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IGL: Regulatory overhang continues

Feb 12, 2013

Indraprastha Gas Ltd (IGL) has announced its results for the third quarter of the financial year 2012-2013 (3QFY13). The company has reported a 31.1% year on year (YoY) growth in sales and 24.9% YoY growth in the bottomline. Here is our analysis of the results.

Performance summary
  • The topline registered an increase of 31.1% YoY during the quarter on the back of growth in sales volumes and better realizations. For the first nine months (9mFY13), the company reported a 38.2% YoY growth in the revenues.
  • The operating profits were up by 24.4% YoY with margins at 21.5% (versus 22.7% in 3QFY12). For 9mFY13, the growth in the operating profits came at 22.9% YoY, with margins at 23.1% (26.0% in 9mFY12).
  • The net profits for the quarter were up by 24.9% YoY with margins at 9.9% (10.4% in 3QFY12). For 9mFY13, the growth in the net profits came at 19.5% YoY, with margins at 10.8% (12.6% in 9mFY12).

Financial Summary
(Rs m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
Sales 6,631 8,694 31.1% 17,980 24,853 38.2%
Expenditure 5,127 6,823 33.1% 13,313 19,119 43.6%
Operating profit (EBDITA) 1,504 1,871 24.4% 4,667 5,734 22.9%
EBDITA margin (%) 22.7% 21.5%   26.0% 23.1%  
Other income 15 26 76.2% 43 90 109.3%
Interest (net) 135 141 4.4% 343 437 27.4%
Depreciation 368 474 28.9% 1034 1378 33.2%
Profit before tax 1,016 1,282 26.2% 3,333 4,010 20.3%
Pretax margin (%) 15.3% 14.7%   18.5% 16.1%  
Tax 324 418 28.9% 1069 1304 22.0%
Profit after tax/(loss) 692 863 24.9% 2,264 2,706 19.5%
Net profit margin 10.4% 9.9%   12.6% 10.8%  
No. of shares (m)         140  
Diluted earnings per share (Rs)*         25.1  
Price to earnings ratio (x)**         10.3  
* On a trailing 12-month basis

What has driven performance in 3QFY13?
  • The 31.1% YoY growth in the revenues was on account of increase in gas sales volumes during the quarter. Sequentially, the sales growth for the quarter witnessed a decline (from 43.1% YoY growth in the preceding quarter (2QFY13). The CNG and PNG gas sales volumes grew by 8% YoY and 17% YoY respectively resulting in overall sales volumes growth of 9% YoY. The average realizations also were higher on an annual basis as a result of gas price hikes undertaken by the company.

  • The operating profits grew by 24.4% YoY during the quarter on the back of growth in the topline. The operating profit margins for the quarter stood at 21.5%. This compares to margins of 22.7% in 3QFY12 and 24.2% in the preceding quarter. The margins declined as a result of increasing share of costlier imported gas (Regasified Liquefied Natural Gas/RLNG). The cost of gas (raw material) as a percentage of sales increased to 66.2% for the quarter, up from 63.9% in the preceding quarter and 63.8% in 3QFY12.

    Cost breakup
    (Rs m) 3QFY12 3QFY13 Change 9mFY12 9mFY13 Change
    Consumption of raw materials 4,230 5,759 36.2% 10,815 16,120 49.1%
    as a % of sales 63.8% 66.2%   60.1% 64.9%  
    Staff costs 107 138 29.4% 306 389 27.0%
    as a % of sales 1.6% 1.6%   1.7% 1.6%  
    Other expenditure 791 926 17.1% 2,192 2,610 19.1%
    as a % of sales 11.9% 10.7%   12.2% 10.5%  
    Total expenditure 5,127 6,823 33.1% 13,313 19,119 43.6%
    as a % of sales 77.3% 78.5%   74.0% 76.9%  

  • The growth in the bottomline came at 24.9% YoY, down from 28.5% YoY in the preceding quarter. This was mainly on account of increase in the raw material costs during the quarter. The net profit margins for the quarter slipped down to 9.9% from 11.6% in the preceding quarter and 10.4% in 3QFY12

What to expect?
While IGL is one among the better placed companies in the downstream gas segment, the stock is suffering from a regulatory overhang. In April 2012, things took an adverse turn for IGL as the downstream gas market regulator Petroleum and Natural Gas Regulatory Board (PNGRB) ordered more than 60% cut in network tariffs and 59% cut in compression charges. While the company managed to dodge the regulator's order by getting Delhi High Delhi Court's judgment in its favour, the regulatory uncertainty still looms over the company's fortunes as PNGRB has moved to Supreme Court now and decision is still awaited. The stock price has seen a sharp decline post PNGRB's order to cut tariffs.

At the current stock price, the stock is trading at a trailing 12 months PE ratio of 10.3 times. We had earlier recommended investors to Sell the stock. We would recommend investors to avoid the stock until there is more clarity on the case pending with Supreme Court.

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