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GAIL: Petrochemicals get hit - Views on News from Equitymaster

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GAIL: Petrochemicals get hit
Oct 24, 2008

Performance summary
  • Topline grows by 35% YoY during 2QFY09.

  • EBITDA margin expands to 23.4%.

  • Transmission margins decline as do sales volume of petrochemicals.

  • Other income records a growth of 27% YoY.

  • Bottomline registers a growth of 79% YoY during 2QFY09 due to topline growth and margin expansion.

  • For 1HFY09, the topline and bottomline grow by 35% and 53% YoY respectively.



Standalone financial snapshot
(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 45,289 61,293 35.3% 87,746 118,600 35.2%
Expenditure 36,506 46,979 28.7% 68,576 90,291 31.7%
Operating profit (EBDITA) 8,783 14,314 63.0% 19,170 28,309 47.7%
EBDITA margin (%) 19.4% 23.4% 21.8% 23.9%
Other income 1,806 2,289 26.8% 2,719 3,437 26.4%
Interest 201 189 -5.9% 405 379 -6.3%
Depreciation 1,492 1,386 -7.1% 2,899 2,815 -2.9%
Profit before tax 8,897 15,029 68.9% 18,585 28,551 53.6%
Tax 3,171 4,794 51.2% 6,008 9,348 55.6%
Profit after tax/(loss) 5,725 10,235 78.8% 12,578 19,203 52.7%
Net profit margin (%) 12.6% 16.7% 14.3% 16.2%
No. of shares (m) 1,268.5
Diluted earnings per share (Rs)* 25.7
Price to earnings ratio (x)* 7.6
* On trailing twelve months basis

What has driven performance in 2QFY09?
  • GAIL has recorded a standalone topline growth of 35% YoY in 2QFY09, driven primarily by an increase in LPG & liquid hydrocarbons (52% YoY) and natural gas trading (46% YoY).

    Revenue break-up
    (Rs m) 2QFY08 % share 2QFY09 % share Change
    Natural Gas Trading 25,890 57.2% 37,890 61.8% 46.3%
    Natural Gas Transmission 5,060 11.2% 5,390 8.8% 6.5%
    Petrochemicals 6,340 14.0% 6,210 10.1% -2.1%
    LPG and Liquid Hydrocarbons 7,020 15.5% 10,650 17.4% 51.7%
    LPG Transmission 890 2.0% 900 1.5% 1.1%
    GAILTEL 70 0.2% 60 0.1% -14.3%
    Unallocated 20 0.0% 190 0.3% 850.0%

  • During 2QFY09, natural gas trading grew by 12% in volume terms but by 46% in value terms, indicating higher realisations. The petrochemical segment declined by 22% in volume terms but declined by only 2% in value terms. Natural gas transmission declined by 1% YoY in volume terms while recording a 7% YoY growth in value indicating higher realisations. However, the margins for the segment declined during the quarter.

  • During the quarter, GAILís raw material cost increased 1% (as percentage of sales) but was offset by a 5% decline (as percentage of sales) in other expenditure, resulting in better EBITDA margins. Staff costs grew by 36% YoY in absolute terms in part due to the pay revision of employees to the tune of Rs 215 m accounted for in 1QFY09.

  • GAIL shared under recoveries of the PSU oil marketing companies to the tune of Rs 4 bn for 2QFY09 (Rs 2.6 bn during 2QFY08).

What to expect?
    The stock currently trades at Rs 195, implying a multiple of 6.3 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 positive view on the stock from a long-term perspective.

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