Higher gas costs affect profitability at Indraprastha Gas

Higher gas costs affect profitability at Indraprastha Gas

The results of Indraprastha Gas Ltd (IGL) for the three months ended 31 December show robust revenue growth, but that has not translated into corresponding growth at the net profit level. This trend in similar to what the company reported in the September quarter.

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Raw material costs that rose 102% hit operating profit and margins fell by 842 basis points on a year-on-year basis to 28.3%, from 36.7% in the same period last year. The costs rose on account of an increase in APM (administered pricing mechanism) gas prices and sourcing of incremental gas from spot RLNG (regasified liquefied natural gas).

Margins in the September quarter had fallen by 890 basis points. One basis point is one-hundredth of a percentage point. In both the quarters, the company’s other income, too, fell sharply.

Interest costs of Rs4 crore compared with zero in the year-ago period also spoiled the show at the net profit level in the December quarter. In the September quarter, IGL had raised loans to fund its capex plans and incurred an interest cost of Rs2 crore. Depreciation costs increased at a faster pace of 33% in the December quarter compared with 23% in the September quarter due to higher capitalization of CNG (compressed natural gas) stations.

The result: 14% growth in net profit to Rs67 crore on a revenue growth of 60% to Rs455 crore. IGL derived 83% of its gross revenue from CNG sales and the rest came from PNG (piped natural gas) sales, the share of which has gone up compared with last year. Price hikes, too, have helped the cause of revenue growth and also helped the company pass on some of the increase in gas costs.

IGL has a fixed gas allocation of about 2.35 million standard cu. m per day. To meet demand above that, the firm will have to depend on LNG, which is a comparatively costlier source. This will mean pressure on operating margins. Given that, investors should watch the firm’s ability to pass on the increase in gas costs.

Prospects for city gas distribution firms in India are bright. Considering that, it’s not surprising that IGL has outperformed the BSE-500 index since the beginning of the fiscal. While the long-term outlook seems bright for IGL, near-term triggers are few. The shares closed 2.38% down at Rs330.20 each on Monday.