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GAIL: A weak quarter
Aug 11, 2014 | Updated on Aug 19, 2014

GAIL (India) Ltd has announced results for the quarter ended June 2014. The company has reported results for the quarter ended 1QFY15. The company has reported 3.7% year on year (YoY) growth in the topline and 23.1% YoY decline in the bottomline for the quarter. Here is a brief summary of the results.

Performance summary
  • The company registered 3.7% YoY growth in the topline during the quarter. The company derecognized revenue worth Rs 2.4 bn in view of revision of natural gas pipeline tariff by PNGRB.
  • The operating profits for the quarter declined by 30.7% YoY with operating profit margins at 7.8%, as compared to 11.7% in the corresponding quarter last year.
  • The net income for the quarter registered 23.1% YoY decline, with margins at 4.6%, as compared to 6.3% in 1QFY14.
  • The company has provided a provisional discount of around Rs 5 bn during the quarter, as compared to discount of Rs 7 bn in the corresponding quarter last year for share under recoveries on LPG (Liquefied Petroleum Gas).
  • There has been a change in the depreciation policy during the quarter (change with regards to useful life of assets) because of which depreciation seems lower and profit looks higher to the extent of Rs 694 m.

Financial Snapshot
(Rs m) 1QFY14 1QFY15 YoY ch.(%)
Sales 128,998 133,722 3.7%
Expenditure 113,915 123,274 8.2%
Operating profit (EBDITA) 15,084 10,448 -30.7%
EBDITA margin (%) 11.7% 7.8%  
Other income 577 1,724 198.9%
Interest (net) 612 932 52.3%
Depreciation 2,808 2,337 -16.8%
Profit before tax 12,241 8,904 -27.3%
Pretax margin (%) 9.5% 6.7%  
Tax 4,159 2,690 -35.3%
Effective tax rate (%) 34.0% 30.2%  
Profit after tax/(loss) 8,082 6,214 -23.1%
Net profit margin 6.3% 4.6%  
No. of shares (m)   1,268  
Diluted earnings per share (Rs)*   33.0  
Price to earnings ratio (x)*   13.0  
*On a trailing twelve months basis

What has driven performance during the quarter?
  • The net sales for the quarter grew 3.7% YoY. The company witnessed a poor performance across most of its business segments. Segmentwise, the revenues in the natural gas marketing segment grew 6% YoY. While the company had imported LNG gas at relatively higher prices, it has to book under recoveries worth Rs 1.9 bn as LNG prices softened in the international markets and customers switched to other low cost suppliers. As such, the gas trading business posted a loss at the gross margin and EBIT level.

  • The sales from Petrochemicals business declined 10% YoY. The Petrochemical segment sales volumes for the quarter declined by around 28% YoY.

  • The revenues from natural gas transmission also registered a decline of around 33.9% YoY during the quarter while the natural gas transmission volumes declined 2.4% YoY. However, the volumes improved marginally during the quarter. As per the management, the company lost around Rs 2.4 bn in the revenues due to lowering of pipeline tariff by Petroleum and Natural Gas Regulatory Board (PNGRB).

  • The revenues for LPG and other Liquid Hydrocarbons (OLHC) segment grew 25% YoY, despite a volume decline of 6% YoY during the quarter. The revenues from LPG transmission also increased by 18% YoY during the quarter while volumes grew by around 19% YoY. The company paid Rs 5 bn (3% share of upstream subsidy burden), down 28.5% YoY towards subsidies during the quarter.

  • The overall operating profit margins declined 3.9% (YoY). This was due to poor performance across segments. The profits for the quarter were adversely impacted due to lower pipeline tariff and costlier imported gas that forced customers to switch to cheaper options. As per the management, the losses due to high cost LNG inventory have been recouped in the current quarter.

  • The net profits for the quarter declined by 23% YoY on account of weak operating performance. The subsidy burden worth Rs 5 bn also dragged the bottomline. This was despite a decline in depreciation cost and almost three fold increase in the other income. The interest expense for the quarter was up 52% YoY.
What to expect?
Declining gas transmission volumes has been a major cause of concern for GAIL. On that front, the company witnessed a sequential improvement in the transmission volumes.

Overall, this was quite a weak quarter for company as performance across most of the business segments was disappointing. This was mainly due to the under recovery on imported LNG that as per the management has been reversed in the current quarter.

At the current price, GAIL is trading at a trailing twelve months price to earnings ratio of 13 times. While there are some concerns in the near term for the company, GAIL being the largest player in gas transmission and trading segment and having presence across the value chain is well placed to benefit from the increase in gas demand in the long term. We recommend investors to buy the stock from a long term perspective.

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 large cap stock comprises more than 5% of your portfolio

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