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GAIL: Petrochemicals to the rescues margins
Oct 25, 2011

GAIL India Ltd. has announced the second quarter results for financial year 2011-2012 (2QFY12). The company has reported 19.7% year on year (YoY) growth in top line and 18.5% YoY growth in the bottom-line for the quarter. Here is our analysis of the results.

Performance summary
  • Top line soared 19.7% YoY during the quarter. For the half year, the growth in the topline came at 22.1% YoY.
  • Operating profits registered a growth of 15.0% YoY during the quarter with margins at 17.2% (down 0.7% YoY) . For the half year, the operating profits were up 11.7% with margins at 17.5% (down 1.6% YoY)
  • Net profits were up 18.5% YoY during the quarter with margins at 11.3%, almost same as 11.4% last year. For the half year, the bottomline was up 14.8%, with net profit margins at 11.2% versus 11.9% last year.
  • During the quarter, the company contributed Rs 5.6 bn, up 64% YoY to share under recoveries on LPG as per the decision of Government of India. The subsidy burden for the half year stood at Rs 12.4 bn, up 58% YoY


Standalone performance summary
(Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
Sales 81,282 97,264 19.7% 152,440 186,154 22.1%
Expenditure 66,712 80,509 20.7% 123,324 153,626 24.6%
Operating profit (EBDITA) 14,570 16,755 15.0% 29,116 32,528 11.7%
EBDITA margin (%) 17.9% 17.2%   19.1% 17.5%  
Other income 1,499 1,160 -22.6% 1,976 1,807 -8.6%
Interest (net) 117 226 92.7% 323 434 34.5%
Depreciation 1,626 2,008 23.5% 3,226 3,789 17.5%
Profit before tax 14,326 15,682 9.5% 27,544 30,111 9.3%
Pretax margin (%) 17.6% 16.1%   18.1% 16.2%  
Tax 5,090 4,738 -6.9% 9,440 9,320 -1.3%
Profit after tax/(loss) 9,236 10,944 18.5% 18,104 20,791 14.8%
Net profit margin 11.4% 11.3%   11.9% 11.2%  
No. of shares (m)         1,268  
Diluted earnings per share (Rs)*         30.2  
Price to earnings ratio (x)**         14.1  
(* Based on trailing twelve months earnings)

What has driven performance in 2QFY12?
  • Top line growth of 19.7% YoY for the quarter was mainly driven by natural gas trading business (80% of the total revenues) that grew by 20.4% YoY. Among the other business segments, natural gas transmission registered a flat growth while growth in Petchem and LPG/liquid hydrocarbons came at 30% and 34% respectively. The sales from LPG transmission segment registered a decline of 3.7% YoY.

    Segmental break up...
    (Rs m) 2QFY11 2QFY12 Change 1HFY11 1HFY12 Change
    Natural Gas transmission            
    Revenues 9,793 9,800 0.1% 18,762 19,189 2.3%
    PBIT 7,206 5,562 -22.8% 13,612 12,083 -11.2%
    PBIT margins 73.6% 56.8%        
    LPG transmission            
    Revenues 1,141 1,098 -3.7% 2,276 2,240 -1.6%
    PBIT 787 722 -8.2% 1,520 1,412 -7.1%
    PBIT margins 69.0% 65.8%   66.8% 63.0%  
    Natural gas trading            
    Revenues 62,894 75,754 20.4% 117,411 147,808 25.9%
    PBIT 1,602 2,866 78.9% 3,181 5,997 88.5%
    PBIT margins 2.5% 3.8%   2.7% 4.1%  
    Petrochemicals            
    Revenues 7,209 9,376 30.1% 13,585 15,746 15.9%
    PBIT 2,716 4,041 48.8% 5,562 6,474 16.4%
    PBIT margins 37.7% 43.1%   40.9% 41.1%  
    Liquid hydrocarbons            
    Revenues 7,367 9,887 34.2% 15,182 18,026 18.7%
    PBIT 1,752 3521.2 101.0% 4,085 5806.4 42.1%
    PBIT margins 23.8% 35.6%   26.9% 32.2%  
    Others            
    Revenues 143 257 79.5% 294.6 476.9 61.9%
    PBIT -479 -818 na -616 -1,153 na
    PBIT margins na na   na na  

  • Operating profits registered a growth of 15.0% YoY during the quarter. Segment wise, LPG/Liquid hydrocarbons, Natural gas trading and Petchem division registered an annual growth of 101%, 79% and 49% respectively which was offset by 23% YoY and 8% YoY decline in operating profits of Natural gas transmission and LPG transmission respectively. Accordingly, the margins increased for LPG/Liquid hydrocarbons, Natural gas trading and Petchem division while declined for LPG transmission and Natural gas transmission on a year on year basis. Overall, the margins were down slightly due to increase in survey expenditure and write off of Dry Well expenditure in Exploration and Production segment.

  • Net profit registered an increase of 18.5% YoY during the quarter. The effective tax rate declined to 30% versus 36% last year. The margins declined by 0.1%YoY as the company contributed Rs 5.6 bn, up 64% YoY to share under recoveries on LPG as per the decision of Government of India

What to expect?
At a price of Rs 426, the stock is currently trading at PE ratio of 14.1 (on a trailing 12 months earning basis). While transmission business disappointed on the margins front, the Petchem business witnessed a comeback which is a positive. That GAIL is in an expansion mode at a time when domestic gas supplies remain constrained and imported gas is costly, is a major concern along with uncertainty on subsidy sharing mechanism. We will incorporate the results in our estimates and update our subscribers with fresh recommendation very soon.

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