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  • Jan 29, 2014 - GAIL: Subsidy relief, one time gains boost profits

GAIL: Subsidy relief, one time gains boost profits
Jan 29, 2014 | Updated on Feb 6, 2014

GAIL (India) Ltd has announced the results for the third quarter of the financial year 2013-2014 (3QFY14). The company has reported 28.1% year on year (YoY) growth in the topline and 30.7% YoY growth in the bottomline for the year. Here is our analysis of the results.

Performance summary
  • The company registered 28.1% YoY growth in the topline during the quarter. For the nine months year, the revenues were up 22.5% YoY.
  • The operating profits for the quarter grew by 16.6 % YoY with operating profit margins at 14.3%, as compared to 15.7% in the corresponding quarter last year. For the nine months, the operating profits were almost flat, with operating profit margins at 12.3% versus 15.0% in 9mFY13.
  • The net income for the quarter registered 30.7% YoY growth, with margins at 10.5%, as compared to 10.3% in 3QFY13. For the nine months, the net profits were almost flat with margins at 7.9% as compared to 9.7% in 9mFY13.
  • The company has provided a provisional discount of around Rs 13.2 m during the quarter, as compared to discount of Rs 7 bn in the corresponding quarter last year for share under recoveries on LPG (Liquefied Petroleum Gas). For the nine months, the discount stood at around Rs 14 bn, down 33.3% YoY.

Financial snapshot
(Rs m) 3QFY13 3QFY14 YoY ch.(%) 9mFY13 9mFY14 YoY ch. (%)
Sales 125,216 160,385 28.1% 350,520 429,408 22.5%
Expenditure 105,571 137,489 30.2% 297,816 376,795 26.5%
Operating profit (EBDITA) 19,644 22,896 16.6% 52,705 52,613 -0.2%
EBDITA margin (%) 15.7% 14.3%   15.0% 12.3%  
Other income 1,918 2,082 8.5% 4,949 4,878 -1.4%
Interest (net) 552 913 65.4% 1400.8 2,606 86.0%
Depreciation 2,424 3,008 24.1% 7,084 8,705 22.9%
Profit before tax 18,587 21,057 13.3% 49,169 46,180 -6.1%
Pretax margin (%) 14.8% 13.1%   14.0% 10.8%  
Exceptional items   3,450   0 3,450 nm
Reported Profit before tax 18,587 24,507 31.8% 49,169 49,630  
Reported Pretax margin (%) 14.8% 15.3%   14.0% 11.6%  
Tax 5,738 7,713 34.4% 15,129 15,598 3.1%
Profit after tax/(loss) 12,849 16,794 30.7% 34,040 34,032 0.0%
Net profit margin 10.3% 10.5%   9.7% 7.9%  
No. of shares (m)         1,268  
Diluted earnings per share (Rs)*         31.7  
Price to earnings ratio (x)**         11.4  
* On a trailing 12 months basis

What has driven performance in 3QFY14?
  • The revenues for the quarter grew by 28.1% due to growth across all the segments. The gas trading reported an impressive growth of 31.3%. However, for Petrochemicals segment, the growth was relatively muted at 5.2% YoY. Sequentially, the volumes in the transmission segment improved during the quarter. While sales volumes in natural gas and petrochemicals were marginally higher sequentially, the volumes in LPG and other liquid hydrocarbon segment declined (QoQ). The LPG transmission volumes improved significantly during the quarter (both on an annual and sequential basis). Barring LPG transmission and LPG sales, for rest of segments, the volumes declined on a YoY basis.

