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Threat from EVs

Newspaper article suggests aggressive influx of EVs into Delhi

* The article suggests aggressive timelines for aggregators for transitioning to electric vehicles (EVs).

* In our earlier note, we had highlighted how the onslaught of EVs in China resulted in a decline of 3-11% CAGR in CNG and LNG sales over the past five years for two prominent Chinese CGD companies.

* Aggregators account for 30-40% of total CNG sales for IGL. In the near term, while the EPS may not be impacted, concerns remain on the ask rate of 6% terminal growth implied by the CMP. We reiterate our negative stand on IGL.

Key highlights from the article

* The article suggests that draft policy warrants cab aggregators and delivery services to ensure 5% (4W) and 10% (2W) of all new purchases to be EVs by Mar’22.

* It aggressively suggests that by Mar’23, the same should rise to 25% and 50%, respectively.

* While we acknowledge that the draft is open for public comments for 60 days and the timelines may be diluted, the direction remains in line with our expectation. Delhi being one of the most polluted cities globally is bound to see policy-led transition to EVs just like the judiciary-led transition to CNG decades back.

Cues from China, where the story began in CY09

* Our earlier report, ‘India’s gas sector to benefit from syzygy ahead’, highlighted how CNG/LNG Retail sales have been declining by 3%/11% CAGR for China Gas Holdings/ENN Energy for the past five years.

* On the contrary, the Industrial segment continued to grow for these companies at 19-20% CAGR for the past few years. Due to high Real Estate prices, we don’t expect the Industrial segment to grow in Delhi. Other areas like Ajmer may contribute, but these would take time for establishing requisite connectivity.

* While volumes from newly started geographical areas would continue to grow, policy-led boost towards EVs would meaningfully dent its long-term volume growth prospects. Aggregators account for 30-40% of total CNG sales, while buses would account for a similar proportion. We expect such strict measures in its bus procurement policy also, which would further dent IGL’s volume growth potential.

Valuation and view

* As per our DCF model, the CMP of IGL implies a terminal volume growth of 6%, which is difficult to achieve considering the rising penetration of EVs.

* Domestic APM gas prices are expected to witness another steep hike of USD2- 4/mmBtu in Apr’22, followed by another, but muted, growth in Oct’22. Oil Marketing Companies (OMCs) have also demanding a doubling of commissions for sale of CNG from their premises.

* Considering the pressure on gas prices, we build in an EBITDA/scm of INR7.7/6.7/6.5 in FY22E/FY23E/FY24E as compared to INR7.6 in FY21. We project total volume growth of 31%/11%/8% in FY22E/FY23E/FY24E. We value the company at 21x FY24E consolidated EPS and reiterate our Neutral rating on the stock.

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