Nuvama Institutional Equities has recently issued a ‘Reduce’ rating on Indraprastha Gas (IGL), officially lowering its target price by 7%, bringing it down to Rs 166. This downgrade stems from a broader trend of devaluation in the sector, heavily influenced by unpredictable government policies, which is reminiscent of the challenges faced by oil marketing companies. As a result, IGL is currently trading at a significant discount.

Q4FY25 Performance Overview

In its Q4 FY25 results, IGL reported an EBITDA that surpassed market expectations. However, the financial performance was notably affected by a one-time reversal of a Rs 110 crore provision linked to trade margin revisions with oil marketing companies, which dates back to the period between April 2019 and April 2021. The reported EBITDA for the quarter was Rs 500 crore, reflecting a 5% decline compared to the previous year.

Volume Shortfalls Impacting Ratings

Nuvama’s decision to downgrade IGL also relates to volume performance, which fell 3% short of expectations, totaling 9.2 mmscmd (million metric standard cubic meters per day). This setback was primarily due to recent changes in the APM allocation, leading to supply disruptions in various regions.

Despite these challenges, IGL’s management remains optimistic, anticipating a gradual recovery in EBITDA margins. They project margins to increase from Rs 4.6/scm to between Rs 7-8/scm by Q4 FY25. According to Nuvama, “Management expects short-term margins to range from Rs 6–7/scm, gradually improving to a sustainable Rs 7–8/scm as new areas boost volumes and gas costs are rationalized through flexible contracts and potential CNG price adjustments.”

Future Volume Growth and Challenges

Looking ahead, IGL has outlined a goal of 10% volume growth for FY26. However, Nuvama warns of potential downsides due to the forthcoming Delhi EV policy, ongoing volume losses as DTC buses shift to electric fleets, and a possible slowdown in demand as CNG prices rise, making it less competitive against alternative fuels and electric vehicles.

Q4 Financial Highlights

In its quarterly report, IGL showcased a 9% decrease in net profit, amounting to Rs 349.23 crore, despite a 10% increase in net sales, which reached Rs 3932.78 crore. The total sales volume for Q4 FY25 was reported at 826.40 million scm, reflecting a 4% year-on-year increase.

Stock Performance Overview

When examining the stock performance of Indraprastha Gas, it has remained relatively stable over the past five trading days, showing no significant changes. However, the stock has faced a 6.5% decline over the last month and a 10% drop over the past six months. Notably, it has experienced an 18.5% reduction in value over the last year, indicating a challenging market environment for investors.

In conclusion, while IGL has faced various hurdles impacting its performance and outlook, the management’s proactive strategies may pave the way for future recovery. Investors should stay informed about the evolving market dynamics, particularly regarding government policies and industry trends.