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IGL: Lower depreciation charge boosts profits
Aug 8, 2014

Indraprastha Gas Ltd (IGL) has announced its results for the first quarter of the financial year 2014-2015 (1QFY15). The company has reported 3.5% year on year (YoY) decline in the revenues and 30.2% YoY growth in the net profits for the quarter. Here is our analysis of the results.

Performance summary
  • The topline registered a decline of 3.5% YoY during the quarter.
  • The operating profits for the quarter grew by 7.4% YoY with margins at 24.0%, up from 21.5% in 1QFY14.
  • The net profits for the quarter grew by 30.2% YoY with margins at 13.1%, up from 9.7% in 1QFY14.

Financial summary
(Rs m) 1QFY14 1QFY15 Change
Sales 9,007 8,687 -3.5%
Expenditure 7,067 6,604 -6.6%
Operating profit (EBDITA) 1,939 2,084 7.4%
EBDITA margin (%) 21.5% 24.0% 2.5%
Other income 38 78 103.9%
Interest (net) 128 91 -28.7%
Depreciation 532 368 -30.7%
Profit before tax 1,318 1,702 29.1%
Pretax margin (%) 14.6% 19.6% 5.0%
Tax 442 561 27.0%
Effective tax rate (%) 33.5% 33.0% -0.6%
Profit after tax/(loss) 876 1,140 30.2%
Net profit margin 9.7% 13.1% 3.4%
No. of shares (m)   140  
Diluted earnings per share (Rs)*   27.6  
Price to earnings ratio (x)*   13.3  
* On a trailing 12 months earnings.

What has driven performance in 1QFY15?
  • The revenue for the quarter declined on account of decline in the selling prices of compressed natural gas (CNG) and domestic piped natural gas from February 2014. Because of the reallocation of domestic gas to the company (as the Ministry of Petroleum and Natural Gas decision), the gas costs has come down and the same will be passed on to the customers. The volumes for the quarter grew 1% YoY. While CNG volumes grew by 2% YoY, the PNG sales volumes declined by 3% YoY.

  • The operating profit for the quarter grew by 7.4% YoY, with operating profit margins growing by 2.5% YoY. This was on account of decline in the gas costs (as a % of sales). While the average selling price has come down, the decline is moderate in comparison to the decline in gas costs. However, the benefit was slightly offset by increase in staff costs and other expenditure.

    Cost summary
    (Rs m) 1QFY14 1QFY15 Change
    Consumption of raw materials (natural gas) 5,955 5,420 -9.0%
    as a % of sales 66.1% 60.2%  
    Staff costs 147 162 10.3%
    as a % of sales 1.6% 1.8%  
    Other expenditure 966 1,022 5.8%
    as a % of sales 10.7% 11.3%  
    Total expenditure 7,067 6,604 -6.6%
    as a % of sales 78.5% 73.3%  

  • The net profits for the quarter grew 30.2% YoY. This was mainly due to revision in depreciation rates. The depreciation expenses for the quarter declined by 30.7% YoY. Had the depreciation policy been unchanged, the company would have incurred higher depreciation expense by around Rs 215 m. The growth in the bottomline was also supported by increase of 104% YoY in the other income and decline in interest expenses.
What to expect?
The company has witnessed a moderation in the sales volumes growth that reflects the slowdown in the demand due to weak economy.

The decision to reallocate additional domestic gas to IGL is likely to be positive for the company. Once the benefit of lower gas costs is passed to customers, it is expected to boost the volume growth by making use of natural gas more competitive.

However, there are some concerns regarding the company going on since long time. The first is regulatory uncertainty regarding Petroleum and Natural Gas Regulatory Board's (PNGRB) order.

Further, Delhi Development Authority has raised a demand of Rs 1.6 bn (retrospectively from FY08) due to increase in license fees for sites taken by the company on lease or for setting up CNG stations. The company has filed a writ petition in High Court against this demand and the matter is subjudice. The stock is currently trading at a P/E ratio of 13 times (on a trailing twelve months earnings base). We suggest investors to avoid buying the stock at current price levels.

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