The stock of Delhi-based city gas distribution company, Indraprastha Gas (IGL) zoomed up by 28.70 per cent (or Rs 55.60) to close at Rs 249.35 as against Sensex's fall of 2 per cent, on Friday. The surge came after the Delhi High Court's order, which states that Petroleum and Natural Gas Regulatory Board (PNGRB) does not have the power to fix gas tariffs, and thus, brings big relief for the company.
The order ends the near two months of uncertainty over IGL's profitability and future prospects. On April 9, 2012, the oil and gas regulator had announced a cut in network and compression charges by a whopping 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, IGL was also 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 profits to fall by up to 75 per cent in the current fiscal, besides setting it back by over Rs 1,000 crore on account of refund of past charges. Following the order, the stock fell 33.67 per cent on April 10th to close at Rs 229.80 as compared to its previous close of Rs 346.40. Since then, it kept sliding and closed near its 30-month low at Rs 193.75 on Thursday.
The regulator's move was also significant from the point of view that it impacted the key margin lever at IGL's disposal- its pricing power. Driven by rising Liquifies Natural Gas (LNG) prices, IGL had impacted six price hikes in FY12, enabling it to post EBITDA margin of 25 per cent in FY12. The PNGRB's April 9th order had led HSBC's analysts to halve their FY13 EBITDA margin estimates for IGL to 13 per cent. Analysts at SBI Cap Securities, too, had then estimated IGL's FY13 EBIDTA to fall by 59 per cent. Accordingly, in their report dated April 10th, HSBC's analysts were estimating IGL's net profit to tank 71.3 per cent in FY13 to Rs 88 crore as compared to Rs 306 crore in FY12.
Analysts tracking the company had then said that among the few levers that IGL was left with was that it was free to fix marketing margins (unregulated currently). However, many of them also believed it would have only partially compensated for the potential loss due to cut in network and compression tariffs. Further, implementation of these lower tariffs would have also crunched the return ratios of IGL, and its future growth plans.
Friday's High Court order has brought some cheer, though analysts still await some clarity. Deepak Pareek, analyst at Prabhudas Lilladher says, "This is certainly a positive development for IGL. We keep the stock under review and await clarity on future course of action by PNGRB and the IGL management". While the Delhi High Court decision is a welcome step, PNGRB still has the option of approaching Supreme Court.
For now, even after Friday's surge, IGL's stock is still down by about 28 per cent from Rs 346 levels witnessed on 9th April.
Following the court's ruling, counters of other companies in the sector, too, galloped on Friday. Shares of Gujarat Gas Company gained 14.62 per cent to close at Rs 333.55, while those of Gujarat State Petronet climbed 11.2 per cent to Rs 70.50.
"It's a positive development which boosted sentiments for the companies in the industry. However, the board's intervention has sent wrong signals to the investors and I doubt whether the battered down stocks would regain their earlier levels," said Ambareesh Baliga, cheif operating officer, Way2Wealth Securities.
(With inputs from Chandan Kishore Kant)
