Why Indraprastha Gas Share Price is Falling

In recent months, share price of gas distribution companies have come under intense pressure.

The biggies - Mahanagar Gas and Indraprastha Gas - have seen a drop of around 25% in their stock prices this year.

Rising crude oil prices should have boosted people to move to CNG vehicles, right? Which should be good for gas distribution companies like Indraprastha Gas and Mahanagar Gas.

However, that did not happen. All the gas distribution companies have bled on the bourses. Their only fault was that they are in the gas sector.

Among the prominent names, Indraprastha Gas share price has fallen 25% in the past one year. The stock has again come under pressure after getting some respite in mid-August.

Why is Indraprastha Gas share price falling?

We know that ever since the Russia-Ukraine war, crude oil prices have been shooting up. But what we ignored is that natural gas prices are on the rise too.

Since April 2019 the natural gas price is soaring. This was good news for the gas manufacturing companies because their profits were shooting owing to a rise in gas prices.

Rising gas prices will lead to better profit margins, because the demand for natural gas cannot be reduced as there is no real alternative. Hence it was a win-win for the manufacturing companies.

However, this turned out to be bad news for gas distribution companies because their input costs have increased. Increased input costs and the inability to raise selling price has taken a hit on IGL's profit margins.

As a result, companies are forced to use liquefied natural gas (LNG) to meet the shortfall in domestic gas allocation, which added insult to injury and global LNG prices have shot through the roof.

A clear impact of that can be seen in its financial statement. IGL's net profit margins have fallen for the past eight quarters despite increasing sales. Last year its net profit margins fell by 5.8%.

Quarterly Performance

Particulars (Rs in m)	Jun-21	Sep-21	Dec-21	Mar-22	Jun-22
Turnover	14,103	20580	24689	27242	35611
EBITDA*	4447	4471	4503	4442	4521
Tax	857	1241	1051	1361	1394
Profit after tax	2443	3651	3085	3586	4209
Net profit margin (%)	17.7	18.1	12.7	13.5	11.9

Source: Equitymaster
*Interest before tax is considered

Natural gas prices in India are decided every six months on 1 April and 1 October. Late last week, natural gas prices were hiked by 40%. This is the third price hike since April 2019.

However, the centre is trying to control rising gas prices. Earlier in September, it had set up a gas price review panel led by Kirit Parikh - a former member of the planning commission.

The panel was asked to recommend a "fair price to the end-consumer" by the end of September. However, the committee sought an extension. A final report from the panel is expected to come around mid-October.

Reportedly, the hike in gas prices is expected to increase CNG prices in metro cities like Delhi and Mumbai. This will directly impact IGL's profit margins and share price.

The domino effect

If one thing goes wrong everything else follows. This is called the domino effect. This is true for IGL.

IGL's margins are already under pressure because of rising natural gas prices. The prices are expected to rise further in the coming week, which means more pressure.

The margins have already fallen to 11.9% in the first quarter. If the situation stays the same, will IGL continue to be profitable?

As if this was not enough, IGL is also facing a threat from the increasing use of electric vehicles (EVs). Up until August 2022, 33,440 EVs were sold 2022, this is the highest ever sale in 7 months.

This has moved people away from CNG vehicles.

Hence, IGL is currently surrounded by the winds of negativity. However, the overall future of the CNG vehicle industry is bright as people are looking for an alternative to petrol vehicles.

About Indraprastha Gas

Indraprastha Gas is an Indian natural gas distribution company that supplies natural gas as cooking and vehicular fuel. Established in 1998, the company operates primarily in Delhi-NCR including neighbouring cities like Noida.

It is a joint venture of GAIL, Bharat Petroleum, and the Government of Delhi to implement the City Gas Distribution Network.

For more details, check out Indraprastha Gas financial factsheet and its latest quarterly results.

You can also compare Indraprastha Gas with its peers.

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