    Segmental breakup
    Rs m 3QFY13 3QFY14 YoY ch. (%) 9MFY13 9MFY14 YoY ch. (%)
    Natural Gas transmission
    Sales 9,894 11,889 20.2% 28,891 32,550 12.7%
    PBIT 6,195 4,112 -33.6% 17,917 15,412 -14.0%
    PBIT margins 62.6% 34.6%   62.0% 47.3%  
    LPG Transmission
    Sales 808 1,138 40.8% 1,905 3,032 59.2%
    PBIT 133 597 349.7% 353 1573.6 345.8%
    PBIT margins 16.4% 52.5%   18.5% 51.9%  
    Gas Trading
    Sales 101,180 132,867 31.3% 290,571 367,237 26.4%
    PBIT 2,986 5,054 69.2% 10,390 12,949 24.6%
    PBIT  margins 3.0% 3.8%   3.6% 3.5%  
    Petrochemicals
    Sales 11,070 11,645 5.2% 25,610 34,015 32.8%
    PBIT 4,395 3,356 -23.6% 10,534 11,648 10.6%
    PBIT margins 39.7% 28.8%   41.1% 34.2%  
    LPG & Other Liquid Hydro Carbons
    Sales 12,772 19,336 51.4% 31,190 39,762 27.5%
    PBIT 5,920 7,624 28.8% 10,958 5,236 -52.2%
    PBIT margins 46.4% 39.4%   35.1% 13.2%  
    Other segment
    Sales 435 1,138 161.9% 1,753 2,469 40.8%
    PBIT -549 292 nm -684 54 nm
    PBIT  margins -126.3% 25.6%   -39.0% 2.2%  

  • The overall operating margins grew by 16.6 % YoY, at a rate lower than the growth rate in the revenues. This was mainly due to decline in the profitability in natural gas transmission segment and Petrochemicals segment. Lower volumes and high gas costs had an adverse impact on Petrochemicals' segment's profitability. However, that was offset by performance in the gas trading segment where margins improved to 3.8% from 3% in the corresponding quarter last year. This was despite an annual decline in the gas trading volumes, on account of increase in price of gas sold (higher volumes of LNG sold). In LPG &Other Liquid Hydrocarbons segment, the margins contracted to 39.4% from 46.4% in the corresponding quarter of the last year. The LPG segment got a relief from subsidy burden during the quarter as the Government has decided to cap the company's burden to Rs 14 bn for the year which it has already incurred.

  • The net profits for the quarter grew by 30.7% YoY. Apart from the relief in the subsidy burden, the growth in the bottomline was boosted by one time exceptional gains from sale of shares in China gas. However, high depreciation and interest costs adversely impacted the bottomline of the company.

    Cost breakup
    (Rs m) 3QFY13 3QFY14 YoY ch. (%) 9mFY13 9mFY14 YoY ch. (%)
    Raw materials 94,794 121,382 28.0% 268,013 337,516 25.9%
    % of sales 75.7% 75.7%   76.5% 78.6%  
    Staff costs 1,856 2,184 17.6% 5,484 6,219 13.4%
    % of sales 1.5% 1.4%   1.6% 1.4%  
    Other expenses 8,921 13,924 56.1% 24,318 33,059 35.9%
    % of sales 7.1% 8.7%   6.9% 7.7%  
    Total expenses 105,571 137,489 30.2% 297,816 376,795 26.5%
    % of sales 84.3% 85.7%   85.0% 87.7%  
What to expect?
The concerns on subsidy burden shared by GAIL in the LPG segment have eased significantly. However, domestic gas supply scenario still does not offer much comfort. The poor pipeline capacity utilization is likely to continue . Also, the performance in the Petrochemicals has been disappointing. The bottomline for the quarter grew significantly due to exceptional items which will not be there in the next quarter.

The company is in the process of expanding transmission capacity and Petrochemical operations. However, the gas supply constraints and profitability of Petchem segment as gas prices go up remain a concern.

On the positive side, GAIL's subsidy burden for FY14 has been capped at Rs 14 bn that the company has already incurred. The subsidy burden in LPG segment is likely to be low.

At the current price, the stock is trading at a trailing 12 months price to earnings ratio of 11.4. We maintain a ‘Hold’ recommendation on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow suggested asset allocation and that no single stock comprises 5% of your portfolio.

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