Indraprastha Gas: Charged by legal relief

Earlier this month, the Supreme Court handed Delhi-based city gas distributor Indraprastha Gas (IGL) an anticipated but much-awaited victory.

It dismissed the special leave petition filed by the downstream regulator Petroleum & Natural Gas Regulatory Board (PNGRB).

The petition was against the Delhi High Court order of June 2012 which quashed the regulator’s directions to IGL to slash tariffs and charges. PNGRB had, in April 2012, issued a directive to IGL to slash network tariff and compression charge by about 60 per cent — with retrospective effect from April 2008.

The IGL stock had taken a hammering then falling more than 40 per cent over two days.

The proposed cuts would have resulted in IGL potentially facing losses on its operations, and the retrospective effect would have eroded its net worth. IGL sought relief from the Delhi High Court and won it quickly.

PNGRB then took the fight to Supreme Court. IGL’s case however seemed strong with the State and Central Governments backing its contention that PNGRB does not have the authority to fix the company’s tariffs.

The market seemed confident about IGL eventually emerging victorious — since its low in April 2012, the stock had nearly doubled. Besides, in a worst case scenario, IGL would have had the leeway to adjust marketing margins to compensate for lower network tariffs and compression charges.

The case dragged on in the Supreme Court for nearly three years but now with the verdict in IGL’s favour, a major overhang on the stock has been removed.

The stock’s 9 per cent rally on the day of the verdict signalled relief at the culmination of a long-running dispute.

The focus is now solely on the company’s operations which have been under rough weather of late.

Volume growth has been tepid the past few quarters.

Overall growth in 2014-15 was just about 1 per cent, far lower than the double-digit volume growth until 2013. Blame this on two factors. One, there were delays in new vehicle additions and slow pace of vehicle conversions to compressed natural gas (CNG) — the segment accounting for more than three-fourth of revenue. Next, competition in the industrial segment from cheaper substitutes, such as fuel oil, saw volumes of piped natural gas (PNG) fall.

The company’s revenue in 2014-15 fell 6 per cent to ₹3,670 crore while profit grew more than 21 per cent to ₹438 crore. But the growth in profit was mainly due to a drop in depreciation cost (accounting change) and fall in interest expenses.

Meanwhile, the stock’s run-up has made it a tad expensive. At ₹462, the Indraprastha Gas stock trades at 14.8 times its trailing 12-month earnings, higher than the average 13 times it traded at in the past five years.

Yet, shareholders can remain invested in the stock. The positives below, when they start reflecting in the financials, can become trigger for fresh buying.

One, the Centre’s push in favour of city gas distributors that supply CNG to vehicles and PNG to households should help.

Domestically-produced gas will now fuel such vehicles and households, and these categories have been moved to the top of the pecking order in domestic gas allocation. So, their dependence on costlier imported gas should reduce.

For Indraprastha Gas, which gets more than 80 per cent of its volumes from these businesses, the upshot is lower sourcing cost, more competitive pricing and potentially higher volumes.

CNG for vehicles and PNG for households have been more economical for customers compared with fuels, such as diesel, petrol and LPG; the advantage is set to continue.

The Delhi Government’s recent decision to increase value added tax (VAT) on petrol and diesel instead of reducing prices charged to customers adds to IGL’s advantage and its pricing power. Volumes may have been lacklustre, but the company has been able to pass on price hikes regularly and maintain margins.

Next, the Delhi Government’s plans to add 10,000 new buses in the city, nearly a fourth of the existing fleet, should mean pick-up in volume growth in the coming years, and reverse the trend of the recent past.

IGL’s recent move to enter into contracts with industrial customers based on spot LNG (which are cheaper than LNG sourced through long-term contracts) should improve cost competitiveness and help stem volume fall in the segment.

IGL’s efforts to increase reach beyond Delhi and surrounding areas should add to volume growth in the future.

It has 50 per cent stake in the high-potential Central UP Gas and Maharashtra Natural Gas (which has operations in Pune). A strong balance sheet with negligible debt is an added positive.

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