, our base case estimates and view stay unchanged. We have revised our DCF based TP to Rs 625/sh (earlier TP of Rs 545/sh) to factor in higher margin in long term from direct (in house) sales from Gurugram and Faridabad GAs. Reiterate BUY.

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