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GAIL: Going good

May 30, 2002

Considering the performance of the economy and peers over the past twelve months, provisional results of Gas Authority of India (Gail) are satisfactory. In four quarters of FY02, turnover growth has fluctuated between 2% and 7% YoY. Full year gross sale numbers have come ahead of our expectations of 1% growth. This is likely due to lower estimates on gas volume sales.

(Rs m)4QFY014QFY02ChangeFY01FY02Change
Sales 25,780 26,633 3.3% 100,587 105,524 4.9%
Other Income 545 522 -4.1% 1,420 1,926 35.6%
Expenditure 19,418 20,629 6.2% 78,693 81,543 3.6%
Operating Profit (EBDIT) 6,362 6,004 -5.6% 21,895 23,982 9.5%
Operating Profit Margin (%)24.7%22.5%21.8%22.7%
Interest 638 513 -19.7% 1,971 2,257 14.5%
Depreciation 1,940 1,723 -11.2% 5,821 6,111 5.0%
Profit before Tax4,3284,291-0.8%15,52217,53913.0%
Tax 1,633 1,080 -33.9% 4,260 5,830 36.8%
Profit after Tax/(Loss) 2,695 3,211 19.2% 11,262 11,709 4.0%
Net profit margin (%)10.5%12.1%11.2%11.1%
No. of Shares 845.7 845.7 845.7 845.7
Diluted Earnings per share*12.715.213.313.8
P/E Ratio5.7
*(annualised)

In the four years to FY01, Gail had reported a compounded growth (CAGR) of 22% in topline, which suggests that growth in FY02 has hit a speed breaker. The higher growth in the concerned years was primarily driven by four key areas. LPG, which is among the fastest growing petroleum products. Polymers, which were commissioned in FY00 and respectable volume growth and improving realisations in gas transmission. Between FY98 to FY00, linkage of domestic gas prices to international rates increased from 55% to 75% in major markets. This could have cushioned the fall in energy prices during the concerned period.

The Government has not revised gas prices after FY00 and with energy prices strengthening between FY00 and FY02, the ceiling on gas prices at 2,850/tscm has been triggered. Consequently, realisation growth is restricted. With most pipelines functioning on high operating rates, volume growth was likely to be challenging. Growth in FY02 is likely to have been generated from LPG transmission business (Jamnagar-Loni pipeline) and downstream businesses.

The company has managed to increase operating margins by 90 basis points. This is primarily due to purchases, which constitute 77% of sales, remaining flat. This seems to indicate that volumes have not grown, if gas procurement prices remained unchanged. The effective tax rate during the year has declined from 27.4% to 24.8% (not including deferred taxes).

In the current year, Gail is expected to increase capacity on the Jamnagar - Loni pipeline to 2.5 MMTPA. Also, the company has another LPG pipeline project of 600 km in the South from Vizag to Secunderabad at an estimated outlay of Rs 4.9 bn. As per reports, the company is planning on augmenting capacity along HBJ to 60 mmscmd. We reckon any such plans are likely to depend on the 5 MMTPA LNG terminal project at Dahej, which is scheduled to be completed by 2004.

In the current year, Gail could experience growth in all its businesses, as the economy charts a recovery. LPG transmission is likely to be the fastest growing division, as it operates on a lower base. That said, with dismantling of the APM, it is a matter of time before gas prices are linked to international markets. As per reports, the Government, in two phases, could link international and domestic prices by FY04. The hike is likely to be graded, as key gas consumers belong to the sensitive power and fertiliser sector. Gail could face gas pricing risk, as the hike may not be entirely transferable.

At Rs 79 the scrip is trading on a multiple of 5.7x. Over the past 12 months valuations have improved from 3.5x earnings. The scrip trades in a band of 3x-6x. With disinvestment fever, the scrip has benefited from its PSU status. The Government has identified Gail as a strategic asset and is not likely to divest in favour of a strategic investor. As per reports, cross-holding in the company could be offered in the primary market. With a mismatch in demand-supply for gas, the core business continues to remain strong.

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