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GAIL: Margins under pressure
Jul 27, 2011

GAIL (India) Ltd. has announced the first quarter results for financial year 2011-2012 (1QFY12). The company has reported 25% year on year (YoY) growth in top line and 11% YoY growth in the bottom-line for the quarter. Here is our analysis of the results.

Performance summary
  • Top line soared 24.9% YoY during the quarter.
  • Operating profits registered a growth of 8.4% YoY during the quarter. However, the margins declined 2.7% (YoY).
  • Net profits were up 11% YoY. The net profit margins declined 1.4% (YoY)
  • The company contributed Rs 6,819 mn, up 53% YoY during the quarter to share under recoveries on LPG as per the decision of Government of India.

Standalone performance summary
(Rs m) 1QFY11 1QFY12 Change
Sales 71,158 88,890 24.9%
Expenditure 56,612 73,118 29.2%
Operating profit (EBDITA) 14,546 15,772 8.4%
EBDITA margin (%) 20.4% 17.7%  
Other income 478 647 35.4%
Interest (net) 205 208 1.2%
Depreciation 1,600 1,782 11.4%
Profit before tax 13,218 14,429 9.2%
Pretax margin (%) 18.6% 16.2%  
Tax 4,350 4,582 5.4%
Profit after tax/(loss) 8,869 9,847 11.0%
Net profit margin 12.5% 11.1%  
No. of shares (m)   1,268  
Diluted earnings per share (Rs)*   28.8  
Price to earnings ratio (x)**   15.9  
(* Based on trailing twelve months earnings)

What has driven performance in 1QFY12?
  • Top line growth of 24.9% YoY for the quarter was mainly driven by natural gas trading business (81% of the total revenues) that grew by 32.2% YoY. Among the other business segments, natural gas transmission, LPG transmission and liquid hydrocarbons business grew by 4.7% YoY, 0.7% YoY and 4.1% YoY respectively. The Petrochemical division performance was disappointing with a marginal decline in revenues.
  • Segmental break up...
    (Rs m) 1QFY11 1QFY12 Change
    Natural Gas transmission
    Revenues 8,969 9,389 4.7%
    PBIT 6,406 6,520 1.8%
    PBIT margins 71.4% 69.4%  
    LPG transmission
    Revenues 1,136 1,142 0.6%
    PBIT 733.5 689.7 -6.0%
    PBIT margins 64.6% 60.4%  
    Natural gas trading
    Revenues 54,517 72,054 32.2%
    PBIT 1578.5 3,131 98.4%
    PBIT margins 2.9% 4.3%  
    Petrochemicals
    Revenues 6,376 6,369 -0.1%
    PBIT 2,846 2,434 -14.5%
    PBIT margins 44.6% 38.2%  
    LPG Liquid hydrocarbons
    Revenues 7,815 8,138 4.1%
    PBIT 2,333 2285.1 -2.1%
    PBIT margins 29.9% 28.1%  
    Others
    Revenues 151.3 219.7 45.2%
    PBIT -138 -335.1 NA
    PBIT margins NA NA  

  • Operating profits registered a growth of 8.4% YoY during the quarter. However, the operating margins declined by 2.7% YoY on account of 31% increase in cost of raw material (up 3.3% as a percentage of sales). Segment wise, natural gas trading segment was the only one to witness an increase in operating profit margins, to the extent of 1.5% YoY, resulting in operating profit growth of 98% YoY. The operating profits for Natural gas transmission were up marginally (1.8% YoY) . However, the margins declined 2% YoY. The Petchem segment registered a decline of 14.5% YoY in operating profits and a decline of 6.4% YoY in margins. The operating profits and margins for LPG transmission were down 6% YoY and 4.2% YoY respectively. The operating profits and margins for liquid hydrocarbon segment were down 2.1% YoY and 1.8% YoY respectively
  • Net profit registered an increase of 11% YoY during the quarter. Both interest and depreciation costs declined as a percentage of sales on a year on year basis. Besides, the effective tax rate also declined by a little more than 1% YoY. However, the net profit margins were down 1.4% YoY due to higher gas procurement costs and high subsidy outgo (up 53% YoY).

What to expect?
At a price of Rs 458, the stock is currently trading at PE ratio of 16 (on a trailing 12 months earning basis). Besides natural gas trading segment, none of the segments has performed well. The subsidy outgo has also risen by 53% YoY. GAIL is in the major expansion mode in a scenario when domestic gas supplies remain constrained and imported gas is costly.

We will incorporate the results in our estimates and update our subscribers with fresh recommendation very soon.

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