A Delhi High Court order on Friday, stating that the Petroleum and Natural Gas Regulatory Board (PNGRB) does not have the power to fix gas rates, gave a big relief to city gas distribution company Indraprastha Gas Ltd (IGL).
Following the favourable ruling, IGL shares surged 28.7 per cent, or Rs 55.60, to close at Rs 249.35 on Friday.
The order ends two months of uncertainty over the company’s profitability and prospects. On April 9, the oil and gas regulator had announced a cut in network and compression charges by 63 per cent and 59 per cent to Rs 38.58 per million British thermal units (mBtu) and Rs 2.75 per kg, respectively, for the National Capital Region (NCR) where IGL enjoys a monopoly. Additionally, it was asked to refund the excess charges worth about Rs 900-1,100 crore, on a retrospective basis (effective April 2008).
Consequent to this order, analysts had then estimated IGL’s profit to fall up to 75 per cent in the current financial year, besides setting it back by over Rs 1,000 crore on account of refund of past charges. Following the order, the stock fell a sharp 33.67 per cent on April 10 to Rs 229.80, from Rs 346.40 previously. Since then, it kept sliding and closed near its 30-month low of Rs 193.75 on Thursday.
The regulator’s move was also significant as it affected the key margin lever at IGL’s disposal — its pricing power. Driven by rising liquified natural gas prices, IGL had initiated six price rises, enabling it to post an Ebitda margin of 25 per cent in FY12.
PNGRB’s April 9 order had led HSBC analysts to halve their FY13 Ebitda margin estimate for IGL to 13 per cent. Analysts at SBI Cap Securities, too, had then estimated a 59 per cent fall in IGL’s FY13 Ebitda. In their report dated April 10, HSBC analysts were estimating the net profit to tank 71.3 per cent in FY13 to Rs 88 crore, as compared to Rs 306 crore this year.
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Analysts tracking the company said among the few levers IGL was left with, was that it was free to fix marketing margins (unregulated currently). However, many believed it would have only partially compensated for the potential loss due to cut in network and compression rates. Implementation of these lower rates would have also crunched the return ratios and growth plans of the firm.
Friday’s order has brought some cheer, though analysts await further clarity. Deepak Pareek, analyst at Prabhudas Lilladher, said, “This is certainly a positive development for IGL. We keep the stock under review and await clarity on the course of action by PNGRB and the IGL management.”
While the Delhi HC decision is welcome, PNGRB still has the option of approaching Supreme Court. Even after Friday’s surge, the stock is still down 28 per cent from Rs 346 witnessed on April 9.
Following the SC ruling, counters of other companies in the sector galloped on Friday. Shares of Gujarat Gas Company gained 14.62 per cent to close at Rs 333.55 and Gujarat State Petronet climbed 11.2 per cent to Rs 70.50.