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IGL : PNG segment drags performance - Views on News from Equitymaster
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IGL : PNG segment drags performance
Aug 26, 2015

Indraprastha Gas Ltd (IGL) has announced its results for the quarter and the year ended June 2015. The company has reported 3.7% year on year (YoY) growth in the revenues while net profit for the quarter declined by 11.5% YoY. Here is our analysis of the results.

Performance summary
  • The revenues for the quarter grew by 3.7% YoY.
  • The operating profit for the quarter declined by 6.3% YoY, with operating profit margins at 21.5% , as compared to 23.8% in 1QFY15.
  • The net profits for the quarter declined by 10.7% YoY with net profit margins at 11.3%, down from 13.1% in the corresponding quarter last year.
  • In the long pending case regarding tariffs, the Supreme Court has passed the judgment in favor of the company and has dismissed the appeal of Petroleum Natural Gas and Regulatory Board (PNGRB).

Financial performance snapshot
(Rs m) 1QFY15 1QFY16 Change
Sales 8,672 8,994 3.7%
Other operating income 16 23 50.3%
Total income 8,687 9,018 3.8%
Expenditure 6,604 7,057 6.9%
Operating profit (EBDITA) 2,068 1,938 -6.3%
EBDITA margin (%) 23.8% 21.5%  
Other income 78 56 -28.2%
Finance costs 91 36 -61.0%
Depreciation 368 386 4.7%
Profit before tax 1702 1596 -6.2%
Pretax margin (%) 19.6% 17.7%  
Tax 561 577 2.8%
Effective tax rate (%) 33.0% 36.2%  
Profit after tax/(loss) 1,140 1,018 -10.7%
Net profit margin 13.1% 11.3%  
No. of shares (m)   140.0  
Diluted earnings per share (Rs)*   30.4  
Price to earnings ratio (x)*   15.2  
*On a trailing 12 months basis

What has driven performance in 1QFY16?
  • Net sales declined due to muted gas volumes growth during the quarter. Overall, volumes for the quarter grew by 2% YoY. Volumes in PNG segment declined by around 4% YoY. CNG volumes for the quarter grew by around the same percentage. Further, lower realizations in PNG segment restricted the growth.

  • The operating profit margin for the quarter declined by 21.5% (YoY) from 23.8% in 1QFY15 due to higher other expense and cost of gas (as a % of sales). However, on a sequential basis, margins improved on account of better sourcing of gas.

    Cost summary
    (Rs m) 1QFY15 1QFY16 Change
    Consumption of raw materials (natural gas) 5,296 5,587 5.5%
    as a % of sales 61.1% 62.1%  
    Staff costs 162 171 5.7%
    as a % of sales 1.9% 1.9%  
    Other expenditure 1,146 1,299 13.3%
    as a % of sales 13.2% 14.4%  
    Total expenditure 6,604 7,057 6.9%
    as a % of sales 76.2% 78.5%  

  • The net profits margin for the quarter stood at 11.3%, down from 13.1% in 1QFY15 (10.5% in 4QFY15). The effective tax rate for the quarter stood at 36.2% versus 33% in 1QFY15. The decline in the other income was more than offset by decline in the finance cost for the company.
What to expect?
The Delhi Development Authority (DDA) 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.

On the positive side, the interest cost has come down significantly. Acquisition of 50% stake in MNGL is likely to provide company access to markets in Maharashtra.

Supreme Court's decision in favor of the company wrt network tariffs and compression charge is positive for the company. Now that one of the major overhang has been lifted, company's financials can be forecasted with clarity. However, markets were already pricing in a favorable outcome. For future growth, company will need to sell higher gas volumes. In a scenario of declining crude price and fuel oil, this may be a challenge. It may also face margin pressure, especially in the PNG segment.

The stock is currently trading at a P/E ratio of 15.2 times. We are in the process of updating our estimates for IGL and will come up with a revised target price very soon. Until then, we recommend investors not to buy the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities, please ensure that you broadly follow our suggested asset allocation and that no single large cap stock comprises more than 5% of your portfolio.

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