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IGL's compressed natural gas (CNG) sales were hit more than the piped natural gas (PNG) segment (Mint )
IGL's compressed natural gas (CNG) sales were hit more than the piped natural gas (PNG) segment (Mint )

After a muted June qtr, pace of volume recovery is key for IGL

Revenues declined by 59% y-o-y to 639 cr. This was driven by the sharp 57% y-o-y fall in sales volumes

City gas distributor Indraprastha Gas Ltd’s (IGL) June quarter earnings were depressed as covid-19 disruptions adversely impacted performance. Revenues declined by 59% year-on-year (y-o-y) to 639 crore. This was driven by the sharp 57% y-o-y fall in sales volumes to 2.72 mmscmd (million standard cubic metres per day). Its compressed natural gas (CNG) sales were hurt more than the piped natural gas (PNG) segment.

While IGL’s gross margins expanded y-o-y, Ebitda margins contracted because of negative operating leverage. Ebitda is earnings before interest, tax, depreciation, and amortization. Lower other income and high depreciation costs further weighed on profitability, leading to 85% y-o-y decline in net profit to nearly 32 crore.

Pandemic woes
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Pandemic woes

The situation is expected to improve, but how quickly volumes recover will be crucial. “IGL volumes have recovered to about 80% of normal levels in August, which is higher than about 65% of normal levels clocked by Mahanagar Gas Ltd (MGL) with similar volume mix," said Pratik Chaudhuri, analyst, Jefferies India Pvt. Ltd, in a report on 26 August.

Even so, covid-19 will keep meaningful volume recovery at bay for the near-term. Jefferies builds in an 18% y-o-y decline in IGL’s volumes for FY21 and 25% decline for MGL.

Note that shares of IGL and MGL have declined by about 20% from their respective pre-covid highs in January-February. Even so, based on Bloomberg data, MGL trades at a relatively cheaper valuation of about 12 times estimated financial year 2022 earnings, while IGL trades at nearly 20 times. Investors are willing to assign higher valuation multiples to IGL because of better volume performance, though some analysts are cautious on the stock given the high valuations.

“We think (valuation) prices in the robust earnings outlook but does not leave much cushion for any regulatory risks," said Chaudhuri.

“We remain wary of medium-term risks to (1) CNG margins from imminent enabling of open access for city gas distribution networks and (2) CNG volumes from plausible shift towards electric mobility for buses and three-wheelers segment as targeted by the recently notified Delhi electric vehicle policy," said analysts from Kotak Institutional Equities in a report.

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