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GAIL: Blame it on LPG
Jan 29, 2009

Performance summary
  • Topline grows by 35% YoY during 3QFY09.
  • EBITDA margin shrinks to 5%.
  • Petrochemicals margins decline from 50% in 3QFY08 to 28% this quarter. Transmission margins also decline. LPG margins plummet from 29% in 3QFY08 to -70% this quarter.
  • Other income records a growth of 46% YoY.
  • Bottomline declines 59% YoY during 3QFY09 due to plunging operating margins.
  • For 9mFY09, the topline and bottomline grow by 35% and 16% YoY respectively.


Standalone financial snapshot
(Rs m) 3QFY08 3QFY09 Change 9mFY08 9mFY09 Change
Net sales 43,253 58,160 34.5% 131,268 177,269 35.0%
Expenditure 34,261 55,457 61.9% 102,836 145,748 41.7%
Operating profit (EBDITA) 8,992 2,703 -69.9% 28,432 31,520 10.9%
EBDITA margin (%) 20.8% 4.6%   21.7% 17.8%  
Other income 1,579 2,308 46.2% 4,028 5,236 30.0%
Interest 196 185 -5.3% 600 564 -6.0%
Depreciation 1,387 1,374 -0.9% 4,286 4,189 -2.2%
Profit before tax 8,988 3,452 -61.6% 27,574 32,003 16.1%
Tax 2,775 919 -66.9% 8,783 10,266 16.9%
Profit after tax/(loss) 6,213 2,534 -59.2% 18,791 21,737 15.7%
Net profit margin (%) 14.4% 4.4%   14.3% 12.3%  
No. of shares (m)         1,268.4  
Diluted earnings per share (Rs)*         22.8  
Price to earnings ratio (x)*         8.6  
* On trailing twelve months basis

What has driven performance in 3QFY09?
  • GAIL has recorded a standalone topline growth of 35% YoY in 3QFY09, driven primarily by an increase in natural gas trading (62% YoY) and petrochemicals (15%). Revenue from the LPG segment declined by 34% YoY due to subsidies.

    Revenue break-up
    (Rs m) 3QFY08 % share 3QFY09 % share Change
    Natural Gas Trading 26,000 60.5% 42,020 72.3% 61.6%
    Natural Gas Transmission 5,500 12.8% 5,410 9.3% -1.6%
    Petrochemicals 5,320 12.4% 6,130 10.5% 15.2%
    LPG and Liquid Hydrocarbons 5,080 11.8% 3,330 5.7% -34.4%
    LPG Transmission 980 2.3% 1,060 1.8% 8.2%
    GAILTEL 70 0.2% 60 0.1% -14.3%
    Unallocated 30 0.1% 110 0.2% 266.7%

  • LPG subsidy accounted during the quarter was Rs 9.1 bn (Rs 3.9 bn in the corresponding period last year), comprising of Rs 2.6 bn for 2QFY09 and Rs 6.5 for 3QFY09. The subsidy for 9mFY09 has already exceeded the total subsidy borne by GAIL in entire FY08 by 35%.

  • During 3QFY09, natural gas trading grew by 16% in volume terms. The petrochemical segment increased by 61% in volume terms but increased by only 15% in value terms, due to a substantial decline in realisations. Natural gas transmission declined by 1% YoY in volume terms while recording a 1.6% YoY decline in value indicating stable realisations. However, the margins for the segment declined during 3QFY09. LPG was the villain of the piece. LPG margins plummeted from 29% in 3QFY08 to -70% this quarter.

  • During the quarter, GAILís raw material cost increased 13.7% (as % of sales). Staff costs grew by 3.2% (as a % of sales).

What to expect?
The stock currently trades at Rs 196, implying a multiple of 6.4 times our estimated FY11E consolidated earnings.

The LPG subsidy burden witnessed this quarter is a legacy of the political meddling in the Indian oil and gas sector. Transmission tariffs are likely to remain sluggish due to the governmentís proposed allocation to non-remunerative users like the fertilisers industry. Additionally, the petrochemical segment is vulnerable to a cyclical downturn.

However, the companyís 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 maintain our positive view on the stock from a long-term perspective.

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