Volume, margin concerns for Indraprastha Gas
Volumes of the city gas distribution company have been relatively subdued so far this year
The Indraprastha Gas Ltd (IGL) stock has outperformed the S&P BSE Oil and Gas index so far this fiscal year. Its shares have appreciated by around 38% and currently trade at about 12 times its estimated earnings for the next fiscal year. To be sure, volumes of the city gas distribution (CGD) company have been relatively subdued so far this year. Lower-than-expected state transport vehicle additions and a sluggish economy have weighed on demand. Why has the stock outperformed? One, higher gas allocation to the CGD sector. Two, there are expectations that the Supreme Court decision in the IGL-Petroleum and Natural Gas Regulatory Board tariff dispute will be favourable for the firm. On the operational front, the situation isn’t hunky dory. IGL’s management expects volume growth of 3-4% for the next few years, say analysts from Emkay Global Financial Services Ltd. This volume growth will be aided by development of some clusters. Still, there are challenges for volume growth. The Delhi market has become a mature market for IGL, offering minimal scope for compressed natural gas (CNG) volume growth from the current levels, adds Emkay. Additionally, the narrowing gap between alternative fuel prices such as petrol and diesel means the scope for private vehicle conversion to CNG is lower. Piped natural gas (PNG) volumes too are at risk, as alternative fuels such as fuel oil become more competitive, thanks to the sharp drop in crude oil prices. In fact, PNG volumes had declined by about 8% year-on-year (y-o-y) in the December quarter. Nevertheless, profit for the year have been decent till now. For the nine months ended December, IGL posted a net profit of Rs.342 crore, representing a 27% increase on a y-o-y basis. Decline in operating expenses (mainly raw material costs), depreciation costs and finance expenses compared with last year boosted the profitability this year. Revenue growth though is not encouraging. IGL’s revenue for the nine months ended December declined by 6% y-o-y to Rs.2,764 crore. Some analysts say IGL’s ability to raise prices would be crimped from here. That will determine how profit margins will behave in the days to come. According to analysts from IIFL Institutional Equities, in the first nine months of 2014-15, IGL reported a blended Ebitda (earnings before interest, taxes, depreciation and amortization) margin of Rs.6.10 per standard cubic metre. “In 4Q, the company cautioned about moderation in margins as the full impact of domestic gas price revisions reflect,” analysts from IIFL wrote in a report last month. That’s because IGL hasn’t taken price hikes to pass on the increase in domestic gas prices. The writer doesn’t own shares in the above-mentioned companies.