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GAIL: A tough quarter - Views on News from Equitymaster
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GAIL: A tough quarter
Jun 2, 2015

GAIL India (Ltd) has announced results for the quarter ended March 2015. The company has reported 1.6% year on year (YoY) decline in the sales and 47.5% YoY decline in the bottomline for the quarter. Here is a brief summary of the results.

Performance summary
  • The company registered a decline of 1.6% YoY in the topline during the quarter. Net sales for FY 15 declined by 1.2% YoY.
  • The operating profits for the quarter declined by 54.5% YoY with operating profit margins at 4.3%, down from 9.2% in 4QFY14. For FY15, the operating profit declined by around 29.7% YoY with margins at 8.0%, down from 11.2%.
  • The net income for the quarter declined by 47.5% YoY, with margins at 3.6%, as compared to 6.7% in 4QFY14. For the year, the bottomline declined by 30.5% YoY with net profit margin at 5.4%, down from 7.6%.
  • The company has borne subsidy worth Rs 10 bn for the year versus subsidy worth Rs 19 bn in FY14. However, subsidy burden was nil for the quarter.
  • A final dividend worth Rs 3 per share has been announced by the company subject to approval by shareholders. Along with the interim dividend, the total dividend thus amounts to Rs 6 (dividend yield 1.5% at current stock price).

Standalone financial summary
(Rs m) 4QFY14 4QFY15 YoY ch.(%) FY14 FY15 YoY ch.(%)
Net Sales 144,643 142,354 -1.6% 572,451 565,695 -1.2%
Other operating income 1,029 352 -65.8% 2,628 1,725 -34.4%
Expenditure 131,273 136,272 3.8% 508,067 520,458 2.4%
Operating profit (EBDITA) 13,370 6,082 -54.5% 64,384 45,237 -29.7%
EBDITA margin (%) 9.2% 4.3%   11.2% 8.0%  
Other income 4,107 2,593 -36.9% 8,985 8,609 -4.2%
Interest (net) 1,056 914 -13.4% 3,662 3,613 -1.3%
Depreciation 3,057 2,528 -17.3% 11,762 9,743 -17.2%
Exceptional items 0 0   3,450 629  
Profit before tax 14,393 5,585 -61.2% 64,023 42,844 -33.1%
Pretax margin (%) 10.0% 3.9%   11.2% 7.6%  
Tax 4,673 477 -89.8% 20,271 12,452 -38.6%
Effective tax rate (%) 32.5% 8.5%   31.7% 29.1%  
Profit after tax/(loss) 9,720 5,107 -47.5% 43,753 30,392 -30.5%
Net profit margin 6.7% 3.6%   7.6% 5.4%  
No. of shares (m)         1,268  
Diluted earnings per share (Rs)*         24.0  
Price to earnings ratio (x)*         16.3  
*On a trailing 12-month basis

What has driven performance in 4QFY15?
  • The revenues for the quarter declined on account of poor gas transmission and trading volumes. High LNG prices and low price of substitute fuels led to lower volumes of gas offtake. The revenues declined for LPG and Other Liquid Hydrocarbon segment due to shut downs and non availability of rich gas. LPG transmission volumes were also impacted due to repair of gas pipelines.

