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IGL: Decent performance despite high costs
Jan 31, 2012

Indraprastha Gas Ltd. (IGL) has announced the third quarter results for financial year 2011-2012 (3QFY12).For the quarter, the company has reported a 45.1% YoY growth in topline and 2.9% YoY growth in the bottomline respectively. Here is our analysis of the results.

Performance summary
  • The topline registered an increase of 45.1% YoY during the quarter. For the nine months, sales were up 45.0% YoY.
  • The operating profits were up by 16.4% during the quarter with margins at 22.7%, down from 28.3% in the corresponding quarter last year. For the nine months, operating profits were up by 29.1% YoY and margins came at 26.0% (versus 29.0% last year).
  • The net profits for the quarter grew just by 2.9% YoY, with margins at 10.4% versus 14.7% last year. For the nine months, the bottomline was up 18.8% YoY, with margins at 12.6%, versus 15.4% last year.

Standalone performance summary
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Sales 4,571 6,631 45.1% 12,397 17,980 45.0%
Expenditure 3,278 5,127 56.4% 8,782 13,313 51.6%
Operating profit (EBDITA) 1,293 1,504 16.4% 3,615 4,667 29.1%
EBDITA margin (%) 28.3% 22.7%   29.2% 26.0%  
Other income 7 15 120.4% 23 43 88.1%
Interest (net) 41.16 135.28 228.7% 61.332 342.9 459.1%
Depreciation 262 368 40.7% 731 1,034 41.4%
Profit before tax 997 1,016 1.9% 2,845 3,333 17.2%
Pretax margin (%) 21.8% 15.3%   22.9% 18.5%  
Tax 325 324 -0.1% 939 1,069 13.8%
Profit after tax/(loss) 672 692 2.9% 1,906 2,264 18.8%
Net profit margin 14.7% 10.4%   15.4% 12.6%  
No. of shares (m)         140  
Diluted earnings per share (Rs)*         21.1  
Price to earnings ratio (x)**         16.8  
*On the basis of trailing 12 months

What has driven performance in 3QFY12?
  • The company's topline registered a growth of 45.1% YoY on account of hike in gas prices and higher volumes in both CNG and PNG segments. On an overall basis, there is 25 % growth in sales volume during this quarter over the corresponding quarter of FY11.

  • The operating profits for the quarter registered 16.4% YoY growth while margins declined to 22.7% versus 28.3% last year. This was on account of increased costs of sourcing gas and added burden due to rupee devaluation. Hence, the raw material costs were up 63% YoY (up to 63.8% of sales from 56.9% of sales) last year. However, this was slightly offset by decline in staff costs (1.6% as of sales this quarter versus 2.2% as a percentage of sales last year) and decline in other expenditure (down from 12.7% last year to 11.9% this year , as a percentage of sales).

  • The net profits for the quarter were up 2.9%. The margins for the quarter came at 10.4% versus 14.7% last year. The decline in the margins was on account of high cost of sourcing gas and over 3 times increase in interest expenses. The depreciation expenses too were up 41%.
Cost break up...
(Rs m) 3QFY11 3QFY12 Change 9mFY11 9mFY12 Change
Consumption of raw materials 2,599 4,230 62.8% 6,812 10,815 58.8%
as a % of sales 56.9% 63.8%   54.9% 60.1%  
Staff costs 99 107 7.9% 289 306 5.8%
as a % of sales 2.2% 1.6%   2.3% 1.7%  
Other expenditure 581 791 36.0% 1,681 2,192 30.4%
as a % of sales 12.7% 11.9%   13.6% 12.2%  
Total expenditure 3,279 5,127 56.4% 8,782 13,313 51.6%
as a % of sales 71.7% 77.3%   70.8% 74.0%  

What to expect?
The company expects a volume growth of 25%-26%. It has recently increased CNG prices in the month of January by Rs 1.75 per kg in Delhi and by Rs 2 per kg in Noida, Greater Noida and Ghaziabad. As per the management, the entire additional costs have been passed on. For PNG, the last price hike was in the month of September. The company expects spot LNG prices to remain in the range of US$16-US$ 18 per mmbtu.

The company is facing pressure from increasing proportion of imported gas that contributes to 18%-20% of the overall costs. Besides, rupee depreciation has been a major overhang with every increase in rupee increasing gas prices for the company by 50 paise -60 paise. The fourth quarter is expected to be better as rupee seems to be making a comeback versus the dollar.

Going forward, securing long term LNG contracts will be crucial for the company to grow. For this, the company is in talks with its promoters like Gas Authority Of India Ltd. (GAIL) and Bharat Petroleum Corporation Ltd. (BPCL) and expects some positive results in next four to six months. Besides, there are issues like land acquisition hurdles and delay in the commissioning of stations once they are ready due to numerous approvals required. The management has given a capex guidance of Rs 6 bn for FY12 and FY13 (each) and plans to add 30 stations going forward. While rupee devaluation concerns have been easing, the share prices could react negatively to any unfavorable decision by PNGRB (Petroleum and Natural Gas Regulatory Board) regarding regulation of marketing margin. As of now, there is no clarity on the issue.

At a current stock price of Rs 355, the stock is trading at 16.8 times trailing 12 months earnings which we donít think is expensive considering the strong fundamentals. The company has shown a very strong pricing power historically which is the key strength. Besides, GAIL has recently signed long term LNG contracts which may help the company in procuring long term LNG supplies (GAIL being one of the key promoters).

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