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GAIL: Lukewarm performance - Views on News from Equitymaster
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GAIL: Lukewarm performance
May 13, 2008

Performance summary
  • Topline grows by 12.2% YoY during FY08 driven by its petrochemical and LPG & liquid hydrocarbon segments.

  • EBITDA margins expand to 22% during FY08 on the back of a lower growth in expenditure.

  • Other income records a mild growth of 2% YoY.

  • Bottomline registers a growth of 9% YoY during FY08 due to expansion in operating margins and lower interest expenses.

  • Topline and bottomline grow 27.1 % YoY and 6.1 % YoY respectively in 4QFY08.


Standalone financial snapshot
(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 38,834 49,353 27.1% 160,472 180,082 12.2%
Expenditure 32,810 37,753 15.1% 130,499 140,590 7.7%
Operating profit (EBDITA) 6,024 11,600   29,973 39,492 31.8%
EBDITA margin (%) 15.5% 23.5%   18.7% 21.9%  
Other income 1,129 997 -11.7% 5,450 5,564 2.1%
Interest 221 195 -11.7% 1,071 796 -25.7%
Depreciation 1,471 1,425 -3.2% 5,754 5,710 -0.8%
Profit before tax 5,461 10,976 101.0% 28,598 38,550 34.8%
Tax (1,347) 3,752 -378.7% 4,731 12,535 165.0%
Profit after tax/(loss) 6,807 7,224 6.1% 23,867 26,015 9.0%
Net profit margin (%) 17.5% 14.6%   14.9% 14.4%  
No. of shares (m)       845.7 845.6  
Diluted earnings per share (Rs)         30.8  
Price to earnings ratio (x)         12.6  

What has driven performance in FY08?
  • GAIL has recorded a standalone topline growth of 12.2% YoY in FY08, driven primarily by a increase in petrochemicals (18% YoY) and LPG & liquid hydrocarbons (34% YoY). Although, the natural gas trading and transmission has also grown, it has been in lower single digits.

    Revenue break-up
    (Rs m) FY07 % share FY08 % share Change
    Natural Gas Trading 120,208 62.3% 126,577 59.9% 5.3%
    Natural Gas Transmission 22,144 11.5% 22,865 10.8% 3.3%
    Petrochemicals 22,040 11.4% 25,912 12.3% 17.6%
    LPG and Liquid Hydrocarbons 19,906 10.3% 26,614 12.6% 33.7%
    LPG Transmission 3,440 1.8% 3,893 1.8% 13.2%
    GAILTEL 254 0.1% 286 0.1% 12.6%
    Unallocated 5,084 2.6% 5,064 2.4% -0.4%

  • During FY08, natural gas trading grew by 2% in volume terms but by 5% in value terms indicating higher realisations. Similarly, the petrochemical segment grew by 13% in volume terms but managed a superior growth rate of 18% in value terms, due to higher realisations during the year. However, natural gas transmission grew by 6% YoY in volume terms but recorded a 3% YoY growth in value indicating lower transmission margins.

    Volumes
    Particulars FY07 FY08 Change
    Natural gas sales (MMSCMD) 68 69 1.9%
    Natural gas transmitted (MMSCMD) 77 82 6.2%
    Petrochemical sales (TMT) 347 391 12.7%
    Petrochemicals production (TMT) 354 386 9.0%
    LPG and Liquid Hydrocarbons sales (TMT) 1 1 -0.6%
    LPG and Liquid Hydrocarbons production (MMT) 1 1 0.4%
    LPG transmission (MMT) 2 3 10.6%

  • Raw materials costs declined nearly 4% (as percentage of sales) during FY08 aiding the EBITDA margins, which expanded to 22% (up from 19% during FY07). Staff costs grew by 55% YoY during FY08 in absolute terms indicating the manpower crunch faced in the energy industry.

    Cost break-up
    (Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
    Raw materials 27,611 31,676 14.7% 111,389 118,856 6.7%
    % sales 71.1% 64.2%   69.4% 66.0%  
    Staff cost 915 2,203 140.9% 3,025 4,700 55.4%
    % sales 2.4% 4.5%   1.9% 2.6%  
    Other expenditure 4,285 3,874 -9.6% 16,086 17,033 5.9%
    % sales 11.0% 7.8%   10.0% 9.5%  
    Total cost 32,810 37,753 15.1% 130,499 140,590 7.7%
    % sales 84.5% 76.5%   81.3% 78.1%  

  • Standalone bottomline growth for the company at 9% YoY in FY08 can be attributed to higher realisations, higher sales quantity of petrochemicals, LPG and other liquid hydrocarbons, increase in gas throughput, increase in LPG transmission quantity and some decrease in subsidy sharing in domestic LPG and PDS kerosene.

  • The subsidy sharing in domestic LPG and PDS kerosene stood at Rs. 13 bn in FY08 as against Rs. 15 bn in FY07.

  • During FY08, fixed assets to the tune of Rs. 21 bn were capitalized on account of Dahej-Uran pipeline, Dahej-Panvel pipeline, petrochemical expansion at Pata, and Jagoti-Dewas-Pitampur pipeline projects and other regional pipelines. GAIL plans to invest Rs. 34 bn during FY09. Of these, Rs 26 bn will be invested in pipeline projects, Rs. 5 bn will be invested in E & P projects, Rs. 2 bn will be invested in Petrochemicals, Rs. 1 bn will be invested in business development and the rest will be invested in projects related to city gas, telecom etc. A wholly owned subsidiary, GAIL Gas, is being incorporated to set up city gas projects across country. A JV, GAIL China Gas Global Energy Holding, has been floated with China Gas Holding to pursue the potential projects such as Beijing Gas CNG, CBM in inner Mongolia and petrochemical based on coal.

    Projects under progress
    Name Rs bn Date
    Chainsa-Jhajjar pipeline 5 2009
    Vijaipur-Dadri-Bawana pipeline 55 2010
    KG Basin loopline, RIL pipeline connectivity NA Soon
    Dabhol-Bangalore pipeline 36 2011
    Kochi-Kanjirkod-Banglore-Manglore pipeline 35 2011
    Jagdishpur-Haldia pipeline 65 2011
    Petrochemical JV with Numaligarh & OIL, Assam 55 2012
    Petrochemical JV with HPCL, Visakh NA MoU

What to expect?
The stock currently trades at Rs 389, implying a multiple of 10.2 times our estimated FY10 consolidated earnings. 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. However, transmission tariffs are likely to remain sluggish due to the government’s 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 our view on the stock from a long-term perspective.

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