    Segmental breakup
    (Rs m) 4QFY14 4QFY15 YoY ch.(%) FY14 FY15 YoY ch.(%)
    Natural gas transmission
    Revenues 8,491 9,266 9.1% 41,042 33,491 -18.4%
    EBIT 2,604 3,221 23.7% 18,016 13,156 -27.0%
    EBITmargins (%) 30.7% 34.8%   43.9% 39.3%  
    LPG transmission
    Revenues 1,149 1,242 8.1% 4,181 4,406 5.4%
    EBIT 579 671 15.8% 2,153 2,380 10.5%
    EBIT  margins (%) 50.4% 54.0%   51.5% 54.0%  
    Natural gas marketing
    Revenues 121,980 125,193 2.6% 489,217 491,740 0.5%
    EBIT 2,854 934 -67.3% 15,803 5,609 -64.5%
    EBITmargins (%) 2.3% 0.7%   3.2% 1.1%  
    Petrochemicals
    Revenues 11,802 12,001 1.7% 45,817 47,201 3.0%
    EBIT 1,965 -1543 NM 13,612 1,306 -90.4%
    EBITmargins (%) 16.6% -12.9%   29.7% 2.8%  
    LPG and other OLHC
    Revenues 14,858 10,352 -30.3% 54,619 50,528 -7.5%
    EBIT 4,979 2,827 -43.2% 10,214 19,217 88.1%
    EBIT  margins (%) 33.5% 27.3%   18.7% 38.0%  
    Other
    Revenues 1,457 1,972 35.4% 3,926 7,627 94.3%
    EBIT -2.5 743 NM 52 2,250 4260.5%
    EBIT margins (%) -0.2% 37.7%   1.3% 29.5%  

  • The operating profit declined for the quarter despite nil subsidy. This was mainly account of losses in the Petchem segment due to use of costlier input and poor realisations in a weak crude price scenario. Poor profitability in the in the natural gas trading segment also contributed to the decline. Further, weakness in crude price led to lower realizations in LPG and LHC segment while high gas cost further impacted the profitability.

    Cost breakup
    (Rs m) 4QFY14 4QFY15 YoY ch.(%) FY14 FY15 YoY ch.(%)
    Raw materials 116,994 108,711 -7.1% 454,510 453,937 -0.1%
    as a % of net sales 80.9% 76.4%   79.4% 80.2%  
    Employee costs 2,258 2,022 -10.5% 8,477 9,064 6.9%
    as a % of net sales 1.6% 1.4%   1.5% 1.6%  
    Other expenses 12,021 25,539 112.5% 45,080 57,457 27.5%
    as a % of net sales 8.3% 17.9%   7.9% 10.2%  
    Total  131,273 136,272 3.8% 508,067 520,458 2.4%
    as a % of net sales 90.8% 95.7%   88.8% 92.0%  

  • The net profit for the quarter declined by 47.5% YoY due to a weak performance at the operational level. The other income for the quarter also declined by 36.9% YoY. However, the effective tax rate at 8.5% (due to MAT credit) was quite low during the quarter and arrested the decline to some extent.
What to expect?
While realizations on Petchem and LHC have gone down, the management expects it to improve as crude price normalize. GAIL expects to improve its market share in Petchem segment (industry growing at an average annual rate of 14%) from 15% now to 30% by FY 18. As per the management, as far as tariff regulation is concerned, the worst is over. Going forward, any revision is likely to be favorable for GAIL. Also, there are some positives such as gas pooling scheme for stranded power plants that may improve volumes to some extent in the long term.

The company has incurred losses in the Petchem segment due to low realizations in a weak crude price environment) and use of high cost long term LNG as input gas. Since spot LNG is significantly cheaper currently, the company has signed a deal that will allow it to use pooled gas for Petchem project. The company is also negotiating with Ras Gas, Qatar to have more flexibility to off take lower volumes (from 10% to 20%).

The company has capitalized expenses worth Rs 68 bn associated with the expansion of Petchem plant and related facilities. As per the management, the work on Kochi Mangalore pipeline should start in October /November 2015 and should get over by July/August 2016. The key clients for this are likely to be Mangalore Fertilizers, Mangalore Refinery and Mangalore Petrochemicals.

In the near term, the outlook remains weak for GAIL. However, the long term prospects are positive with likely new gas supplies and clarity on subsidy sharing. The management has said that the pipeline expansion will happen in a phased manner, in synchronization with fertilizer plant. The management has recently launched 'Sanchay' - an effort to optimize operating cost in the long term.

At the current price, the stock is trading at trailing 12 months price to earnings ratio of 16.3 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 suggested asset allocation and that no single large cap stock comprises more than 5% of your portfolio.

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