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Indraprastha Gas: higher costs, muted volumes affect March quarter

LiveMint logoLiveMint 05-06-2014 Pallavi Pengonda

Indraprastha Gas Ltd (IGL) announced worse-than-expected March quarter financial results last week thanks primarily to higher raw material costs. As a result, operating profit margin declined by 116 basis points over the same period last year to 19.85%. One basis point is one-hundredth of a percentage point.

Input costs increased because the company had to resort to using regasified liquefied natural gas (RLNG), which is a costlier source of gas, in order to make up for the shortfall in domestic gas supply.

Operating profit increased at a relatively slower pace of 3.6% year-on-year to `192 crore, and total operating income grew 9.7% to `968 crore. For the March quarter, overall sales volume growth was 3%, which is far from encouraging. Net profit increased by 8% to `90 crore, which disappointed investors.

The good news is that the current quarter is expected to be better. “Recent increases in CNG (compressed natural gas)/domestic PNG prices by 8%/4% from early May and the government’s decision to allocate additional gas for CNG and domestic PNG segments would help the company to improve its margins in the June quarter, we think,” wrote analysts from Nomura Research in their results note.

A pickup in industrial activity will help. Additionally, regular diesel price hikes are expected to maintain the cost advantage of CNG over diesel. That should help CNG volumes over a period of time. While that augurs well, so far in this financial year, IGL’s shares have increased by 12.6%, suggesting that the stock is factoring most of the positives. The stock trades at about 12.5 times its estimated earnings for this year.

On the flip side, the pending Supreme Court verdict in IGL’s dispute with Petroleum and Natural Gas Regulatory Board over pricing continues to act as an overhang. The board had issued an order that slashed transmission tariffs and compression charges and IGL is contesting it in the Supreme Court on the contention that the regulator does not have the authority to determine tariffs. Of course, a favourable decision would help the stock.

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