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IGL: Regulatory uncertainty remains an overhang
Dec 2, 2014

Indraprastha Gas Ltd (IGL) has announced its results for the second quarter of the financial year 2014-2015 (2QFY15). The company has reported 5.6% year on year (YoY) decline in the revenues and 29.0% YoY growth in the net profits for the quarter. Here is our analysis of the results.

Performance summary
  • The revenues for the quarter declined by 5.6% YoY mainly on account of lower realizations. While CNG segment witnessed higher volumes on an annual basis, the PNG gas sales volumes declined both sequentially and on an annual basis.
  • The operating profit for the quarter grew by 7.8% YoY, with operating profit margins growing by 2.8% YoY. This was on account of decline in the gas costs (as a % of sales). 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. However, the benefit from lower gas costs was slightly offset by increase in staff costs and other expenses (all as % of sales).

Financial performance snapshot
(Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
Sales 10,079 9,511 -5.6% 19,086 18,198 -4.7%
Expenditure 8,068 7,342 -9.0% 15,135 13,946 -7.9%
Operating profit (EBDITA) 2,011 2,169 7.8% 3,951 4,252 7.6%
EBDITA margin (%) 20.0% 22.8%   20.7% 23.4%  
Other income 38 86 122.7% 77 163 113.5%
Interest (net) 98 104 5.9% 226 195 -13.7%
Depreciation 548 370 -32.5% 1,079 738 -31.6%
Profit before tax 1,404 1,781 26.8% 2,722 3,482 27.9%
Pretax margin (%) 13.9% 18.7%   14.3% 19.1%  
Tax 476 584 22.7% 918 1,146 24.8%
Effective tax rate (%) 33.9% 32.8%   33.7% 32.9%  
Profit after tax/(loss) 927 1,196 29.0% 1,803 2,336 29.6%
Net profit margin 9.2% 12.6%   9.4% 12.8%  
No. of shares (m)         140  
Diluted earnings per share (Rs)*         29.5  
Price to earnings ratio (x)*         14.7  
* On a trailing 12 months earnings
.

What has driven performance in 2QFY15?
  • The revenues for the quarter declined by 5.6% YoY mainly on account of lower realizations. While CNG segment witnessed higher volumes on an annual basis, the PNG gas sales volumes declined both sequentially and on an annual basis.

  • The operating profit for the quarter grew by 7.8% YoY, with operating profit margins growing by 2.8% YoY. This was on account of decline in the gas costs (as a % of sales). 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. However, the benefit from lower gas costs was slightly offset by increase in staff costs and other expenses (all as % of sales).

    Cost summary
    (Rs m) 2QFY14 2QFY15 Change 1HFY14 1HFY15 Change
    Consumption of raw materials (natural gas) 6,926 6,095 -12.0% 12,880 11,515 -10.6%
    as a % of sales 68.7% 64.1%   67.5% 63.3%  
    Staff costs 147.6 168.7 14.3% 294.4 330.7 12.3%
    as a % of sales 1.5% 1.8%   1.5% 1.8%  
    Other expenditure 994.4 1,078 8.4% 1960.3 2,100 7.1%
    as a % of sales 9.9% 11.3%   10.3% 11.5%  
    Total expenditure 8,068 7,342 -9.0% 15,135 13,946 -7.9%
    as a % of sales 80.0% 77.2%   79.3% 76.6%  

  • The net profits for the quarter grew 29.0% YoY. This was mainly due to revision in depreciation rates. The depreciation expenses for the quarter declined by 32.5% YoY. The growth in the bottomline was also supported by increase of 123% YoY in the other income.
What to expect?
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 14.7 and seems to be pricing in a favorable decision from Supreme Court regarding the PNGRB order. However, we believe it is best to avoid this stock for now until there is regulatory clarity which will be crucial in determining company's fortunes.

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