Declining CNG Demand In Delhi Will Erode Long-Term Market Position

Key Takeaways

• Rapid adoption of electric vehicles and renewables is eroding core CNG demand, shrinking IGL's addressable market and threatening long-term growth prospects.
  
• Structural overreliance on Delhi-NCR and rising competition amplify revenue concentration risks, margin pressure, and potential for stranded asset exposure.
  
• Expansion into new geographies and segments, regulatory reforms, and improved operational efficiency are driving diversification, cost advantages, and sustained growth opportunities.

Catalysts

Engages in the distribution and sale of natural gas in India.

• The ongoing and accelerating transition of public bus fleets in Delhi from CNG to electric vehicles is directly eroding IGL's high-volume, high-visibility CNG business, with management expecting nearly all remaining buses to be phased out within two years; this will result in enduring volume decline in a core segment, dragging down long-term revenue growth and operational efficiency.
  
• Aggressive national and state-level policy support for renewables and electrification threatens to permanently shift urban mobility and industrial demand away from natural gas, substantially shrinking IGL's long-term addressable market and putting sustained pressure on both topline revenues and future growth expectations.
  
• The company's heavy reliance on Delhi-NCR remains a structural weakness, as local policy decisions-such as rapid EV adoption mandates and volatile state tax regimes-can quickly alter the business environment, leading to long-term revenue concentration risk and unpredictable net earnings volatility.
  
• Mounting competition from new entrants and private sector players in both established and expanding geographical areas is likely to undermine IGL's pricing power and customer retention, fueling margin compression and limiting the company's ability to offset secular volume headwinds with higher realizations.
  
• Continued advances in alternative energy storage, battery technology, and distributed energy networks will accelerate the obsolescence of natural gas as a transition fuel, diminishing the relevance of IGL's infrastructure investments and leading to stranded asset risk, persistent margin pressure, and steadily declining return on invested capital.

Indraprastha Gas Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Indraprastha Gas compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Indraprastha Gas's revenue will grow by 2.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 10.9% today to 9.4% in 3 years time.
• The bearish analysts expect earnings to reach ₹15.6 billion (and earnings per share of ₹11.14) by about August 2028, down from ₹16.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 19.9x on those 2028 earnings, up from 17.0x today. This future PE is greater than the current PE for the IN Gas Utilities industry at 16.2x.
• Analysts expect the number of shares outstanding to decline by 0.06% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.73%, as per the Simply Wall St company report.

Indraprastha Gas Future Earnings Per Share Growth

Risks

• Strong double-digit growth in new geographical areas outside Delhi-NCR, with 23% growth in newer geographies and continued network expansion, could drive sustained revenue and volume increases for IGL.
  
• Robust increases in new and retrofitted CNG vehicle additions, with an average of 18,500 vehicles per month and a 37% market share for CNG-fueled passenger vehicles, indicate persistent demand tailwinds that may help support long-term revenue growth.
  
• Ongoing state tax rationalization (such as recent cuts in Rajasthan and ongoing discussions in Uttar Pradesh), along with regulatory reforms like the single-zone transmission tariff, may lower effective costs and improve net margins, offsetting cost pressures and supporting earnings.
  
• IGL's operating leverage from expanding CNG station density and pipeline networks, as well as improved asset utilization, has the potential to lower per-unit costs and enhance EBITDA margins over time.
  
• Strategic moves such as planned acquisitions in geographic adjacencies and entry into new segments (LNG retailing, meter manufacturing, and renewables JVs) suggest that IGL's revenue streams are diversifying, reducing concentration risk and potentially supporting top-line and bottom-line growth in the long term.

Valuation

• The assumed bearish price target for Indraprastha Gas is ₹155.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Indraprastha Gas's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹648.0, and the most bearish reporting a price target of just ₹155.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹164.9 billion, earnings will come to ₹15.6 billion, and it would be trading on a PE ratio of 19.9x, assuming you use a discount rate of 12.7%.
  
• Given the current share price of ₹202.17, the bearish analyst price target of ₹155.0 is 30.4% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.