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GAIL: Petchem division drags performance
Jul 28, 2015

GAIL India (Ltd) has announced results for the quarter ended March 2015. The company has reported 6.1% year on year (YoY) decline in the sales and 31.7% YoY decline in the bottomline for the quarter. Here is a brief summary of the results.

Performance summary
  • The company registered a decline of 6.1% YoY in the topline during the quarter.
  • The operating profits (excluding other income) for the quarter registered a modest decline of 1.2% YoY with operating profit margins at 8.0%, up from 7.6% in 1QFY15.
  • The net income for the quarter declined by 31.7% YoY, with margins at 3.4%, as compared to 4.7% in 1QFY15.
  • The company has not shared under recovery burden this quarter (as compared to a subsidy burden of Rs 5 bn in the corresponding quarter last year).

Standalone financial summary
(Rs m) 1QFY15 1QFY16 YoY ch.(%)
Net Sales 133,371 125,191 -6.1%
Other operating income 351 462 31.7%
Expenditure 123,274 115,214 -6.5%
Operating profit (EBDITA) 10,097 9,976 -1.2%
EBDITA margin (%) 7.6% 8.0%  
Other income 1,724 786 -54.4%
Interest (net) 932 1,636 75.5%
Depreciation 2,337 3,077 31.7%
Profit before tax 8,904 6,511 -26.9%
Pretax margin (%) 6.7% 5.2%  
Tax 2,690 2270 -15.6%
Effective tax rate (%) 30.2% 34.9%  
Profit after tax/(loss) 6,214 4,241 -31.7%
Net profit margin 4.7% 3.4%  
No. of shares (m)   1,268
Diluted earnings per share (Rs)*   22.4  
Price to earnings ratio (x)*   16.1  
*On a trailing 12-month basis

What has driven performance in 1QFY16?
  • The decline in the revenues was mainly on account of lower revenues in the gas marketing segment and poor performance in the Petchem, LPG and OLHC segments. However, revenues from natural gas transmission and LPG transmission witnessed growth on a year on year basis.

    Segmental breakup
    (Rs m) 1QFY15 1QFY16 YoY ch.(%)
    Natural gas transmission
    Revenues 6,604 9,248 40.0%
    EBIT 2,234 3,937 76.2%
    EBITmargins (%) 33.8% 42.6%  
    LPG transmission
    Revenues 1,114 1,362 22.3%
    EBIT 690 822 19.1%
    EBIT  margins (%) 62.0% 60.3%  
    Natural gas marketing
    Revenues 116,691 105,811 -9.3%
    EBIT (355) 3,424 nm
    EBITmargins (%) -0.3% 3.2%  
    Petrochemicals
    Revenues 9,927 5,163 -48.0%
    EBIT 1,249 -3,002 nm
    EBITmargins (%) 12.6% -58.1%  
    LPG and other OLHC
    Revenues 12,601 9,291 -26.3%
    EBIT 4,956 2,768 -44.2%
    EBIT  margins (%) 39.3% 29.8%  
    Other
    Revenues 1,625 1,888 16.2%
    EBIT 613 681 11.2%
    EBIT margins (%) 37.7% 36.1%  

  • In terms of physical performance, the company witnessed a decline in volumes across all the segments on a year on year basis. Sequentially, there was a significant decline in the sales of Petchem due to shutdown of the Pata plant for commissioning of new capacity. Volumes in the LPG transmission and LPG segments also declined. However, volumes witnessed a marginal growth for natural gas transmission and natural gas marketing segments on a sequential basis.

  • The operating margins for the quarter improved to 8.0% from 7.6% in 1QFY15 mainly due to strong margins in the natural gas transmission and gas marketing segment. However, the margins for LPG and OLHC segment suffered on account of lower realizations .However, lower input costs led to a sequential improvement in the margins for LPG and OLHC segment. The company did not bear any subsidy burden for the quarter.

  • On account of depreciation charges post the expansion of Pata plant, lower petchem realisations (in line with weak crude prices), high input LNG costs for Petchem division and shut down of the plant for some period (related to expansion), the company posted losses at EBIT level for the division.

    Cost breakup
    (Rs m) 1QFY15 1QFY16 YoY ch.(%)
    Raw materials 111,161 103,179 -7.2%
    as a % of net sales 83.3% 82.4%  
    Employee costs 2,274 2,482 9.2%
    as a % of net sales 1.7% 2.0%  
    Other expenses 9,840 9,553 -2.9%
    as a % of net sales 7.4% 7.6%  
    Total 123,274 115,214 -6.5%
    as a % of net sales 92.4% 92.0%  

  • The net profit for the quarter declined by 31.7% YoY. Apart from a decline in the sales, decline in the other income, higher effective tax rate and increase in depreciation and interest expenses (on the back of capitalization of Pechem capacity expansion) led to the decline in the bottomline. The company did not bear any under recovery burden for the quarter.
What to expect?
High input gas costs and lower realizations in LPG and OLHC and Petchem division have dragged the performance of GAIL. The depreciation and interest expenses also have gone up on account of increased capacity in the Petchem segment. In the near to medium term, the headwinds are likely to continue for GAIL. On the positive side, the company did not have to bear any under recovery burden this quarter. However, there is still not enough clarity regarding the same in the future.

For the long term, triggers for GAIL could be better transmission tariffs, abolition of subsidy and priority allocation of gas to petchem segment. Another important factor will be increase in the gas volumes. An increase in the volumes due to pooling policy for power plants and fertilizer plants will also be positive for the company

At the current price of Rs 352, the stock is trading at trailing 12 months price to earnings ratio of 16.1 times. We are in the process of revising our estimates and will update subscribers about the same soon. Until then, we put the view and target price for the stock 'Under Review'.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single stock comprises more than 5% of your portfolio.

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