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IGL: High gas costs drag bottomline
Nov 8, 2013

Indraprastha Gas Ltd (IGL) has announced its results for the second quarter of the financial year 2013-2014 (2QFY14). The company has reported 18.1% year on year (YoY) growth in the revenues and 6.6% YoY decline in the net profits for the quarter. Here is our analysis of the results.

Performance summary
  • The topline registered an increase of 18.1% YoY during the quarter.
  • The operating profits for the quarter declined by 2.6% YoY with margins at 19.9%, down from 24.2% in 2QFY13.
  • The net profits for the quarter declined by 6.6% YoY with margins at 9.2% versus 11.6% in 2QFY13.

Standalone performance summary
(Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
Sales 8,552 10,100 18.1% 16,159 19,127 18.4%
Expenditure 6,486 8,089 24.7% 12,296 15,177 23.4%
Operating profit (EBDITA) 2,066 2,011 -2.6% 3,863 3,951 2.3%
EBDITA margin (%) 24.2% 19.9%   23.9% 20.7%  
Other income 33 38 16.0% 65 77 18.6%
Interest (net) 140 98 -30.1% 296 226 -23.5%
Depreciation 477 548 14.9% 904 1079 19.4%
Profit before tax 1,482 1,404 -5.3% 2,728 2,722 -0.3%
Pretax margin (%) 17.3% 13.9%   16.9% 14.2%  
Tax 489 476 -2.6% 886 918 3.7%
Profit after tax/(loss) 993 927 -6.6% 1,843 1,803 -2.1%
Net profit margin 11.6% 9.2%   11.4% 9.4%  
No. of shares (m)         140  
Diluted earnings per share (Rs)*         25.0  
Price to earnings ratio (x)**         11.4  
*On trailing 12 months basis

What has driven performance in 2QFY14?
  • The company reported a revenue growth of 18.1% YoY on the back of growth in gas sales volumes and higher realizations. The average gas sales volumes for the quarter stood at around 3.84 million standard cubic metres per day (mmscmd), up 4% YoY. Of the total, the compressed natural gas (CNG) sales volumes and Piped Natural Gas (PNG) sales volumes were up by 3% YoY and 10% YoY respectively.

  • The operating profits margins for the quarter slipped to 19.9% from 24.2% in 2QFY13 (versus 21.5% in 1QFY14) on account of substantial increase in the gas costs. The depreciation in rupee led to an increase in the cost of gas (as a % of sales) to 68.6% from 63.9% in 2QFY13.

    Cost break-up
    (Rs m) 2QFY13 2QFY14 Change 1HFY13 1HFY14 Change
    Consumption of raw materials 5,462 6,926 26.8% 10,361 12,880 24.3%
    as a % of sales 63.9% 68.6%   64.1% 67.3%  
    Staff costs 130 148 13.8% 251 294 17.4%
    as a % of sales 1.5% 1.5%   1.6% 1.5%  
    Other expenditure 894.4 1015.8 13.6% 1,684 2,002 18.9%
    as a % of sales 10.5% 10.1%   10.4% 10.5%  
    Total expenditure 6,486 8,089 24.7% 12,296 15,177 23.4%
    as a % of sales 75.8% 80.1%   76.1% 79.3%  

  • The net profits for the quarter declined by 6.6% YoY. The decline in the margins was mainly on account of high cost of natural gas. Besides, higher depreciation charges and higher tax rate also impacted profits.
What to expect?
IGL has reported a lackluster performance during the quarter. Going forward, we expect the growth to remain muted. While the company enjoys strong pricing power, margins may come under pressure on increase in the gas costs. Besides, 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 favor, the regulatory uncertainty still looms over the company's fortunes as PNGRB has moved to Supreme Court now and decision is still awaited.

At current price, the stock is trading at a trailing twelve months price to earnings ratio of 11.4x. On account of above mentioned concerns, we suggest investors to avoid buying the stock at current price level.

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