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GAIL: Higher subsidies drag bottom line
Jun 5, 2012

Gas Authority of India Ltd. (GAIL) has announced the fourth quarter results for financial year 2011-2012 (4QFY12). The company has reported 17.7% year on year (YoY) growth in top line and 38.3% YoY decline in the bottom-line for the quarter. Here is our analysis of the results.

Performance summary
  • The company registered a 17.7% YoY growth in the topline during the quarter. For FY12, the sales were up by 24.2% YoY.
  • The operating profits declined by 40.4% YoY during the quarter, with margins at 7.3% versus 14.5% in 4QFY11. For FY12, the operating profits were up just by 5.1% YoY and margins stood at 14.4% as compared to 17.7% in FY11.
  • The net income for the quarter registered a decline of 38.3% YoY, with margins at 4.6% YoY versus 8.8% YoY last year. For FY12, the bottomline registered a marginal growth of 3% YoY and net profit margins slipped by 190 basis points YoY to 9.0%
  • The Board of Directors has suggested a payment of final dividend of Rs 5.7 per equity share, subject to shareholders' approval.

Standalone performance summary
(Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
Sales 89,089 104,884 17.7% 325,365 403,980 24.2%
Expenditure 76,212 97,207 27.5% 270,041 345,827 28.1%
Operating profit (EBDITA) 12,877 7,677 -40.4% 55,324 58,153 5.1%
EBDITA margin (%) 14.5% 7.3%   17.0% 14.4%  
Other income 525 2,299 338.0% 4,407 4,319 -2.0%
Interest (net) 341 523 53.3% 828.6 1164.6 40.6%
Depreciation 1,672 2,143 28.2% 6,503 7,907 21.6%
Profit before tax 11,389 7,309 -35.8% 52,400 53,400 1.9%
Pretax margin (%) 12.8% 7.0%   16.1% 13.2%  
Tax 3,558 2,476 -30.4% 16,789 16,862 0.4%
Profit after tax/(loss) 7,831 4,833 -38.3% 35,611 36,538 2.6%
Net profit margin 8.8% 4.6%   10.9% 9.0%  
No. of shares (m)         1,268  
Diluted earnings per share (Rs)*         28.8  
Price to earnings ratio (x)**         11.2  
*On a trailing 12 months basis

What happened in 4QFY12?
  • The growth in the net sales slowed down to 17.7% YoY from 34.7% in the previous quarter (3QFY12). Segment wise financials turned out to be disappointing this quarter with growth in revenues from Natural Gas trading segment (80% of revenues) slowing down to 28% YoY from 35% in 3QFY12 . The natural gas sales volumes stood at 85.47 mscmd (million standard cubic metre per day) during the quarter versus 85.73 mscmd in the 4QFY11. The revenues from Petrochemicals segment were down by 6.6% YoY as sales volumes slipped down by 18% YoY. The sales from Natural Gas Transmission segment were down by 7.3% YoY during the quarter and transmission volumes declined by 4.0% YoY. The LPG transmission and Liquid Hydrocarbons division registered a decline of 7.7% YoY and 40.3% YoY respectively. LPG transmission volumes registered a growth of 2.6% YoY during the quarter.

    Cost Breakup
    Rs m 4QFY11 4QFY12 Change FY11 FY12 Change
    Raw materials 66,416 83,654 26.0% 236,233 304,368 28.8%
    % of Sales 74.5% 79.8%   72.6% 75.3%  
    Staff costs 2,436 531 -78.2% 7,212 6,075 -15.8%
    % of Sales 2.7% 0.5%   2.2% 1.5%  
    Other expenses 7,360 13,023 76.9% 26,596 35,384 33.0%
    % of Sales 8.3% 12.4%   8.2% 8.8%  
    Total expenses 76,212 97,207 27.5% 270,041 345,827 28.1%
    % of Sales 85.5% 92.7%   83.0% 85.6%  

  • The company reported a 40.4% YoY decline in the operating profits while margins at 7.3% were almost half of 4QFY11. The operating margins were down mainly because of increase in the cost of raw materials (as a % of sales) - 79.8% in the current quarter versus 74.5% in 4QFY11. The gross margins for the quarter were down by 26% YoY. In percentage terms, overall gross margins stood at 9.5% versus 15.1% in 4QFY11.

    Segmental performance
    (Rs m) 4QFY11 4QFY12 Change FY11 FY12 Change
    Natural Gas transmission
    Revenues 9,125 8,463 -7.3% 37,896 38,524 1.7%
    PBIT 5,344 3,248 -39.2% 25,613 21,539 -15.9%
    PBIT margins 58.6% 38.4%   67.6% 55.9%  
    LPG transmission
    Revenues 1,176 1,086 -7.7% 4,745 4,542 -4.3%
    PBIT 711.4 532.9 -25.1% 3,076 2,720 -11.6%
    PBIT margins 60.5% 49.1%   64.8% 59.9%  
    Natural gas trading
    Revenues 71,534 91,213 27.5% 256,672 330,516 28.8%
    PBIT 2,710 1,659 -38.8% 7,949 10,886 36.9%
    PBIT margins 3.8% 1.8%   3.1% 3.3%  
    Petrochemicals
    Revenues 10,307 9,629 -6.6% 29,604 34,154 15.4%
    PBIT 4,367 4,309 -1.3% 11,883 14,658 23.4%
    PBIT margins 42.4% 44.8%   40.1% 42.9%  
    Liquid hydrocarbons
    Revenues 5,396 3,223 -40.3% 27,860 30,902 10.9%
    PBIT -728 -3,317 nm 4,858 5,543 14.1%
    PBIT margins nm nm   17.4% 17.9%  
    Others
    Revenues 166.3 415.5 149.8% 612 1,237 102.1%
    PBIT -272.7 -375.2 nm -1056 -1,964 nm
    PBIT margins nm nm   nm nm  

  • Segmentwise, gross margins showed slight improvement only in Petrochemicals segment - 49.9% in the current quarter versus 47.2% in 4QFY11. Margins were lower in trading segment due to provision for debtors and lower margins on spot LNG cargoes. Transmission margins were down due to retrospective cut in tariffs for Mumbai and Agartala network and lower domestic gas volumes

    Segmental gross margins (%)
    Gross Margins (%) 4QFY11 4QFY12
    Transmission
    Natural Gas transmission 73.7% 58.6%
    LPG Transmission 69.5% 63.0%
    Gas trading 4.3% 2.0%
    Petrochemicals 47.2% 49.9%
    LPG and Other Liquid Hydrocarbons -8.9% -94.4%
    Unallocated -417.6% 319.0%

  • The net income for the quarter was down by 38% YoY. The margins during the quarter stood at 4.6% versus 8.8% in 4QFY11.The net income was down mainly on account of higher subsidy burden, retrospective tariff cuts and lower volumes. The other income during the quarter registered a growth of 338% YoY.

What to expect?
The management has given guidance for trading volumes to reach 120 mscmd by the end of this year (117/118 mscmd as of now). If Dabhol terminal gets commissioned in time (by October/November 2012), volumes will improve further by around 7 mscmd. As per the management guidance, GAIL will be spending around Rs 75 bn on capex in FY13, out of which 60% will be funded by debt. GAIL wants to add further 5,500 km of pipeline network to already existing 9,000 km.

At a current price of Rs 320, the stock is trading a Price to earnings multiple of 11.2. We believe that the demand of gas in India will remain strong and GAIL being the largest player and having the ability and proactiveness to secure imported gas will benefit from it. We maintain a positive view on the stock. We are in the process of updating our estimates and will soon update subscribers regarding the valuations.

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