IGL has the choice to widen margins as CNG is about half the value of competing fuels. (Representational picture)
We met IGL’s new Managing Director, Mr A Ok Jana, as a part of our CGD CEO e-Sequence Convention. IGL’s volumes are poised to speed up structurally. The brand new MD believes current open entry regulation is beneficial for CGD incumbents as effectively, which can maintain profitability. Highlights, volumes are poised to speed up to a ten–15% CAGR over 5 years led by a doubling in home gasoline connections and ‘enhanced economics’ of CNG automobiles. IGL targets 2x CNG stations in 5 years. Current open entry regulation encourages new CGD buildout whereas limiting a pure change of fingers. Excessive obstacles stay. IGL has the choice to widen margins as CNG is about half the value of competing fuels. We’re elevating the TP by 4.9% to INR593; reiterate ‘Purchase’.
Sharp CNG quantity restoration is underway, with Nov 2020 volumes at ~93% of pre- covid. IGL targets to finish 3QFY21 with flat YoY quantity and 4QFY21E with 10–12% YoY progress. For FY22E, it expects quantity progress of 20–22% over FY20. Automobile conversions have jumped from 5,000/month to 7,000, and the MD expects this to the touch 10,000. A 15–20% rise in diesel taxes has made CNG value half of competing fuels, to not point out an 8–10% hike in value of BSVI diesel automobiles. IGL targets to extend CNG stations by 15–18% pa, ~60% of which might be straight managed by IGL versus 35–40% at present. Bus volumes (20–25% of CNG) ought to development up from FY22E as ~30% (2,200) new buses could be added within the NCR area by FY22E. College buses (~12% of CNG) shall additional increase volumes as soon as colleges reopen. IGL targets 2x PNG connections in 5 years, including 0.25mn+ pa.
The PNGRB has notified a 12% post-tax RoCE (~16% pre-tax RoCE) for the 20% open entry permitted in every geographical space. Most significantly, to encourage new infrastructure build-out, OMCS are prohibited from taking on current CNG stations. Just one-third of NCR’s gasoline stations wouldn’t have CNG dishing out whereas the strategic ones are already in IGL’s fold.
We consider the danger from open entry is already behind and, in reality, will spur profitability. We keep ‘BUY/SO’ with revised TP of INR593 (from INR565) resulting from enhance in EBITDA margin assumptions, implying 24.6x FY22E PER.
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