IGL, MGL shares tank up to 11% as Delhi government approves EV policy

Shares of City Gas Distribution (CGD) companies Indraprastha Gas (IGL) and Mahanagar Gas (MGL) tanked up to 11 percent on Friday following the Delhi government's approval of the electric vehicle (EV) policy for cab aggregators and delivery service providers.

IGL shed as much as 10.7 percent in intra-day deals to ₹408.25. MGL, on the other hand, lost 8 percent to its day's low of ₹1,032.75.

The sentiment was also weakened after global brokerage house Jefferies downgraded IGL and cut its target price.

The Delhi government has proposed an EV transition policy for cab aggregators, delivery services, and e-commerce companies. It's awaiting approval from the Lieutenant Governor. It is planning to achieve a 5 percent increase in EVs within fleets operated by companies such as Uber and Ola within the next six months. This policy requires 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 have an all-electric fleet.

Since 75 percent of IGL's sales come from the distribution of CNG, this new policy is likely to have a massive impact on the firm.

Jefferies has downgraded the stock to ‘hold’ and cut its target price to ₹465, indicating an upside of 14 percent. This could impact 30 percent of IGL’s overall sales volumes starting FY25, said Jefferies. It has also downgraded FY25/26 EPS by 7/9 percent adding that lower valuation multiple will factor in growing EV risk.

"Cab aggregators make up about 30 percent of these volumes, with Uber, Ola, and e-commerce delivery services being the largest contributors. Uber has already ordered 25,000 EVs from Tata Motors in early 2023. Additionally, approximately 15 percent of IGL's volumes come from DTC buses and three-wheelers, and they also face EV-related risks due to the procurement of 5,500 EV buses and favorable economics for three-wheel EVs. The company's expansion into new areas and potential acquisitions offer growth opportunities, but these might not fully offset a slowdown in the NCR region," it stated.

The brokerage further lowered volume growth estimate to 3 percent/6 percent/6 percent for FY24-26. Its estimates are now 8 percent/15 percent below consensus on FY25/26 PAT.

In a bearish scenario, Jefferies expects a target price of ₹380, implying a 17 percent downside. In this, it assumes electric vehicle adoption succeeding by 2024-25, leading to reduced CNG volume growth starting from FY24E. Other potential factors include the removal of cost advantages for domestic CNG gas and competition from a third-party marketer in Delhi/NCR, impacting profit margins due to gas sales in a regulated environment, noted the report.