Indraprastha Gas Ltd (IGL) is one of the leading city gas distribution (CGD) companies in India, supplying compressed natural gas (CNG) to automobiles and piped natural gas (PNG) to households and industries in Delhi and its adjoining areas. The company has been growing steadily over the years, benefiting from the increasing demand for clean energy and the favourable regulatory environment. However, on October 20, 2023, Indraprastha Gas shares plunged 10% in a single day, while the broader market was rallying.
Why The Sudden Fall, And Its Impact On Indraprastha Gas Ltd’s Future
The main reason behind the sharp decline in IGL’s share price was the announcement of a new electric vehicle (EV) policy by the Delhi government, which aims to accelerate the adoption of EVs in the city. The policy proposes to mandate a 5% increase in EVs within fleets operated by companies such as Uber and Ola within the next six months, and ultimately transition to 100% electric fleets within five years. The policy also includes the complete electric conversion of all commercial categories, including delivery vehicles, by the year 2030.
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This policy poses a significant threat to IGL’s business, as cab aggregators make up about 30% of its overall sales volumes, according to some estimates. If these customers switch to EVs, IGL will lose a large chunk of its revenue and market share. Moreover, the policy could also create a negative perception among other potential customers, who may prefer EVs over CNG vehicles for environmental or economic reasons.
Morgan Stanley & Jefferies Downgrade Indraprastha Gas Ltd
The impact of this policy on IGL’s earnings and valuation was reflected in the downgrade by several brokerage firms, who lowered their target prices and ratings on the stock. For instance, Jefferies downgraded IGL to hold from buy earlier, while slashing its price target by 18% to Rs 465. The brokerage said that it expects IGL’s sales volumes to decline by 7-9% in FY25/26 due to the EV policy, and that it has assigned a lower valuation multiple to factor in the growing EV risk. Similarly, Morgan Stanley cut its target price on IGL by 12% to Rs 480, citing lower volume growth and margin assumptions.
However, not all analysts are pessimistic about IGL’s prospects. Some believe that the EV policy may not be implemented as aggressively as envisaged, given the challenges of infrastructure, cost and consumer behaviour. They also point out that IGL has a strong presence in other regions such as Uttar Pradesh, Haryana and Maharashtra, where it can leverage its network and experience to capture new opportunities. Moreover, they highlight that IGL has a robust balance sheet, with zero debt and healthy cash flows, which gives it the flexibility to invest in growth initiatives and reward shareholders.
Therefore, while the EV policy is undoubtedly a headwind for IGL in the short term, it may not be a game-changer for its long-term prospects. The company still has a dominant position in the CGD sector, which is expected to grow at a compound annual growth rate (CAGR) of 10-12% over the next decade, driven by favourable policies, rising urbanisation and increasing environmental awareness. IGL also has a track record of delivering consistent financial performance, with a CAGR of 15% in revenue and 18% in net profit over the last five years. Hence, investors with a long-term horizon may find value in IGL’s stock at current levels, as it offers an attractive dividend yield of 2.75% and trades at a reasonable price-to-earnings ratio of 19.67.
Disclaimer: This blog post is for informational purposes only and does not constitute investment advice. Readers are advised to do their own research before making any investment decisions.
