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GAIL: Up on transmission volumes
May 18, 2010

GAIL has announced its FY10 results. The company has reported a 4% YoY and 12% YoY growth in sales and net profits respectively. Here is our analysis of the results.

  • Topline grows by 4.2% YoY during FY10 on the back of a 28% YoY growth in the natural gas transmission business. Sales from the petrochemicals segment grow by 2% YoY, while LPG transmission segment grows 18% YoY.
  • EBITDA margin expand to 25.1% during the year from 23.8% in FY09 on the back of lower raw material costs.
  • Other income records a decline of 29% YoY during the period.
  • Bottomline grows by 12% YoY during FY10 due higher volumes and operating margins.
  • Board recommends a final dividend of Rs 5.5 per share (dividend yield 1.3%).


Standalone financial snapshot
(Rs m) 4QFY09 4QFY10 Change FY09 FY10 Change
Net sales   62,578    65,690 5.0%   240,832   251,033 4.2%
Expenditure   51,707    52,054 0.7%   183,403   187,918 2.5%
Operating profit (EBDITA)   10,871    13,637 25.4%     57,430     63,115 9.9%
EBDITA margin (%) 17.4% 20.8%   23.8% 25.1%  
Other income         881       1,017 15.4%        6,118        4,343 -29.0%
Interest         306          200 -34.5%           870           700 -19.5%
Depreciation     1,410       1,389 -1.5%     20,637     20,972 1.6%
Profit before tax   10,037    13,065 30.2%     42,040     45,785 8.9%
Tax     3,737       3,956 5.9%     14,003     14,386 2.7%
Profit after tax/(loss)     6,300       9,108 44.6%     28,037     31,398 12.0%
Net profit margin (%) 10.1% 13.9%   11.6% 12.5%  
No. of shares (m)                1,268  
Diluted earnings per share (Rs)                   25  
Price to earnings ratio (x)                     18  
What has driven performance in FY10?
  • GAIL recorded a topline growth of 4.2% YoY during FY10 on the back of a 28% YoY growth in the natural gas transmission business. Sales from the petrochemicals segment grew by 2% YoY, while LPG transmission segment grew 18% YoY. During 4QFY10, LPG transmission and petrochemicals were the two segments which recorded the highest growth.

    Revenue break-up
    (Rs m) 4QFY09 % share 4QFY10 % share Change
    Natural Gas Trading   47,430 68.3% 46,646 64.2% -1.7%
    Natural Gas Transmission     6,511 9.4%     7,395 10.2% 13.6%
    Petrochemicals     6,813 9.8%     8,223 11.3% 20.7%
    LPG and Liquid Hydrocarbons       7,671 11.0%     9,198 12.7% 19.9%
    LPG Transmission         992 1.4%     1,225 1.7% 23.4%
    GAILTEL 49 0.1% 24 0.0% -51.7%

  • In terms of volumes, GAIL's natural gas transmission volumes were 106 m standard cubic meters per day (mmscmd) in FY10, an increase of 28% from 83 mmscmd in FY09. LPG transmission during FY10 was 3,161 thousand metric tonnes (TMT), up by 15% from 2,744 TMT in FY09. The natural Gas sales during FY10 were 81 mmscmd, up 3% from 79 mmscmd in FY09. The LPG and other liquid hydrocarbon sales during the year were 1443 TMT, up 3% from 1405 TMT in FY09. During FY10, polymer sales were 410 TMT as against 423 TMT in FY09.

  • The company posted a 12% YoY growth in bottomline during FY10 mainly due to the volumes increase in natural gas transmission, LPG transmission and LPG & liquid hydrocarbons segments.

  • GAIL plans a capex of Rs 80 bn in FY11 mostly towards expanding its pipeline network. The company plans to add 1,200 km of pipeline in the current financial year on the back of an addition of 800 km in FY10. Given the large amount of capex involved, the company plans to borrow Rs 35 bn this fiscal to meet its funding needs. Rs 5 bn will be raised in Rupee denominated bonds, with an option of issuing further bonds to the extent of 50%, if demand is strong. Another US$ 150 m will be raised in foreign currency bonds. The company has 7,200 km of natural gas pipelines with a capacity of 148 m cubic metres a day. It aims to add another 8,200 km by FY14. As a result, the company will invest Rs 353 bn by FY14 funded by debt to the tune of Rs 200 bn.

  • GAIL's board of directors has recommended a final dividend of Rs 5.5 per share (dividend yield 1.3%).

What to expect?
The stock currently trades at Rs 437, implying a multiple of 18 times its trailing 12 months standalone earnings and 15 times our FY12 estimated consolidated earnings.

The subsidy burden is a legacy of the political meddling in the Indian oil and gas sector. Although transmission tariffs have not been revised downwards, it is likely to remain sluggish due to the government's proposed allocation to non-remunerative users like the fertilisers industry. Additionally, the petrochemical segment is prone to cyclical upswings and downturns.

However, 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. Considering the factors for and against the company, we would advise against taking fresh positions in the stock at the current juncture.

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