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* We upgrade IGL from Hold to Buy and downgrade GGL from Buy to Hold based on current risk-reward. We retain IGL’s Rs610 TP but raise GGL’s TP to Rs520 from Rs475 on lowering capex and raising terminal growth rate. We keep FY21-23E earnings unchanged.

* Even a worst-case scenario of Rs10/ltr auto-fuel excise duty cut and hike in domestic gas price to USD5/mmbtu, Delhi CNG would still be 40%/16% cheaper to petrol/diesel. IGL should be able to maintain its 10%+ volume growth and Rs8.5/scm+ EBITDA guidance.

* GGL, in turn, may have to roll back recent price hikes as spot LNG cools off. Our volume estimates imply 21% CAGR in FY19-23E for GGL vs. 8% for IGL. However, the heavy reliance on Morbi is a concentration risk. For IGL, the upside from Gurugram is still there.

* We value IGL/GGL using DCF with a 9.5% WACC each and 3%/2.7% terminal growth. Key downside risks for IGL: aggressive EV penetration and a sharp decline in oil prices. Key upside risks for GGL: margin expansion and ban on polluting fuels across Gujarat.

IGL’s retail model with pollution control in NCR implies steady outlook:

For every USD1/mmbtu hike in APM gas price, Delhi CNG prices would go up by Rs5/kg if passed on. In a worst-case scenario, if gas prices are increased to USD5/mmbtu (ONGC’s reference cap), CNG prices would increase from Rs43.4/kg currently to ~Rs60/kg. On the other hand, current petrol prices are at Rs91.2/ltr. Assuming USD65/bbl Brent and an Rs10/ltr rollback in excise duty, CNG would still be 40% cheaper to petrol, well above the 25% hurdle rate for conversion. This is only for private cars as public-commercial transport are mandatorily under CNG. Hence, the discount against diesel, which would fall to 16%, would not matter. In the case of domestic PNG as well, despite Rs10/scm of similar hike, it would still be 15% cheaper to LPG.

We believe that management’s volume growth guidance of 10%+ yoy is reasonable. Monthly private vehicle conversions in 9MFY21 stood at 3,233 vs. 3,075 in FY20 with significant pickup to 8,000+ in Q3FY21. 1,000 buses ordered by DTC would also add up while ramp-up in the seven new areas, including Gurugram, Rewari and Ajmer, would contribute to 15% of IGL’s targeted volume of 10.5-11.0mmscmd by FY25. We also see low downside risks to IGL’s Rs8.5/scm+ EBITDA guidance as it is lower than retail CGD peers, and Haryana Gas’ transfer can add up.

GGL now more expensive than IGL; Morbi a concentration risk:

The recent run-up in GGL’s stock price implies a FY23E PE of 21.1x vs. 18.8x consolidated for IGL. While the FY20-22E period would be marked by doubling of volumes, margin expansion and a jump in earnings-ROE for GGL, this was primarily driven by Morbi regulations and cyclically-low spot LNG prices. Volumes from other segments have been fairly normal and with heavy reliance on spot LNG, there exists commodity risk in the B2B segments. GGL is turning aggressive on CNG expansion though volume potential has to be more visible.

With spot LNG prices cooling off now, GGL may have to pass on the same through a rollback of recent price hikes. We have already built in Rs5.4/scm EBITDA for FY22/23E, which is at the upper end of management’s guidance. We expect IGL and GGL’s volume performance to be similar from FY23, with the risk of rise in spot LNG prices for the latter. Hence, we prefer IGL over GGL, based on current valuations, due to the relative stability of a more retail-oriented model. We turn OW on IGL and UW on GGL in our EAP. We raise GGL’s TP by assuming lower capex and higher terminal growth rate.

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