EV adoption may pose threat to CNG firms dominance in India: Report

Chinese city gas distribution companies have slowed down as the country shifts to electric mobility, said the Prabhudas Lilladher report

Electric vehicle (EV) adoption may pose a threat to the “dominance” of compressed natural gas (CNG) sector in India, according to a report released on Tuesday.

Indraprastha Gas Limited (IGL) reports high growth but the city gas distributor’s future may be limited amid the EV surge – a trend reported for such companies in China, said the report by finance house Prabhudas Lilladher (PL)

Transition to EVs

Last November, the Delhi government mandated cab aggregators and delivery service providers to transition their entire fleet to electric vehicles by 2030.

This move, although in its early stages, suggested that the traditional dominance of CNG and liquefied natural gas (LNG) might face challenges. The policy mandated a gradual transition to EVs, with 100 per cent of the fleet required to switch within four years, significantly impacting IGL's volume, where CNG currently accounted for 75 per cent of total sales.

Additionally, Mumbai's public transport operator, BEST, awarded a tender for 2,400 e-buses to an original equipment manufacturer (OEM). The buses were expected to be deployed within two years, indicating the growing momentum of EVs in the transportation sector.

CNG/LNG sales in India

According to the PL report, IGL has had a compound annual growth rate (CAGR) of 8.4 per cent in total gas sales over the last decade. However, concerns arose regarding the sustainability of this growth due to the increasing popularity of EVs.

According to PL's analysis, CNG sales represented 75 per cent and 73 per cent of IGL and Maharashtra Natural Gas Limited's (MGL) total volume, respectively, in the first nine months of Financial Year 2023-24 (FY24).

MGL experienced a lower trajectory of 4.9 per cent CAGR over the past decade.

Similar to IGL, MGL also faced a high exposure (72 per cent) to the CNG segment, leading to muted volume growth prospects amidst the EV surge. This has raised greater concerns due to limited avenues for growth for the entity.

As a result of these findings, Prabhudas Lilladher downgraded IGL's rating from 'hold' to 'reduce' with a target price (TP) of Rs 382 based on 14x FY26 earnings per share (EPS). Similarly, MGL's rating was downgraded from 'reduce' to 'sell' with a TP of Rs 1,124 based on 12x FY26 EPS.

Despite trading at a peak of 24.3x in FY18, MGL's current valuation at 14.6x FY26 EPS suggested potential further de-rating in the future, according to Prabhudas Lilladher.

China's declining CNG/LNG sales amid EV adoption

Drawing parallels with Chinese City Gas Distribution companies (CGDs), which had faced declining CNG/LNG sales amidst EV adoption, PL predicted a similar fate for IGL and MGL, both heavily reliant on CNG (70-75 per cent dependence).

The impact of EV adoption on China's CNG/LNG sales served as a cautionary tale. In recent years, China has witnessed a decline in CNG/LNG consumption due to the rapid introduction of new EV models.

Companies like China Gas Holdings, ENN Energy, China Resources Gas, and Kunlun Energy have experienced significant decline in gas sales. Their CNG/retail LNG sales have decreased at CAGR ranging from 6 per cent to 21 per cent in the past few years.