CGD Companies IGL and MGL See Significant Decline Following Delhi’s EV Policy Approval

CGD Companies IGL and MGL See Significant Decline Following Delhi's EV Policy Approval

VoM News Desk | October 20, 2023 | 03:02 PM IST | Breaking News | Follow on Google News

CGD Companies IGL and MGL See Significant Decline Following Delhi’s EV Policy Approval

CGD Companies IGL and MGL See Significant Decline Following Delhi’s EV Policy Approval

Shares of City Gas Distribution (CGD) companies, Indraprastha Gas (IGL) and Mahanagar Gas (MGL), witnessed substantial declines, with IGL losing as much as 10.7 percent, trading at ₹408.25, and MGL dropping 8 percent to a day’s low of ₹1,032.75. This decline was prompted by the Delhi government’s approval of the electric vehicle (EV) policy for cab aggregators and delivery service providers.

Jefferies Downgrades IGL and Adjusts Target Price

The sentiment was further weakened by the global brokerage house Jefferies, which downgraded IGL and adjusted its target price. The Delhi government’s proposed EV transition policy targets cab aggregators, delivery services, and e-commerce companies, pending approval from the Lieutenant Governor. The policy aims to achieve a 5 percent increase in EV adoption within fleets operated by companies like Uber and Ola in the next six months. It necessitates a gradual shift to electric vehicles, with 50 percent of new purchases being electric within three years and 100 percent within five years from the notification date. By April 1, 2030, all aggregators must operate an all-electric fleet.

Impact on IGL

Considering that 75 percent of IGL’s sales come from the distribution of Compressed Natural Gas (CNG), this new policy is expected to have a significant impact on the company. Jefferies downgraded the stock to a ‘hold’ rating and reduced its target price to ₹465, indicating a potential upside of 14 percent. The policy change could affect 30 percent of IGL’s overall sales volumes starting from FY25. Additionally, the firm anticipates lower valuation multiples due to growing EV-related risks.

Cab aggregators, including Uber and Ola, constitute about 30 percent of these volumes, with e-commerce delivery services also contributing significantly. Uber has already placed an order for 25,000 EVs from Tata Motors in early 2023. Moreover, around 15 percent of IGL’s volumes come from DTC buses and three-wheelers, which also face EV-related risks due to the procurement of 5,500 EV buses and favorable economics for three-wheel EVs. While the company’s expansion into new areas and potential acquisitions offer growth opportunities, they may not entirely offset a slowdown in the NCR region.

Jefferies’ Lowered Estimates

Jefferies revised its volume growth estimates to 3 percent/6 percent/6 percent for FY24-26. Their estimates now stand 8 percent/15 percent below consensus for FY25/26 PAT. In a bearish scenario, Jefferies anticipates a target price of ₹380, implying a 17 percent downside. In this scenario, they assume that electric vehicle adoption succeeds by 2024-25, resulting in reduced CNG volume growth starting from FY24. Other potential factors impacting IGL include the elimination of cost advantages for domestic CNG gas and competition from third-party marketers in Delhi/NCR, affecting profit margins due to gas sales in a regulated environment.

This policy change reflects the increasing shift towards electric vehicles and may have a profound impact on companies closely tied to traditional fuel sources like CNG.

VoM News Desk

VoM News is an online web portal in jammu Kashmir offers regional, National & global news.