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GAIL: A weak quarter - Views on News from Equitymaster
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GAIL: A weak quarter
Feb 10, 2015

GAIL (India) Ltd has announced results for the quarter ended December 2014. The company has reported flattish 6.7% year on year (YoY) decline in the sales and 64.0% YoY decline in the bottomline. Here is a brief summary of the results.

Performance summary
  • The company registered a decline of 6.7% YoY in the topline during the quarter.
  • The operating profits for the quarter declined by 56.9% YoY with operating profit margins at 6.6%, as compared to 14.3% in the corresponding quarter last year.
  • The net income for the quarter declined by 64.0% YoY, with margins at 4.0%, as compared to 10.5% in 3QFY14.
  • The company has reported an exceptional gain of Rs 629 m on the sale of its CNG business (transferred its CNG stations and associated pipeline in Vadodara to Vadodara Gas Ltd for lump sum amount of Rs 791 m on 1st October 2014)

Financial Performance Snapshot
(Rs m) 3QFY14 3QFY15 YoY ch.(%) 9mFY14 9mFY15 YoY ch.(%)
Sales 160,385 149,694 -6.7% 429,408 424,714 -1.1%
Expenditure 137,489 139,837 1.7% 376,795 384,186 2.0%
Operating profit (EBDITA) 22,896 9,857 -56.9% 52,613 40,528 -23.0%
EBDITA margin (%) 14.3% 6.6%   12.3% 9.5%  
Other income 2,082 1,403 -32.6% 4,878 6,015 23.3%
Interest (net) 913 851 -6.8% 2606.1 2698.9 3.6%
Depreciation 3,008 2,510 -16.5% 8,705 7,214 -17.1%
Exceptional items 3,450 629 -81.8% 3,450 629 -81.8%
Profit before tax 24,507 8,528 -65.2% 49,630 37,259 -24.9%
Pretax margin (%) 15.3% 5.7%   11.6% 8.8%  
Tax 7,713 2,487 -67.8% 15,598 11,975 -23.2%
Effective tax rate (%) 31.5% 29.2%   31.4% 32.1%  
Profit after tax/(loss) 16,794 6,041 -64.0% 34,032 25,284 -25.7%
Net profit margin 10.5% 4.0%   7.9% 6.0%  
No. of shares (m)         1,268  
Diluted earnings per share (Rs)*         27.60  
Price to earnings ratio (x)*         14.6  
*On a trailing twelve months basis

What has driven performance during the quarter?
  • The poor performance for the quarter can be attributed to subsidy burden worth Rs 5 bn pertaining to the second quarter and accounted for in the third quarter of FY15. Further, shortage in the domestic gas supply by over 5 mmscmd, lower off take of imported gas by power and fertilizer plants and higher input cost for the petrochemical plant led to the decline in the topline and bottomline.

  • Segmentwise, the Petrochemicals plant reported 7% YoY growth in the net sales during the quarter. However, revenues from LPG and OLHC segment declined by 45.5% YoY. The sales from natural gas marketing segment declined by around 1% YoY. The revenues from natural gas transmission segment declined 16% YoY. The sales from LPG transmission declined by around 6% YoY. Volumewise, the sales volumes for natural gas declined by 7% YoY. The petrochemical segment sales volumes also declined by 2.4% YoY. The LPG transmission volumes also declined by 9% YoY. While volumes for LPG and OLHC segment were almost flat on a YoY basis, the natural gas transmission volumes stood at 94.09 mscmd as compared to 95.7 mscmd during the corresponding quarter last year.

    Cost breakup
    (Rs m) 3QFY14 3QFY15 YoY ch.(%) 9mFY14 9mFY15 YoY ch.(%)
    Raw materials 121,382 126,032 3.8% 337,516 345,225 2.3%
    as a % of net sales 75.7% 84.2%   78.6% 81.3%  
    Employee costs 2,184 2,442 11.8% 6,219 7,042 13.2%
    as a % of net sales 1.4% 1.6%   1.4% 1.7%  
    Other expenses 13,924 11,362 -18.4% 33,059 31,918 -3.5%
    as a % of net sales 8.7% 7.6%   7.7% 7.5%  
    Total  137,489 139,837 1.7% 376,795 384,186 2.0%
    as a % of net sales 85.7% 93.4%   87.7% 90.5%  

  • The operating margins for the quarter came at 6.6%, down from 14.3% in the corresponding period last year. Segmentwise, apart from natural gas transmission, all segments reported a decline in the margins on a YoY basis. The overall decline in the margins was mainly on account subsidy burden of Rs 5 bn and high input costs (higher share of costlier LNG gas) in the petrochemical segment . Further, in the natural gas marketing segment, inventory loss in the LNG portfolio of Rs 950 m led to the decline in the profitability.

    Segmental summary
    (Rs m) 3QFY14 3QFY15 YoY ch.(%) 9mFY14 9mFY15 YoY ch.(%)
    Natural gas transmission
    Revenues 11,889 9,953 -16.3% 32,550 24,226 -25.6%
    EBIT 4,112 5,080 23.6% 15,412 9,935 -35.5%
    EBITmargins (%) 34.6% 51.0%   47.3% 41.0%  
    LPG transmission
    Revenues 1,138 1,071 -5.9% 3,032 3,164 4.3%
    EBIT 597 542 -9.3% 1574 1709 8.6%
    EBIT  margins (%) 52.5% 50.6%   51.9% 54.0%  
    Natural gas marketing
    Revenues 132,867 131,669 -0.9% 367,237 366,548 -0.2%
    EBIT 5,054 511 -89.9% 12,949 4,675 -63.9%
    EBITmargins (%) 3.8% 0.4%   3.5% 1.3%  
    Petrochemicals
    Revenues 11,645 12,460 7.0% 34,015 35,200 3.5%
    EBIT 3,356 48 -98.6% 11,648 2,849 -75.5%
    EBITmargins (%) 28.8% 0.4%   34.2% 8.1%  
    LPG and other OLHC
    Revenues 19,336 10,537 -45.5% 39,762 40,175 1.0%
    EBIT 7,624 2,424 -68.2% 5,236 16,390 213.1%
    EBIT  margins (%) 39.4% 23.0%   13.2% 40.8%  
    Other
    Revenues 1,138 2,030 78.4% 2,469 5,655 129.0%
    EBIT 292 -95 nm 54 1507 2685.6%
    EBIT margins (%) 25.6% -4.7%   2.2% 26.7%  

  • The net profit for the quarter declined by 64% YoY due to a weak performance at the operational level. However, this was offset to some extent by one time gain of Rs 629 m. The interest and depreciation expenses declined by 6.8% YoY and 16.5% YoY. Lower depreciation and interest expenses and higher other income also supported the growth in the bottomline.
What to expect?
GAIL's performance for the quarter remained poor due to inventory losses, shortage in the domestic gas volumes, subsidy burden and high input costs for the Petrochemical plant. The management in its concall has stated that efforts are on to start Dabhol power plant. The management expects new petrochemical capacity at Pata plant to commission by March 2015.As the price of spot LNG is significantly below long term Ras gas, the management has stated that there is some scope to reduce high cost Ras gas volumes.

At the current price, the stock is trading at trailing 12 months price to earnings ratio of 14.6 times. We recommend investors to Buy the stock from a long term perspective.

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 our suggestions and that no single large cap stock comprises more than 5% of your portfolio.

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