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GAIL- A look at the numbers-III - Views on News from Equitymaster

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GAIL- A look at the numbers-III

Sep 11, 2007

In the previous article, we looked at the main performance metrics for GAILís LPG transmission segment. In this article, we take up its petrochemicals segment.

Particulars FY04 FY05 FY06 FY07
Revenue (Rs m) 12,653 18,421 19,413 25,702
growth   46% 5% 32%
EBIT margin 29% 44% 37% 37%
ROCE (post tax) 11% 26% 23% 32%

What? The return on capital employed (ROCE) has increased rapidly in the past few years from 11% to 32%.

Why? ROCE has gone up, not only on the back of a growth in EBIT but also due to a reduction in capital employed in the segment. As the company goes on depreciating the assets, the books of accounts reflect a reduction in capital employed. Capital expenditure would increase the capital employed as per the books of accounts. However, that happens once in a few years in petrochemicals when major capacity additions take place. This is unlike the transmission segments, where it is more frequent and where maintenance capex too, is likely to be on the higher side. Hence, even if the company kept its petrochemical EBIT steady, the return on a declining capital employed base would seem to be improving.

Particulars FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07
How much                  
Volume Sold (MMT) 1,483 110,169 183,311 250,952 289,375 265,476 318,614 311,093 346,520
growth   7330% 66% 37% 15% -8% 20% -2% 11%
Capacity utilization 0% 46% 75% 96% 112% 101% 96% 100% 114%
At what rate                  
Realisation per MT (Rs) 39,659 43,501 45,089 38,521 38,272 44,424 55,684 59,222 70,758
growth   10% 4% -15% -1% 16% 25% 6% 19%

How? EBIT has grown on the back of a steady margin and a growing topline. The topline grows in a cyclical manner as volumes and realisations ebb and flow depending on which stage of the cycle the petrochemical industry is going through. Capacity utilization increases as volumes swell in the upswing of the cycle. However, capacity addition like the one in FY05 due to de-bottlenecking of the Pata plant brings down the utilization rates.

Capacity addition

Particulars FY Capacity (MTPA) Cost (Rs bn)
UP petrochemical plant, Pata 1999 260,000 24.04
Swing plant upgradation, Pata 2005 50,000 0.76
HDPE plant, Pata 2008 100,000 6.47
HDPE/LLDPE/PP plant, Lepetkata, Assam Planned 280,000 54.61
Gas cracker complex, Kochi Planned 400,000 62.00
JV with National Petrochemicals Company, Iran Planned 1,000,000 61.50

What next? Petrochemicals companies try to scale up in the quest for economies of scale. GAIL too, plans to expand its presence in petrochemicals through joint ventures, with at least one more plant in India and one overseas.

However, there is a constant threat of an over-capacity situation, a harsh reality in a commodity business like petrochemicals. Further, the company competes for market share with a formidable player like Reliance. Substantial capacity addition is also taking place in the Middle East, a region rich in hydrocarbons, the main feedstock for manufacturing petrochemicals.

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