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GAIL: Diversifications not reflecting

Jul 26, 2002

Turnover growth of Gas Authority of India Ltd. (Gail) has been sliding over the past five quarters. Sales growth, which was in the high-teens in FY01, fell to 5% in FY02. Growth for the quarter ended June '02 is even lower than 3.3% recorded in 4QFY02. Gas pipeline business, which contributes an estimated 70% of sales, operates near to rated capacity, which could be a constraint. Also, reportedly, gas supply has not been steady.

(Rs m) 1QFY02 1QFY03 Change
Sales 25,750 26,207 1.8%
Other Income 310 496 60.1%
Expenditure 19,565 19,642 0.4%
Operating Profit (EBDIT) 6,185 6,565 6.2%
Operating Profit Margin (%) 24.0% 25.1%  
Interest 573 524 -8.5%
Depreciation 1,495 1,642 9.8%
Profit before Tax 4,427 4,896 10.6%
Tax 1,623 1,790 10.3%
Profit after Tax/(Loss) 2,804 3,106 10.8%
Net profit margin (%) 10.9% 11.9%  
No. of Shares 845.7 845.7  
Diluted Earnings per share* 13.3 14.7  
P/E Ratio   5.1  
*(annualised)      

Oil & Natural Gas Corporation (ONGC) has been experiencing declines in oil & gas production at major blocks. Also, the company is witnessing a drying up of its Gandhar gas fields. Supply to large consumers has reportedly been reduced. The company itself has a gas processing plant at Gandhar for extracting LPG. Although, GAIL will favour supply to its plant, in the medium term constraints in availability will arise. Having said that, one could have expected growth from other businesses viz. petrochemicals, LPG transmission & sales to reflect on the topline.

Rise in operating profits have largely materialised from margin expansion. Decline in purchase expenses, which account for an estimated 75% of operating costs, has led to rise in margins. Domestic gas prices, which are estimated to be at 50% of international prices, are not expected to have benefited from softer oil prices, as domestic prices are currently locked at a ceiling. The higher margins could have accrued from the LPG and LPG transmission business.

Interest expense is declining over the past two quarters. The petrochemical and LPG pipeline business commenced over FY00 and FY01 leading to interest being expensed in the income statement. Consequently, the YoY effect is likely to have been negated. Also, the company enjoys strong cash flows, which could have been used to repay debt. Deferred tax provided at the end of FY02 has been apportioned over the four quarters. Adjusting for deferred tax, post tax profits would have increased by 7% YoY.

At the topline, the numbers have come in below are expectations. We expected a high single digit growth driven largely by higher utilisation of assets and ramp up in operating rates of other businesses. As per reports, the company is actively looking to acquire stake in Haldia Petrochemicals and investing in the Bangladesh oil & gas sector. ONGC, IOC and Gail are also in discussions with the Bangladeshi Government for building a cross border gas pipeline.

At Rs 74 the scrip is trading on a multiple of 5.1x 1QFY03 annualised earnings. Valuations of the company have increased over the past twelve months, as market confidence in disinvestment process has increased. However, the Government is not likely to make a strategic sale but is likely to dilute its holding through an offering in the domestic or international secondary markets.


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