City gas distribution company Indraprastha Gas Ltd (IGL) delivered a good March quarter, primarily aided by higher volume. Higher margins helped, too. Compressed natural gas (CNG) volume increased 8% from a year earlier and piped natural gas (PNG) volume grew 9%. The company derives about three-fourths of its volume from the CNG business. Unfortunately, a decline in price realization for both segments meant IGL’s revenue for the quarter fell 3.4% to Rs.882 crore.
However, a decline in raw material costs led to a 300 basis points (bps) expansion in operating profit margin to 22%. One basis point is one-hundredth of a percentage point. The current quarter saw IGL gross spreads at Rs.9.6 per standard cu. m (scm), up 10% from a year ago and 4% higher than estimates and well above the average gross spreads of Rs.9.1 earned over FY14-H1FY16, wrote analysts from IDFC Securities Ltd in their post-result note. A strong operating profit performance and a slower rate of increase in depreciation costs helped net profit growth of 12% to Rs.108 crore.
Analysts expect profit margins to improve. “We expect some margin improvement from 1QFY17 onwards due to a lower CNG price cut announced by IGL post the 20% domestic gas price cut since April,” pointed out analysts from Jefferies India Pvt. Ltd.
More crucial would be volume growth. Even though IGL’s total volume for the March quarter increased 8.4%, for financial year 2016, volume grew at a relatively slower pace of 4.4%. But the outlook seems brighter. “We believe FY17/18E growth will see a much improved demand trend of ~8% versus the average of just 3% seen over FY14-16,” says IDFC Securities. “IGL, in particular, would benefit from the additions to Delhi’s state transport fleet, continuation of the odd-even scheme and the steady rate of addition of PNG connections (~100,000 households p.a.),” added the brokerage.
Nonetheless, it’s worth noting that IGL shares have outperformed. The stock has gained 7% in 2016, compared with a 2.4% decline in the benchmark Sensex. Currently, the stock trades at about 15 times estimated earnings for the current fiscal. While the valuations are seemingly adequate, consistent good growth in volume may well lead to some expansion.