The government’s efforts to fight the pollution problem in Delhi have helped city gas distributor Indraprastha Gas Ltd (IGL) in the past. However, this time around, things could well turn out to be different. On Saturday, the Delhi cabinet approved the addition of 1,000 electric buses, an environment-friendly mode of public transport for residents.
This poses a risk to IGL’s compressed natural gas (CNG) business, the hitherto champion for fighting pollution. If the move towards electric vehicles gains momentum, the company’s mainstay business can be hit.
Overall, CNG volumes account for almost three-fourths of IGL’s total sales volume. The good news is the impact is expected to be limited in the near term. That’s because addition of government buses has been rather muted for a while now. Perhaps, that’s why the company’s shares haven’t reflected any of the above-mentioned concerns.
“We do not estimate any near-term negative impact on IGL’s CNG volumes as Delhi Transport Corp.’s CNG buses had not contributed to IGL’s growth in the past 5-6 years in any case," said analysts from Jefferies India Pvt. Ltd in a report on Monday.
But developments on this front will be a key area to monitor in the future, because there can be a rub-off effect. As Jefferies India points out, if the implementation of the first phase involving the addition of 1,000 electric buses in Delhi is successful, and issues around charging infrastructure and vehicle economics are resolved, it could pave the way for the next wave of electric vehicle addition, potentially spreading into other segments such as private buses and autorickshaws.
Recently, IGL won licences in three geographical areas in the 10th round of bidding for city gas distribution. These areas are expected to support the company’s long-term growth story. In general, investors would do well to wait for more clarity on capital expenditure details and volume expectations for these new licence areas.
Operationally, IGL has delivered double-digit growth in volumes continuously for some time now. The December quarter was no different with volume growth at 12.2%, wherein CNG volumes grew slightly faster than the company average. PNG (piped natural gas) volumes increased at a slower pace.
Investors seem to expect the good run on volumes to continue going ahead, which is evident in the company’s valuations. Currently, the IGL stock trades at 21 times estimated earnings for FY20, based on Bloomberg consensus earnings data.
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