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GAIL: Paying for govt. googly

Jul 30, 2004

Introduction to results
GAIL India, the gas major, announced its 1QFY05 results today. Backed by strong volumes on account of gas from Petronet LNG, the company has posted an 11% growth in the topline. On the other hand, the bottomline has suffered a dip of 7% due to the government's subsidy sharing arrangement, which has not been accounted for in 1QFY04.

What is the company's business?
GAIL is India's flagship gas transmission and distribution company with nearly 90% of the natural gas market share. The company operates more than 4,600 kms of cross country pipeline and is also one of the largest LPG manufacturers with 7 plants with a combined capacity of 1.6 MMTPA (million tonnes per annum). The company also has interests in the petrochemicals business for which it uses the natural gas sourced through ONGC and OIL India.

(Rs m) 1QFY04 1QFY05 Change
Net sales 29,232 32,426 10.9%
Other income 475 356 -25.2%
Expenditure 21,866 24,789 13.4%
Operating profit (EBDITA) 7,365 7,636 3.7%
Operating profit margin (%) 25.2% 23.6%  
Interest 535 410 -23.3%
Depreciation 1,612 2,324 44.1%
Profit before tax 5,694 5,258 -7.6%
Tax 2,043 1,869 -8.5%
Profit after tax/(loss) 3,651 3,389 -7.2%
Net profit margin (%) 12.5% 10.5%  
No. of shares (m) 845.7 845.7  
Diluted earnings per share (Rs)* 17.3 16.0  
P/E ratio (x)   12.1  
(* annualised)      

What has driven performance in 1QFY05?
Sales:Topline growth of 11% is largely due to increased volumes available from Petronet LNG's terminal at Dahej. Also, robust growth in LPG and the petrochemicals cycle uptrend continued to add to the realisations. The topline could have further been boosted but for the under-recoveries on account of LPG discounts to the oil marketing companies to the tune of Rs 2.3 bn.

Expenditure break-up
(%) of sales 1QFY04 1QFY05
Purchase of gas/polymers 56.4% 58.4%
Raw materials consumed 7.0% 6.4%
Staff cost 1.3% 1.4%
Other expenditure 10.0% 10.3%

Operating margins: A more than proportionate increase in cost, owing to a 200 basis points hike in purchase of gas and polymers resulted in erosion of operating margins to the tune of 160 basis points. It could be that private gas producers have raised prices of natural gas following international trends as a result of which GAIL had to bear the brunt. Further, discounts on LPG to oil marketing companies, as part of the subsidy sharing agreement have made matters worse for the company. But for the discounts, the operating margins would have shown an improvement of 330 basis points. We believe, the company has not accounted for subsidies in 1QFY04 as the order was passed during the 3QFY04. Therefore, on a YoY basis, 1QFY05 numbers show a dip.

As a result of the aforesaid factors, the company's bottomline dipped by 7% YoY. An increase of 44% in depreciation costs coupled with a 25% drop in other income during the quarter has also dented the bottomline.

Over the last four quarters: The last four quarters have been volatile for the energy companies. GAIL has witnessed a quantum jump in sales growth during the 4QFY04 largely due to the fact that the economy activity had picked up and this trend has continued in the 1QFY05. However, subsidy sharing has resulted in a dip in profits.

What to expect?
GAIL is currently trading at Rs 194, implying a P/E multiple of 12x its annualized 1QFY05 earnings. Given the vast potential for natural gas, we believe GAIL is likely to be a major beneficiary. Going forward, the company is setting up a national gas grid, which is likely to help expand reach to hitherto untapped southern markets. Also, the company is expanding petrochemicals capacity, which is currently witnessing an uptrend and is likely to continue for another year. However, subsidies sharing arrangement by the government and the lack of pricing power are a major cause of concern.

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Nov 26, 2021 (Close)