X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
GAIL: Sales strong, margins under pressure - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

StockSelect
  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

GAIL: Sales strong, margins under pressure

Jun 17, 2009

Performance summary
  • Standalone sales grow by 33% YoY during FY09, 26% YoY during 4QFY09. Growth largely led by the natural gas trading business that grew sales by 45% YoY. On a consolidated basis, sales have grown by 31% YoY. Actual sales number higher by 24% as compared to our estimates.
  • Operating margins contract by 4.5% YoY during FY09, largely on the back of increase (as percentage of sales) in the cost of purchase of traded goods.
  • Standalone net profits grow by 8% YoY during FY09 and falls 13% YoY during the fourth quarter. Growth in the bottomline impacted by pressure on operating margins and higher interest charges. On a consolidated basis, net profit growth for FY09 stood at just around 2% YoY. Actual profit number lower by 9% as compared to our estimates.
  • Declares a final dividend of Rs 3 per share. This, along with the interim dividend of Rs 4 per share, takes the total dividend for FY09 to Rs 7 per share (dividend yield of 2.4%).

Standalone financial performance snapshot
(Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
Sales 49,431 62,340 26.1% 180,699 239,608 32.6%
Expenditure 37,753 51,468 36.3% 140,590 197,216 40.3%
Operating profit (EBDITA) 11,677 10,871 -6.9% 40,109 42,392 5.7%
Operating profit margin (%) 23.6% 17.4%   22.2% 17.7%  
Other income 919 881 -4.1% 4,947 6,118 23.7%
Interest 195 306 56.5% 796 870 9.3%
Depreciation 1,425 1,410 -1.0% 5,710 5,599 -1.9%
Profit before tax 10,976 10,037 -8.6% 38,550 42,040 9.1%
Tax 3,752 3,737 -0.4% 12,535 14,003 11.7%
Profit after tax/(loss) 7,224 6,300 -12.8% 26,015 28,037 7.8%
Net profit margin (%) 14.6% 10.1%   14.4% 11.7%  
No. of shares (m)       845.6 1,268.4  
Diluted earnings per share (Rs)*         22.1  
P/E ratio (x)*         13.1  
* On a trailing 12 months basis

What has driven performance in FY09?
  • Despite pressure on realisation, GAIL managed to grow its net sales by 33% YoY during the year. This was led by the company’s natural gas trading business (68% of total sales), which reported a growth of 45% YoY during the year. The company was able to outperform its volume target as per its annual performance MoU signed with the Ministry of Petroleum and Natural Gas. As against the target of gas transmission of around 81.5 million metric standard cubic meters per day (mmscmd) of natural gas from domestic sources and through LNG route, the company transmitted around 83.3 mmscmd (higher by about 2% YoY). Further, it achieved natural gas sales of 79.1 mmscmd against the MoU target of around 70 mmscmd (higher by about 15% YoY).

    Segment-wise performance
    (Rs m) 4QFY08 4QFY09 Change FY08 FY09 Change
    Natural gas transmission            
    Revenue 5,562 6,511 17.1% 22,479 24,824 10.4%
    % share 9.9% 9.4%   10.9% 9.2%  
    PBIT margin 56.8% 66.7%   65.8% 64.4%  
    LPG transmission            
    Revenue 1,081 992 -8.2% 3,826 3,803 -0.6%
    % share 1.9% 1.4%   1.9% 1.4%  
    PBIT margin 55.3% 64.4%   57.0% 58.1%  
    Natural gas trading            
    Revenue 33,820 47,430 40.2% 126,484 183,083 44.7%
    % share 60.2% 68.2%   61.5% 68.0%  
    PBIT margin 2.1% 1.2%   1.6% 1.9%  
    Petrochemicals            
    Revenue 7,478 6,813 -8.9% 25,873 27,309 5.6%
    % share 13.3% 9.8%   12.6% 10.1%  
    PBIT margin 44.9% 48.1%   47.0% 44.3%  
    LPG & liquid hydrocarbons            
    Revenue 7,909 7,671 -3.0% 26,407 29,641 12.2%
    % share 14.1% 11.0%   12.8% 11.0%  
    PBIT margin 42.0% 29.2%   33.0% 29.0%  
    GAILTEL            
    Revenue 72 49 -31.9% 281 243 -13.7%
    % share 0.1% 0.1%   0.1% 0.1%  
    PBIT margin -12.8% -34.4%   3.8% -18.7%  
    Others            
    Revenue 214 63 -70.7% 298 519 74.4%
    % share 0.4% 0.1%   0.1% 0.2%  
    PBIT margin -113.3% -2626.9%   -1681.5% -1192.9%  
    Total*            
    Revenue 56,137 69,530 23.9% 205,646 269,423 31.0%
    PBIT margin 19.4% 13.6%   17.7% 14.4%  
    * Excluding inter-segment adjustments

  • The other two key businesses of ‘petrochemicals’ and ‘LPG & liquid hydrocarbons’ recorded lackluster performances, growing their sales by just around 6% YoY and 12% YoY during the year.

  • On the back of weakness in realisation as also higher cost on purchase of traded goods, GAIL recorded a 4.5% YoY decline in its operating margins for FY09, which stood at 17.7%.

  • The pressure on operating margins combined with higher interest costs led to GAIL recording a mere 8% YoY growth in standalone net profits during the fiscal. The profit growth would have been even lower but for a 23% YoY rise in other income.

What to expect?
At the current price of Rs 288, the stock is trading at a multiple of 9.4 times our estimated FY11 earnings. The company has done well on the topline front but, given the pressure on costs, has not been able to rake in a good performance at the bottomline level.

GAIL had plans to set up two new mega petrochemicals plants – one with Reliance Industries in the Middle-East, Central Asia or Russia, and the other with Indian Oil for a plant at Barauni in Bihar. However now, as per the management, it is going slow on these plans given the liquidity crunch. The management expects consolidated sales and profits to grow by around 22% YoY and 7% YoY respectively during the current fiscal (FY10). The company also plans to raise Rs 5 bn during the year through a domestic bond issue by December 2009, as part of its annual requirement for at least Rs 30 bn debt for the next three years. Also, during FY10, GAIL plans to invest Rs 56 bn to expand its capacities and reach. Out of this, a large part (around 73%) is planned to be spent in the pipeline projects, while another 12% will be for exploration and production projects.

We had recommended a ‘buy’ on the stock in January 2009 with a 2-year target of Rs 277, which has already been breached. At this time, we advice you to hold on to the same as the company is likely to be a direct beneficiary of increased activity in the natural gas space in India.

To Read the Full Story, Subscribe or Sign In
To Read the Full Story, Subscribe or Sign In


Small Investments
BIG Returns

Zero To Millions Guide 2019
Get our special report, Zero To Millions
(2019 Edition) Now!
We will never sell or rent your email id.
Please read our Terms

GAIL SHARE PRICE


Dec 19, 2018 (Close)

TRACK GAIL

COMPARE GAIL WITH

MARKET STATS