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GAIL: Petchem dampens the show
Jul 27, 2009

Performance summary
  • Topline grows by 5.4% YoY during 1QFY10 led by a 21% growth in the natural gas transmission business. Sales from the petrochemicals and LPG & liquid hydrocarbon segments decline.
  • EBITDA margin shrinks 6.6% lower to 18% in 1QFY09 on the back of higher raw material costs.
  • Petrochemicals gross margins decline from 60% in 1QFY09 to 49% this quarter. However, transmission margins remain flat.
  • Other income records a decline of 48% YoY.
  • Bottomline declines 27% YoY during 1QFY10 due to weaker operating margins and lower other income.


Standalone financial snapshot
(Rs m) 1QFY09 1QFY10 Change
Net sales 57,307 60,413 5.4%
Expenditure 43,313 49,559 14.4%
Operating profit (EBDITA) 13,994 10,854 -22.4%
EBDITA margin (%) 24.4% 18.0%
Other income 1,148 599 -47.8%
Interest 190 179 -5.8%
Depreciation 1,430 1,404 -1.8%
Profit before tax 13,522 9,870 -27.0%
Tax 4,554 3,312 -27.3%
Profit after tax/(loss) 8,969 6,558 -26.9%
Net profit margin (%) 15.7% 10.9%  
No. of shares (m)   1,268.5  
Diluted earnings per share (Rs)*   20.2  
Price to earnings ratio (x)*   16.8  
* On trailing twelve months basis

What has driven performance in 1QFY10?
  • GAIL has recorded a standalone topline growth of 5.4% YoY in 1QFY10, driven primarily by an increase in natural gas transmission (21% YoY) and trading (13%). Revenue from the petrochemicals segment declined by 22% YoY.

    Revenue break-up
    (Rs m) 1QFY09 % share 1QFY10 % share Change
    Natural Gas Trading 34,780 60.7% 39,280 65.2% 12.9%
    Natural Gas Transmission 5,540 9.7% 6,700 11.1% 20.9%
    Petrochemicals 7,920 13.8% 6,200 10.3% -21.7%
    LPG and Liquid Hydrocarbons 7,990 13.9% 6,840 11.4% -14.4%
    LPG Transmission 850 1.5% 1,050 1.7% 23.5%
    GAILTEL 70 0.1% 40 0.1% -42.9%
    Unallocated 160 0.3% 100 0.2% -37.5%

  • The natural gas transmission volumes grew by 14% YoY in 1QFY10 while the petrochemicals segment witnessed a 12% decline in volumes. While transmission margins remained flat during the quarter, petrochemicals margins declined by 11%.

  • During 1QFY10, GAIL shared the under recoveries of the oil marketing companies to the tune of Rs 747 m (Rs 4.8 bn in 1QFY09).

  • As per the regulations of the Petroleum and Natural Gas Regulatory Board, the natural gas pipeline tariff being charged by the company for its pipeline networks is subject to revision with retrospective effect. Impact on profits, if any, will be recognised when the pipeline tariff is revised in accordance with the regulations. It may be noted that in its recent analyst meet, GAIL’s management was of the view that tariff was unlikely to revised downwards.

  • During the quarter, GAIL’s raw material cost increased 4.6% (as % of sales). Other expenditure grew by 1.2% (as a % of sales).

What to expect?
The stock currently trades at Rs 339, implying a multiple of 16.8 times its trailing 12 months standalone earnings and 11 times our FY11 estimated consolidated earnings.

The subsidy burden is a legacy of the political meddling in the Indian oil and gas sector. Even if transmission tariff is not revised downwards, it is likely to remain sluggish due to the government’s proposed allocation to non-remunerative users like the fertilisers industry. Additionally, the petrochemical segment is suffering from the effects of a cyclical downturn.

However, the company’s in-place infrastructure as well as additional pipelines will help capture the increased transmission volumes of domestic natural gas, as and when they come on stream. Considering the factors for and against the company, we would advise against taking fresh positions in the stock at the current juncture.

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