IGL is in the business of city gas distribution in the National Capital Territory of Delhi. IGL also supplies the gas to nearby regions of Delhi. IGL is formed as a JV promoted by GAIL (India) Limited and Bharat Petroleum Corporation (BPCL). Government of NCT of Delhi is holding 5% equity.
The government is planning to renovate the natural gas pricing policy for the purpose of safeguarding consumers from global affairs, to ensure fair prices for both buyers and producers. The domestic supply for the priority sector has been increasing which will benefit the main players of this sector like IGL.
Key takeaways
High growth in CNG Volume
EBIDTA at 8.6/scm
Higher domestic gas allocation
Priority sector input gas costs reduce significantly
The first quarterly results of IGL were brilliant. Revenue growth was led by an all-time high CNG volume of 5.9 mmscmd which is up by 6 percent sequentially and a 29 percent jump in revenue realization. A sharp sequential decline of 13.2 percent in PNG was a shocking surprise. The consolidated Net Profit rose from Rs 278 crore to Rs 481 crore, by comparing the first quarters, IGL has given a growth of 73 percent on a quarterly basis.
Domestic Gas Allocation
Under-allocation of domestic gas is a problem for City Gas Distribution (CGD) companies as transferring the shortfall through spot and contracted LNG has been tough. IGL received 91 percent higher than the required domestic gas (around 6mmscmd) in the recent months as the government gave higher allocation for the CGD sector. This allocation is less than the expected 94 percent of the CNG and PNG (domestic volume). Higher domestic gas supply helped in reducing input gas costs for the priority sector to $7/MMBtu from $10.5/MMBtu and helped in a 20 percent jump in EBITDA to Rs 8.6/scm.
Dull demand for industrial / commercial gas volume
Industrial and commercial gas sales volume have another sequential decline on higher gas prices. Both of the spot and contracted LNG gas prices are likely to remain stagnant in the expensive zone for the near term. Thus, industrial and commercial gas demand may not provide healthy growth in the coming months. IGL’s limited dependency on industrial /commercial gas demand helps in reining in input costs to some degree.
Let us observe the monthly chart for IGL. The price corrected from its lifetime high of Rs 602 and took support at the 50% retracement level at Rs 320. This level at Rs 320 acts a strong support level for many months as the price did not break below it. The monthly MFI stands at 53.84 which indicates that the stock might have some upside in the long term. Since the natural gas pricing policy is controlled by the government, the stock will suffer from price hike or caps on pricing.
Outlook
The government’s indication that it may alter domestic gas prices means some long-term relief. While October domestic gas price hike appears to be inevitable, CGD companies would likely raise and pass on the costs to the consumers.
The rise in CNG prices could affect volume growth as the differential in CNG and petrol/diesel fuel prices are narrowing. Hence, it will negate the cost benefits of switching to CNG.
The CGD sector has been under pressure due to high imported gas costs and a shortfall in domestic gas supply. The recent change in government’s stance, under which domestic supply for the priority sector has been increasing, is beneficial for the priority sector volume-heavy players like IGL.
CGD companies are allowed to make open purchases which will help in reducing costs.
Comparing with its peers, IGL is certainly better than GAIL, Petronet LNG and Mahanagar Gas. However, Adani Total Gas has given better returns over the last 3 years than IGL.
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