In isolation, Indraprastha Gas Ltd’s (IGL’s) growth rates for the December quarter look respectable. Compare that to the first two quarters of this fiscal year and the picture changes. For instance, operating profit margin for the December quarter at 21.5% is the lowest in three quarters. It was around 24% for the first two quarters this fiscal year.
The main culprit is the higher cost of raw materials. For the December quarter, total raw material cost as a percentage of sales stood at two-thirds of revenue, the highest for the last three quarters.
IGL has been dealing with the problem of higher input costs for a while now and investors are aware of it. A key reason for this problem is the fact that the proportion of re-liquified natural gas (RLNG) in the total gas sourcing portfolio has been increasing and RLNG is a costlier source of gas. A shortage of domestic gas supplies means that the company has to resort to using RLNG to meet additional demand.
Year-on-year revenue growth at 31% in the December quarter was slower than in the first two quarters when revenue growth was over 40%. Overall sales volumes growth for the December quarter came in at 9%, a bit lower than the September quarter when volume growth was 10%. Though IGL’s net profit growth at 25% was slower than that of the September quarter, it was better than the June quarter. The company faced a dramatic year-on-year jump in raw material costs in the June quarter, which affected net profit growth rate then.
A key challenge operationally is that of higher input costs. Sure, IGL has enjoyed good pricing power in the past and has been able to pass on the rise in input costs through price hikes. In this quarter itself, the company has increased the selling prices of compressed natural gas (CNG) and piped natural gas (PNG). The company maintains that RLNG prices have been on the rise recently and therefore, new RLNG quantities are available in the market at much higher prices than the existing ones.
But as far as investor sentiments are concerned, the overhang of the PNGRB tariff order still continues to weigh down the stock. The Supreme Court verdict on the same would be the key driver for the stock in the days to come. Thanks primarily to that, the IGL stock has sharply underperformed the benchmark Sensex so far in this fiscal year.