INDRAPRASTHA GAS: Prolonged Legal Battle, Margin Pressures Loom

The relief rally in Indraprastha Gas after the company won a high-profilelegalbattle against gas regulator PNGRB appears to have run its course. After gaining 30% on Friday, the stock has lost 5.4% on Monday in an otherwise positive market, falling to near half of its 52-week high. Analysts arewarning investors not to take IGL’s legal win too seriously. “We do not believe this is the end of the battle as the regulator is likely to appeal to higher courts,” says Rohit Nagaraj, research analyst, Centrum Broking. Itwas mainly the prospectof a prolonged legal battle that prompted investors to dump the stock on Monday. However, the regulator doesn’t seem to have made up its mind yet. “We have not taken a final decision on approaching the Supreme Court,” S Krishnan, chairman, PNGRB, told ET. At a conference call arrangedby a Mumbai-basedfinancial services firm, apparently a former member of PNGRB agreed that the regulator has no power to determine the “final price” of gas. Approaching the Supreme Court or getting the PNGRB Act amended are the two options before the regulator.
How should a retail investor interpret all these? A Kotak Institutional Equities report says that IGL’s margins are bound to fall in future even if the final selling price of gas is not regulated. It says IGL’s rich valuationsfactor in high ROEs and growth in perpetuity. The brokerage sees significant risks to this even if network tariffs and compression charges for gas are not regulated. Investors would be better off shunning the stock until there is clarity.