Will regulator's order to cut tariffs erode IGL's net worth?

Following a directive by the government regulator to cut tariffs for certain types of gas in New Delhi, Indraprastha Gas, the monopoly gas supplier in the country’s capital, tanked 37 percent on the bourses.

The Petroleum & Natural Gas Regulatory Board (PNGRB) asked the company to lower its network tariff for compressed natural gas (CNG) and liquefied petroleum gas (LPG) by around 60 percent in New Delhi as well as NCR.The price of compressed natural gas in the capital could come down by 20 percent and of piped natural gas (PNG) by 10 percent.

The regulator has also asked that its order be implemented immediately. The order came into effect retroactively from April 2008 at levels lower than Indraprastha had been charging. As per rough estimates, the excess tariff charged could be around Rs 1,600 crore.

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.

This is a major setback for the company as its operating margins could decline by around 50 percent.According to SBI Caps the actual decline in net profits would depend on quantum of marketing margins that the company is able to charge as marketing margins are still de-regulated and the company has the option of charging higher marketing margins to maintain its margins.

IIFL too thinks if this tariff order were to be implemented in totality, then 2013 earnings will see a massive cut of around 80-90 percent, which means the stock would see a further downside. “Secondly, the historical surplus earnings that the regulator has estimated that IGL would earn and it would have to pass it on to the consumers through some mechanism. If you were to ballpark estimate that number it comes roughly about 1,000 to 1,200 crore and if that were to be true then IGL’s entire net worth will get wiped out,” said Harshavardhan Dole of IIFL in an interview with CNBC-TV18.

Indraprastha Gas is a joint venture of GAIL, Bharat Petroleum and the state government of New Delhi to sell auto and cooking gas in New Delhi and adjacent areas.