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GAIL: Petrochemicals under perform - Views on News from Equitymaster
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GAIL: Petrochemicals under perform
Feb 1, 2008

Performance summary
  • Topline declines by 2% YoY during 3QFY08 due to increased subsidy burden.
  • EBITDA margins expand by 17.2% during 3QFY08 on the back of a decline in raw material expenses (both in absolute terms and as a percentage of sales).

  • Other income falls steeply by 80% YoY.

  • Bottomline registers a decline of 7% YoY during 3QFY08 in spite of an operating margin expansion and lower interest expenses.

  • Topline and bottomline grow 7.5% YoY and 10% YoY respectively in 9mFY08.

Financial snapshot
(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 43,784 42,983 -1.8% 121,638 130,729 7.5%
Expenditure 42,421 34,261 -19.2% 118,000 102,836 -12.9%
Operating profit (EBDITA) 1,363 8,723 3,638 27,893 666.7%
EBDITA margin (%) 3.1% 20.3% 3.0% 21.3%
Other income 9,125 1,848 -79.7% 24,632 4,567 -81.5%
Interest 271 196 -27.7% 850 600 -29.3%
Depreciation 1,439 1,387 -3.6% 4,283 4,286 0.1%
Profit before tax 8,778 8,988 2.4% 23,137 27,574 19.2%
Tax 2,124 2,775 30.7% 6,078 8,783 44.5%
Profit after tax/(loss) 6,655 6,213 -6.6% 17,059 18,791 10.1%
Net profit margin (%) 15.2% 14.5% 14.0% 14.4%
No. of shares (m) 845.7
Diluted earnings per share (Rs)* 30.3
Price to earnings ratio (x)* 13.4
(*on trailing twelve months earnings)

What has driven performance in 3QFY08?
  • The decline in GAILís revenues and net profit during 3QFY08 was mainly due to the increased subsidy burden and tax during the period. The LPG subsidy during the period increased by Rs 520 m to Rs 3,675 m.

  • The company has subsidised the under-recoveries of oil marketing companies (OMCs) by allowing discounts in the prices of domestic LPG to the tune of Rs 3.7 bn for 3QFY08 and Rs 9.3 bn for 9mFY08.

    Revenue break-up
    (Rs m) 3QFY07 % share 3QFY08 % share Change
    Natural Gas Trading 31,490 61.7% 31,120 63.8% -1.2%
    Natural Gas Transmission 6,410 12.6% 6,020 12.3% -6.1%
    Petrochemicals 6,240 12.2% 5,380 11.0% -13.8%
    LPG and Liquid Hydrocarbons 5,940 11.6% 5,280 10.8% -11.1%
    LPG Transmission 990 1.9% 1,000 2.0% 1.0%

  • The contribution of Petrochemicals and LPG & liquid hydrocarbons segments to the topline is now at par with the natural gas transmission segment. Hence, an increase in volume in gas transmitted has been more than offset by volume declines in Petrochemicals and LPG & liquid hydrocarbons.

    Volumes
    3QFY07 3QFY08 Change
    Natural gas sales (MMSCMD) 70 69 -0.9%
    Natural gas transmitted (MMSCMD) 80 85 6.2%
    Petrochemicals production (MT) 94 77 -18.1%
    Polymer sales (MT) 97 81 -16.5%
    LPG and Liquid Hydrocarbons production (TMT) 349 370 6.0%
    LPG and Liquid Hydrocarbons sales (TMT) 349 309 -11.5%
    LPG transmission (TMT) 728 710 -2.5%

  • GAIL recorded a sharp decline in other expenditure for 3QFY08 as it includes Rs 140 m on account of dry well expenditure in exploration & production (E&P) business for the period as opposed to Rs 1.8 bn in 3QFY07. Dry well expenditure amounted to Rs 2.7 bn for 9mFY08 (Rs 1.8 bn in 9mFY07).

    Cost break-up
    (Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
    Raw materials 36,715 29,462 -19.8% 104,212 87,180 -16.3%
    % sales 83.9% 68.5% 85.7% 66.7%
    Staff cost 651 985 51.4% 2,107 2,497 18.5%
    % sales 1.5% 2.3% 1.7% 1.9%
    Other expenditure 5,055 3,814 -24.5% 11,681 13,159 12.7%
    % sales 11.5% 8.9% 9.6% 10.1%
    Total cost 42,421 34,261 -19.2% 118,000 102,836 -12.9%
    % sales 96.9% 79.7% 97.0% 78.7%

What to expect?
The stock currently trades at Rs 406, implying a multiple of 10.6 times our estimated FY10 earnings. 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. However, 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.

Considering the factors for and against the company, we maintain ourview on the stock from a long-term perspective.

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