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GAIL: Higher subsidies drag bottomline
May 23, 2011

GAIL announced the fourth quarter results for financial year 2010-2011 (4QFY11). The company has reported 36% YoY growth in top line and 14% YoY decline in the bottom-line for the quarter. Here is our analysis of the results.

Performance summary
  • Top line soared 35.6% YoY during the quarter. For the full year, revenues grew by 29.6% YoY.
  • Operating profits were down 5.6% YoY during the current quarter. For the full year, the margins were down 2% (YoY)
  • Net profits were down 14.0% YoY for the quarter, contracting margins by 5.1% YoY. For the full year, the net profits were up 13.4% YoY while the decline in margin was arrested at 1.6% (YoY)
  • The subsidy burden for FY11 came at Rs 21.1 bn, up 59% YoY.
  • The Board of Directors has recommended a final dividend of Rs.5.5 per share. This along with Rs 2 per share of interim dividend amounts to a total dividend of Rs 7.5 per share for FY11.This implies a dividend yield of 1.8% for FY11 at current share price of Rs 426.


Standalone performance summary
(Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
Sales 65,690 89,089 35.6% 251,033 325,365 29.6%
Expenditure 52,054 76,212 46.4% 203,272 270,041 32.8%
Operating profit (EBDITA) 13,637 12,877 -5.6% 47,760 55,324 15.8%
EBDITA margin (%) 20.8% 14.5%   19.0% 17.0%  
Other income 1,017 525 -48.4% 4,343 4,407 1.5%
Interest (net) 200 341 70.6% 700 828.6 18.4%
Depreciation 1,389 1,672 20.4% 5,618 6,503 15.7%
Profit before tax 13,065 11,389 -12.8% 45,785 52,400 14.4%
Pretax margin (%) 19.9% 12.8%   18.2% 16.1%  
Extraordinary income/(expense)
Tax 3,956 3,558 -10.1% 14,386 16,789 16.7%
Profit after tax/(loss) 9,108.2 7,830.7 -14.0% 31,398 35,611 13.4%
Net profit margin (%) 13.9% 8.8%   12.5% 10.9%  
No. of shares (m)         1,269  
Diluted earnings per share (Rs)*         28.1  
Price to earnings ratio (x)**         15.2  
(* Based on trailing twelve months earnings)

What has driven performance in 4QFY11?
  • Top line growth of 35.6% YoY for the quarter was mainly driven by natural gas trading business (73% of the total revenues) that grew by 53.4% YoY. Among the other business segments, natural gas transmission and Petrochemicals segment grew by 23.4% YoY and 25.3% YoY respectively. However, other segments registered a decline in the sales with LPG hydrocarbons down 41.3% YoY and LPG transmission down 3.9% YoY. The share of LPG liquid hydrocarbons declined from 13% to 6% (as a percentage of sales).

    Segmental break up...
    (Rs m) 4QFY10 4QFY11 Change FY10 FY11 Change
    NAtural Gas transmission
    Revenues 7,395 9,125 23.4% 31,684 37,896 19.6%
    PBIT 5,061 5,344 5.6% 22,394 25,613 14.4%
    PBIT margins 68.4% 58.6% -9.9% 70.7% 67.6%  
    LPG transmission
    Revenues 1,225 1,176 -3.9% 4,472 4,745 6.1%
    PBIT 871.5 711.4 -18.4% 2,782 3,076 10.6%
    PBIT margins 71.2% 60.5%   62.2% 64.8%  
    NAtural gas trading
    Revenues 46,646 71,534 53.4% 188,029 256,672 36.5%
    PBIT 385 2,710 603.6% 3,732 7,949 113.0%
    PBIT margins 0.8% 3.8%   2.0% 3.1%  
    Petrochemicals
    Revenues 8,223 10,307 25.3% 29,122 29,604 1.7%
    PBIT 4,468 4,367 -2.3% 13,279 11,883 -10.5%
    PBIT margins 54.3% 42.4% -12.0% 45.6% 40.1%  
    LPG Liquid hydrocarbons
    Revenues 9,198 5,396 -41.3% 28,330 27,860 -1.7%
    PBIT 4,067 -728 NA 6,088 4,858 NA
    PBIT margins 44.2% NA   21.5% 17.4%  
    Others
    Revenues 177.7 166.3 -6.4% 657.5 612 -6.9%
    PBIT (1,866) (273) NA (3,497) (1,056) NA
    PBIT margins NA NA   NA NA  

  • For FY11, the sales were up by 30% YoY. Segmentwise, natural gas trading and natural gas transmission registered a growth of 37% YoY and 20% YoY respectively. The LPG transmission and Petrochemicals witnessed a moderate growth of 6.1% YoY and 1.7% YoY respectively. However, sales from LPG liquid hydrocarbons segment registered a 1.7% YoY decline. The transmission capacity during the year increased from 150 mscmd to 170 mscmd.

  • Operating profits registered a decline of 5.6% YoY growth during the quarter. The expenses were high on account of a whopping 53% YoY increase in cost of raw materials and purchased goods whose share increased from 67% to 75% YoY (as a % of net sales). The staff costs (3% of net sales) also increased by 154% YoY during the quarter. Segment wise, natural gas trading segment was the only one to witness an increase in operating profit margins, to the extent of 3% YoY. The LPG liquid hydrocarbons segment registered losses at operating income level. The margins for natural gas transmission and petrochemicals segment were down 10% and 12% respectively (YoY).

  • For FY11, LPG transmission and natural gas trading divisions registered 2.6% and 1.1% increase in margins on a YoY basis. The margins for natural gas transmission declined by 3.1% (YoY) followed by LPG liquid hydrocarbons (margins down 4.1% YoY) and Petrochemicals (margins down 5.5% YoY).

  • Net profit registered a decline of 14% YoY during the quarter. Besides higher gas procurement costs and interest expenses and lower other income, the margins sunk at net profit level on account of high subsidy burden at Rs 9 bn for the quarter (versus Rs 3.4 bn for 4QFY10).

  • For FY11, the subsidy burden of Rs 21.1 bn (up 59% YoY) pulled net profit margins to 10.9% (down 1.6% on a YoY basis).However, the net income registered an increase of 13.4% YoY in FY11.

What to expect?
The company has suggested a capex of Rs 77 bn for FY12 and aims to increase pipeline network by 1,800 km and transmission capacity from 170 mscmd. The cash balance of the company is almost half of last year’s balance. It also plans to borrow Rs 33 bn which includes US$ 450 m through external commercial borrowings and bond issue. Over the next three years, the company has plans to spend Rs 286 bn and plans to funds this capex through borrowings worth Rs 137 bn.

As per the management, the gas supplies will not be a big concern as the company plans to buy spot gas to compensate for drop in Reliance Industries' eastern offshore fields. However, we believe that high cost of spot gas supplies may curtail demand and margins will be strained.

The reported results for FY11 are in line with our estimates both at the topline and bottomline level. At the current price of Rs 426, the stock of GAIL is trading at 15.2 times its trailing 12 month earnings. The stock is down around 10% from the date of our latest recommendation. We believe that the negatives like higher subsidy burden or lack of clarity on subsidy going forward, gas constraints and high cost of gas have already been priced into the current stock price. At these levels, it seems to be a good opportunity to BUY the stock with a 2 to 3 year perspective. It implies point to point upside of 35% and a CAGR of 17% on the basis of FY13 target price of Rs 577.

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