Stock Review: Indraprastha Gas

   INDRAPRASTHA Gas has posted a modest 14% net profit growth in the December 2010 quarter, despite a strong spurt in sales, mainly due to pressure on margins, higher interest and depreciation costs and low other income.

   The cost of the gas Indraprastha's sells has doubled after the government deregulated prices in May 2010. Even though the company has, to a large extent, passed the increased cost to its customers through price hikes, its margins have come under pressure. During the December quarter, while sales grew 60% to . 457 crore, the company's raw material cost more than doubled, bringing down the operating profit margin to 28.3% from 36.7% in the year-ago period.

   The Delhi-based city gas distribution company's volumes growth at 22.5% during the quarter was marginally low compared with the first half of FY11, when the growth was almost 26.5% against the corresponding period of the previous fiscal. This was, however, substantially better than the 17% cumulative

annualised growth rate (CAGR) the company witnessed between FY07 and FY10.
   On bourses, the company has consistently outperformed the overall market in the past one year. The scrip gained nearly 67% against the just 10% rise in the broader market benchmark, BSE Sensex. BSE Oil & Gas index has underperformed, remaining almost flat in the period.

   Like other companies in the natural gas industry, Indraprastha Gas has also embarked on an aggressive expansion plan. During FY10, the company added nearly . 300 crore to its gross block, the highest single-year addition in the company's history. Additionally, it has planned . 700-crore capex programme for FY11 and plans to invest a similar amount next year. As a result, the company is expected to triple its gross block by the end of FY12, compared with March 2009 levels.

   But the plans have increased the company's interest and depreciation costs, which ate into almost 39% of the company's profit before interest, depreciation and tax against the 28% last year. An over 80% fall in its other income was also one reason for this.

   The company, which was debt-free in the last four fiscals, was carrying a debt of around . 250 crore as on December 31, 2010. It paid . 4.1 crore as interest during the December quarter. Considering the heavy capex programme for FY12, which is nearly double the company's annual cash generation, the company is likely to raise further debt in the coming months.

   Indraprastha Gas is set to grow substantially in the coming years as the assets it is creating start generating revenues. The impact of its capex programme is already becoming visible in terms of higher sales volumes.