CNG price hike a positive development for Indraprastha Gas

CNG price hike a positive development for Indraprastha Gas

The recent increase of compressed natural gas (CNG) prices by Indraprastha Gas Ltd (IGL) clearly demonstrates the strong pricing power the firm enjoys.

Though this may not have a big impact on IGL’s valuations, it will help it pass on higher input costs. The company has previously raised prices to offset the impact of high-cost, regasified liquefied natural gas (R-LNG). This time, apart from the higher R-LNG cost, IGL maintains that the depreciation of the rupee against the dollar and the rise in operational expenses due to increased power tariffs have prompted price hikes.

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New Delhi-based IGL is engaged in retail gas distribution, supplying CNG to the transport sector and piped natural gas (PNG) to domestic, industrial and commercial sectors in Delhi and the National Capital Region (NCR). In the year to March, the CNG business accounted for about 82% of the total sales volumes, with rest coming from PNG.

The company delivered a good June quarter on account of higher sales volumes and lower gas costs. IGL’s June quarter financial performance was helped by the merger of administered pricing mechanism gas allocation for Delhi and NCR in early June. The full benefit of the same is expected in the September quarter.

In the June quarter, the company’s operating profit margin increased to 29.5% from around 27% in the March quarter. Analysts say the company will be able to maintain its profit margin in this fiscal year, but the sustainability of profit margins over the long run is challenging.

The shortage of domestic gas and dependence on high-cost R-LNG to meet demand means city gas distribution companies such as IGL and Gujarat Gas Co. Ltd have to live with higher gas sourcing costs. Needless to say, the ability of these companies to pass on higher costs and protect their profit margins would be one key metric for investors to track in future.

Having said that, a favourable operating environment in the form of robust demand has boosted the IGL stock, which has outperformed the BSE-200 index sharply since the beginning of this fiscal, suggesting most of the positives have been factored in the price currently.