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Margins bottoming; volumes diversifying; valuation undemanding

* High gas costs and INR weakness weigh on stock price: IGL's stock has corrected ~10% over the last four months, primarily on:

1) elevated input gas costs (Brent at USD93/bbl in 1HFY27'TD vs FY26: USD69/bbl) and INR depreciation (INR95/USD in 1HFY27'TD vs FY26: INR88.4/USD), which contracted margins, and

2) growing investor concerns around Delhi’s EV policy.

* Margin has likely bottomed; EV policy impact limited: We highlight:

1) CNG volume growth remains broad-based—ex-Delhi NCR, consistently rising 20%+ YoY, and ex-buses, Delhi CNG rising ~9-11% YoY—supporting our 6-8% medium-term growth thesis;

2) Delhi's EV Policy 2.0/CAQM's N1-N2 LGV mandate is a structural long-term negative, but near-term impact is modest at ~1% p.a.;

3) 1QFY27's INR3.4/scm margin likely marks the trough, with recent CNG/PNG price hikes supporting 2QFY27 margins and additional headroom for further price hikes.

* Valuation and view:

IGL is trading at 9x FY28E forward P/E (ex-MNGL/CUGL), below its mean -1SD, against ~14-15% RoE and 6-8% volume growth. We value IGL at 13x Dec’27E SA P/E and add INR44/sh as the value of JVs to arrive at our TP of INR195/sh. At a 2.6% FY27E dividend yield and 14% EPS CAGR over FY26- 28, we believe the valuation is attractive. Reiterate BUY.

Ex-Delhi NCR diversification and ex-buses Delhi momentum both intact

* Ex-Delhi NCR CNG volumes remain strong: IGL continues to see robust volume growth outside the Delhi NCR region, with volumes growing 20%+ YoY over the last few quarters. On an overall basis, non-Delhi NCR volumes are now 15-20% of IGLs total volumes, contributing ~50% of incremental sales. This provides increasing diversification from the relatively mature Delhi market and supports our expectation of 6-8% overall volume growth over the medium term.

* Ex-buses, Delhi CNG volumes grew 11% YoY: In 1QFY27, CNG volume growth ex-buses stood at ~11% YoY (up 9.7% YoY ex-DTC). Volume growth ex-buses continues to grow, driven by strong vehicle additions in IGLs’ geographic areas (GAs) (27,300 CNG vehicles added in 1QFY27; up ~50% YoY). With DTC volumes becoming negligible in 1QFY27, headline CNG volume growth numbers could look significantly better from FY28 (assuming DIMTS bus volumes stabilize as guided by management).

Limited near-term earnings impact from Delhi EV policy 2.0

* CAQM tightens the screws: N1/N2 LGV registration bans extend beyond Delhi's EV policy: Delhi's EV Policy 2.0 (notified Jul'26) mandates that from 1st Jan'27, only electric three-wheelers (3W) (including goods carriers) and N1- category light commercial goods vehicles will be eligible for new registration in Delhi. CAQM's subsequent order (19 Aug'26) tightens this further: new petrol, diesel, and CNG N1 LGVs (up to 3.5t) will be barred from registration in Delhi from 1st Jan'27, extending to five high-vehicle-density (HVD) NCR districts (Gurugram, Faridabad, Sonipat, Ghaziabad, Gautam Buddha Nagar) from 1st Jul'27, and to the remaining 18 NCR districts from 1st Jan'28, with CNG N1s still permitted in these outer districts. CAQM has also brought N2 vehicles (3.5-7.5t) under an electric-only mandate for the first time: new diesel/petrol/CNG N2 registrations banned in Delhi from 1st Jan'28, in the five HVD districts from Jul'28, and in the rest of NCR from Jan'29 (CNG N2 exempted there—a segment the June 30 Delhi EV Policy had left untouched.

* We estimate ~0.6% p.a. CNG volume impact from 3W electrification: We estimate that 3Ws in Delhi form 6% of overall CNG volumes for IGL. Assuming a 10-year replacement life, the CNG volume impact shall be ~0.6% p.a. This is in line with management guidance of lower than 1% p.a. volume impact.

* Delhi's N1 fleet: 106k CNG vehicles today, zero new additions from 2027: As of end-CY25, Delhi's active N1 LGV fleet stood at ~0.11m vehicles, of which ~97% were CNG (~0.1m). New registrations stood at ~14,700 in CY25 alone, of which CNG accounted for ~93% (13,646 units) and EVs just ~7% (link). This implies an annual replacement rate of ~14% (~7-year turnover), meaning the ban from Jan'27 permanently shuts off ~14-15k units of annual CNG replacement demand in Delhi's fastest-turning commercial category, with the fleet eroding gradually as vehicles reach end-of-life rather than facing an immediate volume shock

* We view N1/N2 electrification as a structural long-term negative for IGL, though near-term earnings impact should be limited, given the gradual pace of fleet replacement and continued growth in CNG passenger vehicles. The bigger risk lies in policy precedent: Delhi-NCR's clean mobility roadmap is visibly pivoting from CNG-led to EV-led transport, raising the possibility of passenger vehicles being brought under similar restrictions over the coming years.

Valuation and view

* Valuation inexpensive at below mean -1 S.D. one-year forward P/E: IGL currently trades below mean -1SD one-year forward P/E valuation. Excluding MNGL and CUGL, the stock is trading at 9x FY28E P/E, despite generating ~14- 15% RoE and delivering 6-8% volume growth. We believe the current valuation appears to underappreciate the earnings resilience and growth potential of the business. ? We estimate EBITDA margin of INR5.5/INR6.2 per scm in FY27/28 and volumes to clock 7% CAGR over FY26-28. Resultant EBITDA and PAT are estimated to clock a CAGR of 14% each over FY26-28.

* We value IGL at 13x Dec’27E SA P/E and add INR44/sh as the value of JVs to arrive at our TP of INR195/sh. At a 2.6% FY27E dividend yield and 14% EPS growth over FY26-28, we believe the valuation is attractive. Reiterate BUY.

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