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IGL: Raw material costs dent margins - Views on News from Equitymaster

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IGL: Raw material costs dent margins

Jan 20, 2011

Indraprastha gas has announced its 3QFY11 results. The company has reported a 59.7% YoY and 14.0% YoY increase in sales and net profits respectively. Here is our analysis of the results.

Performance summary
  • Revenues surge by 59.7% YoY during the quarter on the back of high volume growth. For the 9 month period, the revenues are up by 56.1% YoY.
  • Operating margins decline by 8.4% YoY in the quarter. For the 9 months period, the decline is 7.6% YoY.
  • Net profit margins decline by 5.9% YoY during the quarter. For the 9 months period, the decline is 5.3% YoY.

(Rs m)  3QFY10  3QFY11  Change  9mFY10  9mFY11  Change
Sales   2,863  4,571 59.7% 7,941 12,397 56.1%
Expenditure   1,812  3,278 80.9% 5,020 8,782 74.9%
Operating profit (EBDIT)   1,051  1,293 23.0% 2,921 3,615 23.8%
Operating profit margin (%)  36.7% 28.3%   36.8% 29.2%  
Other income  36 7 -81.4% 129 23 -82.2%
Interest expense/(income)  0 41   0 61  
Depreciation  197 262 32.8% 576 731 26.9%
Exceptional items             
Profit before tax  890 997 12.0% 2,473 2,845 15.0%
Profit before tax margin (%) 31.1% 21.8%   31.1% 22.9%  
Tax  301 325 8.0% 833 939 12.7%
Net profit  589 672 14.0% 1,640 1,906 16.2%
Net profit margin (%)  20.6% 14.7%   20.7% 15.4%  
No. of shares          140  
Diluted Earnings per share (Rs)*          17.3  
P/E ratio (x)*          19.1  

What has driven performance in 3QFY11?
  • Top line grew by 60% YoY during 3QFY11 on the back of higher volumes (up 18.9% YoY) and realizations in both CNG and PNG segments. While CNG’s volumes and realizations registered 13.7% YoY and 30% YoY growth respectively, the volumes and realization for PNG rose by 92.4% YoY and 21.2% YoY respectively.
  • Operating profits were up by 23% YoY. However, the margins declined as raw material costs more than doubled as compared to last year, thus rising to 57% of sales, up 12% YoY (as a % of sales). The staff costs also rose by 25% YoY, to 7.7% (as a % of sales) versus 2.8% in the last year.
  • While net profits registered a growth of 14% YoY, margins were down due to increase in the operating expenses, especially the raw material costs. The rise in the raw materials costs is a byproduct of revised APM (administered price mechanism) as the latter causes a rise in gas sourcing costs. Further, higher depreciation charges and interest costs also played a part in slowing down growth in net profits as compared to operating profits.

    Cost break up
    (Rs m) 3QFY10  3QFY11  Change  9mFY10  9mFY11  Change
    Consumption of raw materials 1,283 2,598 102.4% 3,566 6,812 91.0%
    as a % of sales 44.8% 56.8%   44.9% 54.9%  
    Staff costs 79 99 25.2% 211 289 37.0%
    as a % of sales 2.8% 7.7%   2.7% 8.0%  
    Other expenditure 450 581 29.3% 1243 1681 35.2%
    as a % of sales 15.7% 12.7%   15.7% 13.6%  
    Total expenditure 1,812 3,278 80.9% 5,021 8,782 74.9%
    as a % of sales 63.3% 71.7%   63.2% 70.8%  

What to expect?
At the current stock price of Rs 330, the stock is trading at 15 times our FY13 estimates (Research pro subscribers please click here). Given its monopoly in NCR, ambitious expansion plans, strong volume growth prospects for CNG and PNG segments and ease in concerns regarding gas pricing, we expect the company to maintain good performance. However, at current prices, all the positives already seem to be priced in and hence we advise caution on the stock from a medium term perspective.

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