For IGL, the one driving factor is the discount enjoyed by CNG over other auto fuels. This alone makes CNG a natural choice for vehicle owners.
Indraprastha Gas (IGL; CMP: Rs 388.10; Market capitalisation: Rs 27,167 crore, Nifty: 19,765) delivered a consensus-beating result for Q2FY24. However, the market neglected it because of the concerns about the new electric vehicle (EV) policy passed by the Delhi assembly. The stock has corrected by 19 percent in the last one month and it is trading close to its 52-week low.
Decent second-quarter performance
IGL’s Q2 revenue grew by 1.5 percent, sequentially, with margin remaining flat at Rs 8.6/scm as both blended realisation and cost of gas remained flat over the last quarter.
IGL’s Q2 volume growth was 1.2 percent, QoQ, led by CNG sales, which were 2.4 percent up. PNG sales, despite seeing a brisk growth in industrial/ commercial demand, came down a notch as domestic PNG consumption saw a tepid growth.
The volume growth in October is already at 8.5 mmscmd and the management is confident of achieving the guided exit rate of 9 mmscmd by the year end.
CNG demand yet to show signs of trouble
CNG vehicle addition has been decent in the last six months, averaging around 15,000 personal vehicles as CNG commands a large price differential against petrol and diesel. Further, long-haul buses and LNG commercial vehicle additions are on the cards to boost growth.
In Delhi, roughly 15 percent of volume comes from aggregator vehicles, a segment impacted by the EV policy and which accounts for around 1.2 mmscmd CNG volume.
The remaining 85 percent volume is spread between cars, buses, and other commercial vehicles. Further, the company has already set up 30 EV charging stations, to take advantage of the rising number of EVs.
To offset the potential impact, IGL is in talks with multiple states to convert their buses to CNG-powered ones. CNG, with an initial discount and overall price differential with diesel, should be beneficial for both state governments and IGL. To this end, IGL is increasing the number of gas-filling stations as well as other support infrastructure.
The EV policy has many unanswered questions around the charging infrastructure network, and aggregator vehicles outside of Delhi being run in the capital and the overall timeline for the full fleet shift to EV.
We are forecasting a 6-7 percent volume growth and an EPS CAGR of 13 percent for the next two years.
IGL’s newer geographical areas (GAs) are currently small, but growing at 50 percent and have some time to catch up, and the full impact of the EV policy may take more than 5-10 years to be felt.
Meanwhile, CNG continues to remain at a significant discount to other auto fuels, which make a lot of economic sense for personal as well as other commercial vehicle owners to choose it.
This alone is going to drive CNG demand, and with soft gas prices, IGL is well placed to sweeten the fleet conversion deals with state governments. It appears that IGL has been over-penalised under the Delhi EV policy, and with all the negatives already in price, the stock is trading at a decent valuation of 14.7 times its FY25 EPS and offers a tactical investment opportunity.