Jefferies downgrades Indraprastha Gas, cuts target price after Delhi EV policy

Cab aggregators make up about 30% of these volumes, with Uber, Ola, and e-commerce delivery services being the largest contributors

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Jefferies India downgraded Indraprastha Gas Ltd (IGL) to ‘hold’ from ‘buy’ and lowered its target price after the Delhi government approved the electric vehicle policy for cab aggregators and delivery services.

Jefferies has cut its target price to Rs 465 a share, down 3 percent, from its earlier target price of Rs 565 a share after it estimated a potential 30 percent hit on IGL volumes from FY25 onwards, with new general advisories (GAs) are unlikely to offset the slowdown in the NCR, which makes up 88 percent of IGL’s volumes. It downgraded FY25/26 EPS by 7-9 percent and reduced the valuation multiple due to increasing EV-related risks.

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, Jefferies said.

“We lower volume growth estimated to 3 percent/6 percent/6 percent for FY24-26. We have assumed unit EBITDA margins at the upper end of the management guidance. We are now 8 percent/15 percent below consensus on FY25/26 PAT. We lowered the forward PE multiple to 16x to factor in growing EV threat,” the Jefferies report said.

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. 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.

In a bearish scenario, Jefferies anticipates a 21 percent decrease in the target price to Rs 380 per share. This could happen if electric vehicle adoption succeeds 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, according to Jefferies’ report.