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Earnings growth visible, EV threat yet distant

Supportive Volume mix: About 60% volumes come from Delhi and adjoining areas and 40% from other geographical areas (GAs). In FY23, IGL sold volumes of 8.1mmscmd and targets to exit at 9mmscmd in FY24 and 10mmmscmd in FY25 following new GA ramp up, CNG station additions, and increasing D-PNG penetration. The mix of mature and new GAs will support long term volume growth. Volumes from new GAs (currently at 0.2mmscmd) is expected to grow over 1mmscmd by FY26, (potential of 2.5mmscmd) thereby compensating volume loss, if any, due to EV policy in Delhi.

Sustainable Margins: The EBITDA margin in recent quarter was Rs 8.6/scm while gross margin reported was Rs 14.1/scm. Over long-term, IGL expects sustainable EBITDA margin to be Rs 7.5-8/scm. Falling gas cost would reduce IGL cost, while we believe it can partially absorb benefit in margins and report surprise earnings.

Strong Vehicle additions: CNG monthly conversions during recent quarter were 15.9k/month, aided by price cuts; even at lower price differentials of 15%, the conversion were strong at ~13k/month vehicles. OEMs are coming out with newer CNG variants, adding to the total CNG vehicle base. IGL has also begun working with Uttarakhand government for long haul buses where they have piloted 5 buses at present. CNG is ~45% cheaper to petrol in Delhi and ~30% cheaper than diesel, based on respective mileage.

CNG station additions: IGL intends to add 100 CNG stations in FY24 and following years and significantly increasing CNG network in new GAs. New GAs are doing well, with more than 50% new stations being added in new GAs which would boost volumes, offsetting possible decline in growth from EV policy.

Gas Sourcing: The priority gas allotment with IGL is 6.2mmscmd, while long term contracts of 2.2mmscmd are in place, of which it has ~1.3mmscmd purchase contract with GAIL and BPCL (accounting for ~30%.) In recent gas auction by RIL, IGL secured 0.5mmscmd for a period of 5 years.

Subsidiaries: Maharashtra Natural Gas (MNGL) and Central UP Gas (CUGL) are expected to achieve double volume growth with strong PAT growth, (averaging over 35% in the last 5-years.) CUGL GAs include Kanpur and Bareilly, Unnao & Jhansi while MNGL GA comprises Pune city and nearing area.

EV impact: Over long term, increase in adoption of EV vehicles could shadow CNG growth prospects, but there are no threats in immediate to medium term. To compensate for the potential loss of volumes, IGL is working on installation of 50 charging stations by end of FY24, it currently has 30 stations. The EV policy introduced by Delhi government is going to impact cab aggregators, as they would have to shift 100% fleet to EV in 5 years, thus impacting 15% of total volume. To offset transition in buses, IGL is in talks with many state transport corporations (Rajasthan, Uttarakhand, Haryana, UP) to put their fleet on CNG/LNG for long haul.

Valuation: We expect an 7% volume CAGR over FY23-FY26 with a spread of Rs7.5– 8/scm. IGL is the best placed CGD given its resilient volume mix, debt-free balance sheet and prudent capital allocation. Stock trades at 15.9x/14.7x FY25e/26e PER, below -1 std of the last five-year average. We value it on a PER basis, assigning an 17x multiple and target of Rs540 (incl. value from investments in MNGL, at Rs68/sh and, in CUGL, at Rs21/sh).

Risks: Slower volume growth, margin compression on lower differences vs alternatives, regulatory changes, sharp increase in LNG prices, slower infra rollout, competition from alternative fuels like electricity for vehicles.

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