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GAIL: Awaiting gas price revision

Jul 29, 2003

GAIL announced its first quarter results for FY04 yesterday. The company reported a topline growth of about 12%. This was on account of increase in volumes of gas sold and transmitted. ONGC, which is the major supplier of natural gas to GAIL, has seen a 2% increase in its natural gas production. This might have resulted in the company increasing its throughput. Moreover, increase in LPG production has also added to the topline.

(Rs m)1QFY031QFY04Change
Sales 26,207 29,232 11.5%
Other Income 496 476 -4.2%
Expenditure 19,642 21,866 11.3%
Operating Profit (EBDIT) 6,565 7,365 12.2%
Operating Profit Margin (%)25.1%25.2% 
Interest 524 535 2.2%
Depreciation 1,642 1,612 -1.8%
Profit before Tax4,8965,69416.3%
Tax 1,790 2,043 14.1%
Profit after Tax/(Loss) 3,106 3,651 17.6%
Net profit margin (%)11.9%12.5% 
No. of Shares 845.7 845.7  
Diluted Earnings per share*14.717.3 
P/E Ratio 6.6 

Expenses of the company increased in line with the increase in revenues. It must be remembered that GAIL just receives transmission charges for the gas throughput. Therefore, any rise in throughput tends to increase expenses proportionately (natural gas accounts for 75% of expenses for GAIL). Consequently operating profit margins has remained at the same level. Net profit also increased in line with the growth at the operating level.

At Rs 113, the stock is trading at a P/E multiple of 6.6x its 1QFY04 annualised earnings (5.9x FY04E earnings). Natural Gas prices have remained stable since last four years. Recently the group of ministers has recommended an increase in the natural gas prices and also an increase in transmission charges. If this were to happen, GAIL will not be impacted by higher gas prices in any big manner. Also, considering the potential for natural gas in India, the prospects looks good for the company. However, in the long term, the entry of private players in the sector may be looked at as a risk for the company.

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