Indraprastha Gas: Rising and rising

The more than anticipated price hike will see earnings growth numbers increase and the share price has reacted.

The share price of compressed natural gas (CNG) and piped natural gas (PNG) distributor Indraprastha Gas (IG) propelled to a 52-week high on Friday as the company announced an increase in CNG prices. The recent price rise in the administered price mechanism (APM) had put pressure on its margins. The cost of gas purchase had increased to around Rs 6.5 /scm from around Rs 6.3/scm in the March quarter and Rs 6.1 in the previous one.

This, and an increased wage bill, saw the Ebitda (earnings before interest, taxes, depreciation and amortisation) margins decline by 410 basis points from the December 2009 quarter to 32.6 percent in the March quarter. However, IG’s margins remain amongst the highest in the industry, at around 32 per cent, way above nearest competitor Gujarat Gas, which has around 25 per cent.

The reason for such high margins, reckon analysts, is that IG charges its CNG and PNG prices based on prices of alternative liquid fuel, while it procures subsidised gas. Thereby, it actually enjoys the benefits of the subsidy. However, the recently announced price hike and the sourcing of expensive gas from the KG-D6 basin meant procurement costs were set to rise even further. The company’s earnings remain sensitive to the APM prices. More, the price hike of Rs 5.6/kg, taking the price from Rs 21.9/kg to Rs 27.5/kg, was more than the market expectations. The market was expecting a Rs 2 to Rs 2.5/kg increase.

CNG, which contributes around 90 per cent of the company’s revenue, will see a substantial margin growth. A hike in the PNG segment is also expected soon. With the Commonwealth Games round the corner and increased conversions to CNG, especially with petrol and diesel prices rising, volume growth is also expected. Analysts are reworking the earnings estimates upwards. There are concerns that IG could face some resistance for the extent of the hike and might have to roll it back to some extent. Going ahead, as the structural advantages the company enjoys diminish, the high margins are expected to normalise. Till then, the company’s earnings are set to rise.