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GAIL: Robust performance - Views on News from Equitymaster
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GAIL: Robust performance
Jul 29, 2008

Performance summary
  • Topline grows by 35% YoY during 1QFY09.
  • EBITDA margin remains stable at 24.4%.
  • Other income records a growth of 26% YoY.
  • Bottomline registers a growth of 31% YoY during 1QFY09 due to topline growth.


Standalone financial snapshot
(Rs m) 1QFY08 1QFY09 Change
Net sales 42,457 57,307 35.0%
Expenditure 32,070 43,313 35.1%
Operating profit (EBDITA) 10,387 13,994
EBDITA margin (%) 24.5% 24.4%
Other income 913 1,148 25.7%
Interest 204 190 -6.8%
Depreciation 1,407 1,430 1.6%
Profit before tax 9,689 13,522 39.6%
Tax 2,837 4,554 60.5%
Profit after tax/(loss) 6,852 8,969 30.9%
Net profit margin (%) 16.1% 15.7%
No. of shares (m) 845.7 845.7
Diluted earnings per share (Rs)* 33.3
Price to earnings ratio (x)* 11.3
* On trailing twelve months basis

What has driven performance in 1QFY09?
  • GAIL has recorded a standalone topline growth of 35% YoY in 1QFY09, driven primarily by an increase in natural gas trading (47% YoY), petrochemicals (20% YoY) and LPG & liquid hydrocarbons (25% YoY).

    Revenue break-up
    (Rs m) 1QFY08 % share 1QFY09 % share Change
    Natural Gas Trading 23,740 55.9% 34,780 60.7% 46.5%
    Natural Gas Transmission 4,720 11.1% 5,540 9.7% 17.4%
    Petrochemicals 6,620 15.6% 7,920 13.8% 19.6%
    LPG and Liquid Hydrocarbons 6,400 15.1% 7,990 13.9% 24.8%
    LPG Transmission 880 2.1% 850 1.5% -3.4%
    GAILTEL 70 0.2% 70 0.1% 0.0%
    Unallocated 30 0.1% 160 0.3% 433.3%

  • During 1QFY09, natural gas trading grew by 17% in volume terms but by 47% in value terms, indicating higher realisations. Similarly, the petrochemical segment declined by 1% in volume terms but managed a superior growth rate of 20% in value terms, due to higher realisations during the quarter. Moreover, natural gas transmission grew by 7% YoY in volume terms while recording a 17% YoY growth in value indicating higher transmission margins.

    Volumes
    (Rs m) 1QFY08 % share 1QFY09 % share Change
    Natural Gas Trading 23,740 55.9% 34,780 60.7% 46.5%
    Natural Gas Transmission 4,720 11.1% 5,540 9.7% 17.4%
    Petrochemicals 6,620 15.6% 7,920 13.8% 19.6%
    LPG and Liquid Hydrocarbons 6,400 15.1% 7,990 13.9% 24.8%
    LPG Transmission 880 2.1% 850 1.5% -3.4%
    GAILTEL 70 0.2% 70 0.1% 0.0%
    Unallocated 30 0.1% 160 0.3% 433.3%

  • During the quarter, GAILís raw material cost increased 1.5% (as percentage of sales) but was offset by a 1.5% decline (as percentage of sales) in other expenditure, resulting in stable EBITDA margins. Staff costs grew by 26% YoY in absolute terms in part due to the pay revision of employees to the tune of Rs 180 m accounted for in 1QFY09.

    Cost break-up
    Particulars 1QFY08 1QFY09 Change
    Natural gas sales (MMSCMD) 68 80 17.2%
    Natural gas transmitted (MMSCMD) 79 84 7.4%
    Petrochemical sales (TMT) 105 104 -1.0%
    Petrochemicals production (TMT) 103 104 1.0%
    LPG and Liquid Hydrocarbons sales (TMT) 354 346 -2.3%
    LPG and Liquid Hydrocarbons production (MMT) 355 342 -3.7%
    LPG transmission (MMT) 621 616 -0.8%

  • GAIL shared under recoveries of the PSU oil marketing companies to the tune of Rs 3.9 bn for 1QFY09 (Rs 2.7 bn during 1QFY08).

  • During the quarter, GAIL incorporated a wholly owned subsidiary, GAIL Gas, for city gas distribution in various cities of India and abroad. Moreover, a joint venture company, GAIL China Gas Global Energy Holding, was incorporated between GAIL and China Gas with 50% equity participation each for investment and engaging in operation and management of projects in the natural gas sector.

What to expect?
The stock currently trades at Rs 376, implying a multiple of 8.3 times our estimated FY11E consolidated earnings. The companyís 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. However, transmission tariffs are likely to remain sluggish due to the governmentís proposed allocation to non-remunerative users like the fertilisers industry. Additionally, the petrochemical segment is vulnerable to a cyclical downturn.

Considering the factors for and against the company, we maintain our view on the stock from a long-term perspective.

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