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GAIL: Petrochemicals margins rebound
Jan 19, 2010

Performance summary
  • Topline grows by 6.7% YoY during 3QFY10 on the back of a 45% YoY growth in the natural gas transmission business. Sales from the petrochemicals segment grows by 29% YoY, while LPG & liquid hydrocarbon segment grows 113% YoY.
  • EBITDA margin expand to 20.7% during the quarter from 4.6% in 3QFY09 on the back of lower raw material costs.
  • Petrochemicals gross margins expand from 27% in 3QFY09 to 48% this quarter. Natural gas transmission margins increase by 8%.
  • Other income records a decline of 45% YoY during the period.
  • Bottomline zooms by 239% YoY during 3QFY10 due to the strong recovery in operating margins.


Standalone financial snapshot
(Rs m) 3QFY09 3QFY10 Change 9mFY09 9mFY10 Change
Net sales 58,160 62,057 6.7% 177,269 184,714 4.2%
Expenditure 55,457 49,182 -11.3% 145,748 150,590 3.3%
Operating profit (EBDITA) 2,703 12,875 376.2% 31,520 34,124 8.3%
EBDITA margin (%) 4.6% 20.7%   17.8% 18.5%  
Other income 2,308 1,259 -45.4% 5,236 3,326 -36.5%
Interest 185 142 -23.2% 564 500 -11.4%
Depreciation 1,374 1,409 2.6% 4,189 4,229 1.0%
Profit before tax 3,452 12,583 264.5% 32,003 32,720 2.2%
Tax 919 3,983 333.6% 10,266 10,430 1.6%
Profit after tax/(loss) 2,534 8,599 239.4% 21,737 22,290 2.5%
Net profit margin (%) 4.4% 13.9%   12.3% 12.1%  
No. of shares (m)         1,269  
Diluted earnings per share (Rs)*         23  
Price to earnings ratio (x)*         19  
* On trailing twelve months basis

What has driven performance in 3QFY10?
  • GAIL has recorded a standalone topline growth of 6.7% YoY during 3QFY10 on the back of a 45% growth in the natural gas transmission business. Sales from the petrochemicals and LPG & liquid hydrocarbon segments also increase by 29% and 113% YoY.

    Revenue break-up
    (Rs m) 3QFY09 % share 3QFY10 % share Change
    Natural Gas Trading 42,010 72.3% 37,710 60.9% -10.2%
    Natural Gas Transmission 5,410 9.3% 7,820 12.6% 44.5%
    Petrochemicals 6,140 10.6% 7,910 12.8% 28.8%
    LPG and Liquid Hydrocarbons 3,330 5.7% 7,100 11.5% 113.2%
    LPG Transmission 1,060 1.8% 1,170 1.9% 10.4%
    GAILTEL 60 0.1% 30 0.0% -50.0%
    Unallocated 110 0.2% 140 0.2% 27.3%

  • The natural gas transmission volumes grew by 29% YoY in 3QFY10 while the petrochemicals segment witnessed an 8% decline in volumes. While transmission margins increased by 8% during the quarter, petrochemicals margins increased by 21%.

  • During 3QFY10, GAIL shared the under recoveries of the oil marketing companies to the tune of Rs 4.6 bn (Rs 9.1 bn in 3QFY09).

  • As per the regulations of the Petroleum and Natural Gas Regulatory Board, the natural gas pipeline tariff being charged by the company for its pipeline networks is subject to revision with retrospective effect. Impact on profits, if any, will be recognised when the pipeline tariff is revised in accordance with the regulations. It may be noted that GAIL's management is of the view that tariff is unlikely to revised downwards.

  • During the quarter, GAIL's raw material cost declined 13.2% (as % of sales). Staff cost and other expenditure declined by 1.5% each (as a % of sales).

What to expect?
The stock currently trades at Rs 439, implying a multiple of 19 times its trailing 12 months standalone earnings and 15 times our FY12 estimated consolidated earnings.

The subsidy burden is a legacy of the political meddling in the Indian oil and gas sector. Even if transmission tariff is not revised downwards, it is likely to remain sluggish due to the government's proposed allocation to non-remunerative users like the fertilisers industry. Additionally, the petrochemical segment is prone to cyclical upswings and downturns.

However, the company's in-place infrastructure as well as additional pipelines will help capture the increased transmission volumes of domestic natural gas, as and when they come on stream. Considering the factors for and against the company, we would advise against taking fresh positions in the stock at the current juncture.

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