Investors of Indraprastha Gas Ltd (IGL) were left disappointed, as the city gas distributor reported a lacklustre volume growth, yet again.
In the December quarter (Q3FY24), sales volume grew by a mere 4% year-on-year to 8.5 million metric standard cubic meters per day (mmscmd), lower than analysts’ estimates. Muted volumes were a drag on its Q3 earnings, with the compressed natural gas (CNG) segment playing a spoilsport. IGL’s volumes have been range-bound lately, and the outlook on this front remains bleak.
A growing adoption of electric vehicles (EV) is expected to hurt IGL’s CNG volumes, as the number of CNG-powered vehicles in the heavily-used public transport dwindles. “Tepid volume growth reflects that CNG volumes have not picked up much after the APM (administered price mechanism) price revision in April 2023,” said a Kotak Institutional Equities report. Volumes have not been growing for nearly two years now in the Delhi National Capital Region (NCR) region, which accounts for nearly 70% of IGL’s CNG volumes, it added.
IGL has guided for an exit volume of 9 mmscmd for FY24 and 10mmscmd for FY25.
This weakness in volume persists even though the Delhi-based company has passed on most of the benefits of lower gas costs to customers in select areas. IGL’s inability to increase prices in the face of weak demand is likely to pressure its margins. IGL has guided for an Ebitda margin of ₹7.5-8 per scm for FY25. Ebitda margin was lower at ₹7.2 per scm in Q3, compared with ₹8.6 per scm in Q2, because of higher gas cost. An unfavourable combination of subdued demand and rising cost has prompted an earnings downgrade. For instance, Kotak has slashed its near-term earnings estimate for IGL by 4-6%, factoring in lower margins and volumes.
Amidst all this, a respite for investors could come from the company’s efforts to expand into newer geographical areas, like Meerut and Muzaffarnagar, to reduce its dependence on the National Capital Region. But unless that meaningfully plays out, it might be challenging to compensate for a slowdown in the NCR.
For now, the stock’s dismal returns reflect these concerns. In the past one year, shares of the company have risen by a mere 2%. “IGL’s stock has already been facing de-rating,” said Swarnendu Bhushan, an analyst at Prabhudas Lilladher. Its valuation multiple has taken a hit. The stock is trading at 17x estimated consolidated FY25 earnings, compared to around 30x a few years back, Bhushan pointed out.