Shares in gas utilities firm Indraprastha Gas (IGL) plunged 33.7% to end at Rs 229.80 on the Bombay Stock Exchange. In contrast, the Sensex gained 22 points to 17,244. IGL stocks closed off the day's low. In early trade, shares of the company had touched a low of Rs 170.
The sharp fall was over a government regulator's directive to cut gas tariffs retrospectively from April 2008. IGL has approached the Delhi High Court against the regulator’s order, the company confirmed.
"IGL has approached today Delhi high court, where we have challenged the constitutionality and legality of the powers of the PNGRB (Petroleum and Natural Gas Regulatory Board) to fix the tariff," Managing Director M Ravindran said.
Here are five reasons why the stock tanked.
1) Government regulator Petroleum and Natural Gas Regulatory Board has ordered Indraprastha Gas Ltd (IGL) to cut tariff by around 60%. The new tariff will be applicable on retrospective basis from April 2008. This is the first time the regulator has determined tariff for any City Gas Distribution player.
"It is not a retrospective order. This was on the cards from the beginning. The tariff determination for the network is the statutory responsibility of the regulator for which the regulator has notified the regulations in March 2008. So from that day, the tariff determination as provided in the regulation takes hold," L Mansingh, ex-chairman of PNGRB told NDTV Profit.
2) Impact on financials: The total refund on account of the retrospective nature of the order could be Rs 900-1,200 crore, which is 20-25% of current market capitalization, Citigroup said. The potential downside is to the tune of 45-65% to earnings before interest, tax, depreciation and amortization. IGL will struggle to make even normative returns on the capital, Citi noted.
3) The regulator wants IGL to return the excess tariff charged till now. However, it has not yet provided a framework to return the excess tariff charged.
"This entire business of CNG and PNG is a retail business, which is a cash and carry business. There are no identifiable customers so retrospective refund is not possible. This the basis on which IGL has gone to High court," Ravindran said.
4) Tariff order also requires selling prices to be reduced immediately.
5) The selling price for gas includes cost of gas, network tariff, compression charge and marketing margin. The regulator has determined the 'network tariff' & 'compression charge.' For now, marketing margins remains a key variable for earnings as margins are not regulated currently. So, IGL has the option to increase marketing margins.
HSBC has downgraded the stock to ‘underweight’ and cut the target price to Rs 150 per share from Rs 366 per share. The company can make up for lower tariff by higher marketing margin, but it may be short-lived.
"Investors across the globe find it difficult to predict at what time government will come into the picture in state run companies... How do you believe in India if they keep on doing such things from retrospective effect," Deven Choksey, MD, KR Choksey told NDTV Profit.
Other government firms that have significant stake in IGL also saw selling pressure. Oil marketing firm BPCL, which owns 22.5% stake in IGL, declined 2%. Another gas distributor GAIL India Limited that owns 22.5% stake in IGL ended 1.8% lower.
"Such a drastic reduction in tariffs for IGL, apart from raising concerns for the company, will also likely raise concerns for possible tariff cuts for networks where tariffs are not yet determined," Nomura said in a note to clients.
Pipeline firm Gujarat State Petronet and gas distribution firm Gujarat Gas Company may soon get tariff revision orders from the regulator, sources told NDTV Profit. Natural gas importer Petronet LNG may also come under the purview of the gas regulator.
The regulator will also decide on the marketing margin that can be charged by any gas marketing entity. Until now, the margins have been agreed on between the buyers and the sellers.
Sources said that the regulator has asked for data regarding marketing margins from all companies though it is yet to decide on a cap on marketing margins.
The sharp fall was over a government regulator's directive to cut gas tariffs retrospectively from April 2008. IGL has approached the Delhi High Court against the regulator’s order, the company confirmed.
"IGL has approached today Delhi high court, where we have challenged the constitutionality and legality of the powers of the PNGRB (Petroleum and Natural Gas Regulatory Board) to fix the tariff," Managing Director M Ravindran said.
Here are five reasons why the stock tanked.
1) Government regulator Petroleum and Natural Gas Regulatory Board has ordered Indraprastha Gas Ltd (IGL) to cut tariff by around 60%. The new tariff will be applicable on retrospective basis from April 2008. This is the first time the regulator has determined tariff for any City Gas Distribution player.
"It is not a retrospective order. This was on the cards from the beginning. The tariff determination for the network is the statutory responsibility of the regulator for which the regulator has notified the regulations in March 2008. So from that day, the tariff determination as provided in the regulation takes hold," L Mansingh, ex-chairman of PNGRB told NDTV Profit.
2) Impact on financials: The total refund on account of the retrospective nature of the order could be Rs 900-1,200 crore, which is 20-25% of current market capitalization, Citigroup said. The potential downside is to the tune of 45-65% to earnings before interest, tax, depreciation and amortization. IGL will struggle to make even normative returns on the capital, Citi noted.
3) The regulator wants IGL to return the excess tariff charged till now. However, it has not yet provided a framework to return the excess tariff charged.
"This entire business of CNG and PNG is a retail business, which is a cash and carry business. There are no identifiable customers so retrospective refund is not possible. This the basis on which IGL has gone to High court," Ravindran said.
4) Tariff order also requires selling prices to be reduced immediately.
5) The selling price for gas includes cost of gas, network tariff, compression charge and marketing margin. The regulator has determined the 'network tariff' & 'compression charge.' For now, marketing margins remains a key variable for earnings as margins are not regulated currently. So, IGL has the option to increase marketing margins.
HSBC has downgraded the stock to ‘underweight’ and cut the target price to Rs 150 per share from Rs 366 per share. The company can make up for lower tariff by higher marketing margin, but it may be short-lived.
"Investors across the globe find it difficult to predict at what time government will come into the picture in state run companies... How do you believe in India if they keep on doing such things from retrospective effect," Deven Choksey, MD, KR Choksey told NDTV Profit.
Other government firms that have significant stake in IGL also saw selling pressure. Oil marketing firm BPCL, which owns 22.5% stake in IGL, declined 2%. Another gas distributor GAIL India Limited that owns 22.5% stake in IGL ended 1.8% lower.
"Such a drastic reduction in tariffs for IGL, apart from raising concerns for the company, will also likely raise concerns for possible tariff cuts for networks where tariffs are not yet determined," Nomura said in a note to clients.
Pipeline firm Gujarat State Petronet and gas distribution firm Gujarat Gas Company may soon get tariff revision orders from the regulator, sources told NDTV Profit. Natural gas importer Petronet LNG may also come under the purview of the gas regulator.
The regulator will also decide on the marketing margin that can be charged by any gas marketing entity. Until now, the margins have been agreed on between the buyers and the sellers.
Sources said that the regulator has asked for data regarding marketing margins from all companies though it is yet to decide on a cap on marketing margins.
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