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Indraprastha Gas: Margins under pressure - Views on News from Equitymaster

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Indraprastha Gas: Margins under pressure

Oct 25, 2011

Indraprastha Gas Limited (IGL) has announced the second quarter results for financial year 2011-2012 (2QFY12).For the quarter, the company has reported a 34% YoY growth in topline and 17% YoY growth in the bottomline respectively. Here is our analysis of the results.

Performance summary
  • The topline registered an increase of 34% YoY during the quarter. For the half year, sales were up 45% YoY.
  • The operating profits were up by 27% during the quarter with margins at 26.4%, down by 1.5% (YoY). For the half year, operating profits were up by 36% YoY
  • The net profits for the quarter registered an increase of 17% YoY, with margins at 12.9%, down 1.9% (YoY). For the half year, the bottomline was up 27% YoY, with margins at 13.9%.
  • Capex for half year stood at Rs 3 bn.


Financial snapshot
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Net Sales 4,468 5,975 33.7% 7,826 11,349 45.0%
Expenditure 3,221 4,395 36.5% 5,504 8,186 48.7%
Operating profit (EBDIT) 1,247 1,580 26.6% 2,322 3,163 36.2%
Operating profit margin (%) 27.9% 26.4%   29.7% 27.9%  
Other income 5 15 178.1% 16 28 74.8%
Interest expense/(income) 20 118 482.6% 20 208 929.4%
Depreciation 239 344 44.2% 470 667 41.9%
Profit before tax 994 1,133 14.0% 1,848 2,317 25.4%
Profit before tax margin (%) 22.2% 19.0%   23.6% 20.4%  
Tax 331 360 8.9% 614 744 21.2%
Net profit 663 772 16.5% 1,234 1,573 27.4%
Net profit margin (%) 14.8% 12.9%   15.8% 13.9%  
No. of shares         140  
Diluted Earnings per share (Rs)*         21.0  
P/E ratio (x)*         19.0  
*On a trailing 12-months basis

What has driven performance in 2QFY12?
  • The company's topline registered a growth of 34% YoY on account of hike in gas prices and 23% increase in volumes (CNG volumes up 14% YoY, PNG volumes up 62% YoY). The sales to industrial, commercial and DTC segment were on credit basis that increased receivables which was compensated by increase in deposits. The increase in the private car volumes was the main driver of growth in CNG segment, though Public transport also contributed to a portion of it. The sales in the PNG segment were lower than expectations due to shut down by two major customers. However, this was temporary and will not get reflected in future sales trend.

  • The operating profits for the quarter registered 27% YoY growth while margins declined to 26.4% versus 27.9% last year. The high cost of sourcing gas (raw material costs as a % of sales increased to 59.9% from 57.0% last year) was passed on by company by way of price hikes. The other cost components like staff costs and 'other expenditure' declined by 0.5% YoY and 0.9% YoY (as a % of sales). The net profit for the quarter was up 16.5% as a result of growth in the topline. However, the net profit margins declined to 12.9% versus 14.8% last year on account of higher gas costs.

    Cost break-up...
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Consumption of raw materials 2,547 3,581 40.6% 4,214 6,585 56.3%
    as a % of sales 57.0% 59.9%   53.8% 58.0%  
    Staff costs 99 100 1.3% 190 199 4.7%
    as a % of sales 2.2% 1.7%   2.4% 1.8%  
    Other expenditure 575 715 24.2% 1,100 1,401 27.5%
    as a % of sales 12.9% 12.0%   14.0% 12.3%  
    Total expenditure 3,221 4,395 36.5% 5,504 8,186 48.7%
    as a % of sales 72.1% 73.6%   70.3% 72.1%  

What to expect?
The management has given guidance of a volume growth above 20% YoY for next two three years and believes that the company will be able to maintain absolute margins of Rs 5 per unit of gas. However, we expect the margins to remain under pressure. This is because any incremental demand will have to be taken care of by costlier RLNG (regasified liquid natural gas) and that too probably on a spot basis. The management said that the company is banking on GAIL to get long term gas supply contract at fair deal. There is no clarity on the city gas projects that the company had bid for. The management has said that wit will be selective in picking cities as far as future bidding rounds are concerned.

While 50 CNG stations are ready for operation, the company needs to satisfy some licensing conditions before they start operating. Out of 50, only 5 are expected to be operational by December end and rest by end of the current fiscal. The company has plans for further 35 CNG stations which will be operational only in the next fiscal. By 2015-16, CNG share in the volumes is expected to come down due to the high base effect. The company has planned a capex of Rs 3 bn in the second half of FY12 and Rs 5 bn for FY13. The management has suggested that it will be using external funds to take care of the capex needs, the current cost of which stands at 10.5%.

At a current stock price of Rs 399, the stock is trading at 19 times trailing 12 months earnings. In the last 45 days, the stock price has fallen by 11%. For final valuations, we will incorporate the results and guidance in our estimates and update subscribers.

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