Indraprastha Gas’ profits to chart a steady growth

Steep Hike In Retail CNG Prices Will Not Hit Sale Volumes

THE Delhi-based natural gas retailer Indraprastha Gas (IGL) jumped on the bourses on Friday following its announcement to raise compressed natural gas (CNG) prices to touch a historical new high above Rs 258. The scrip has outperformed the market in the past one year, gaining 83% as against an 18% rise in Sensex.
After the government decided last month to decontrol the price of natural gas sold by ONGC and Oil India under the administered pricing mechanism (APM), the scrip had lost over 11% in four trading sessions on fears of depressed margins. As a result, the stock has underperformed the Sensex since mid-May. However, Friday’s spurt has more than made up for the lag.
The company raised retail CNG rates by Rs 5.6 per kg in the Delhi region, by Rs 6.9 in Noida and Greater Noida and by Rs 4.9 in Ghaziabad, which, on an average, works out to 25%. With this price hike, IGL’s CNG business, which contributed over 88% to its net sales in FY10, will fully pass on the increased cost of gas to the final consumers. The hike also covers the internal consumption of gas for running compressors. The company has yet to take a final decision on its piped natural gas (PNG) business.
Despite the steep hike in retail CNG prices, IGL’s sale volumes are unlikely to take a hit, going forward. This is because using CNG is a cheaper option compared to liquid fuels. Secondly, IGL has a monopoly in the Delhi market. The government’s push for increasing the usage of natural gas ahead of the Commonwealth Games in October this year is also contributing to a steady growth in demand. In fact, the company, which increased its volumes by 18.6% in FY10 to 2.1 million standard cubic meters per day (MMSCMD) against the previous year, is expected to cross 2.6 MMSCMD by end FY11.
IGL, which had invested a cumulative Rs 820 crore in its business by end FY09, is entering a high-investment phase. In the coming three years, it will invest over Rs 1,600 crore to expand its PNG network and establish itself in new areas like Sonepat and Panipat in Haryana.
Going forward, IGL could face some pressure on its operating margins due to increasing sales volumes and rising raw material costs. However, its steady profit growth is likely to continue.