IGL share price falls 2% as net profit tanks 85%; should you ‘buy’, ‘sell’ or ‘hold’?

Indraprastha Gas shares tanked 2% during the day’s trading session to trade at Rs 407 per share, as investors reacted to the weak set of quarterly numbers that the company posted. In the April-June quarter, Indraprastha Gas (IGL) reported a 85% drop in net profit to Rs 31.8 crore, down from Rs 218 crore in the same period last year. IGL’s numbers were below street expectations as the company felt the brunt of the nation-wide lockdown. IGL shares are down only 4% year-to-date as the stock price made a smart recovery from March lows.

Hit by the lockdown, IGL reported a 57% slump in sales volumes. CNG sales dropped to 105 million Kgs, a 65% from from the year-ago period. Natural gas sales also dropped 17 million Kgs, down 62% from the previous year. Total revenue from sales was down to Rs 633 crore, against Rs 1570 crore that the company made in the same period last year. On a consolidated basis IGL’s total income was down to Rs 723 crore from Rs 1,779 crore in the year-ago period. 

Post the resumption of business, IGL has seen a volume pickup. Brokerage and research firm Prabhudas Lilladher is still upbeat on the stock with a ‘Buy’ call. In a recent post result report, the brokerage firm said that a move towards private vehicle ownership and closure of the metro is likely to drive an increase in CNG volumes. “IGL remains an enviable business model with high volume growth due to geographical expansion along with addition of new buses and taxis,” the report added. The target price for the company has been decreased marginally to Rs 590 per share.

With concerns about rising pollution still remaining, IGL is also a play on the theme of environment protection. According to the company management, volumes slipped to 90% in April, but by June, they were down 35%. However, July volumes were close to 80%. EBITDA margins were at 13% during the April-June quarter. With volume pick up being the key trigger, Emkay Global has upgraded IGL to a ‘Hold’ rating with target price of Rs 430 per share. Global brokerage firm Jefferies also has a ‘Hold’ rating on the scrip. A drop in usage of public transport could also hit IGL’s margins as 70% of its volumes are based on public transport usage.

Kotak Securities says that medium-term risks associated with IGL remain. A shift towards electric mobility in public transport could affect the company adversely.  Enforcing open access of the CGD network is also a key risk associated with IGL. “In our view, OMCs may consider sourcing domestic gas volumes through an open-access CGD network to supply directly to the customers through their retail outlets rather than continuing to sell it on behalf of licensed CGD entities like IGL,” Kotak Securities said. Factoring in slower recovery in volumes and lower unit EBITDA margins amid negative operating leverage, the brokerage firm has a ‘Sell’ call on the stock with a fair value of Rs 380 per share.