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GAIL: A weak quarter - Views on News from Equitymaster

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GAIL: A weak quarter
Oct 25, 2013

GAIL (India) Ltd has announced the results for the second quarter of the financial year 2013-2014 (2QFY14). The company has reported 22.7% year on year (YoY) growth in the topline and 7.1% YoY decline in the bottomline for the year. Here is our analysis of the results.

Performance summary
  • The company registered 22.7% YoY growth in the topline during the quarter. For the half year, the revenues were up 19.4% YoY.
  • The operating profits for the quarter grew by 5.1 % YoY with operating profit margins at 10.5%, as compared to 12.2% in the corresponding quarter last year. For the half year, the operating profits were down 10.1% YoY, with operating profit margins at 11.0% versus 14.7% in 1HFY13.
  • The net income for the quarter registered 7.1% YoY decline, with margins at 6.5%, as compared to 8.6% in 2QFY13. For the half year, the net profits registered a decline of 18.7% YoY, with margins at 6.4% as compared to 9.4% in 1HFY13.
  • The company has provided a discount of around Rs 7 bn during the quarter, down 11% YoY to share under recoveries on LPG (Liquefied Petroleum Gas). For the half year, the discount stood at around Rs 14 bn, down 5.9% YoY.

(Rs m) 2QFY13 2QFY14 YoY ch. (%) 1HFY13 1HFY14 YoY ch. (%)
Sales 114,081 140,025 22.7% 225,305 269,023 19.4%
Expenditure 100,156 125,391 25.2% 192,244 239,305 24.5%
Operating profit (EBDITA) 13,925 14,634 5.1% 33,060 29,717 -10.1%
EBDITA margin (%) 12.2% 10.5%   14.7% 11.0%  
Other income 2,563 2,219 -13.4% 3,031 2,796 -7.8%
Interest (net) 261 1,082 314.2% 849 1,694 99.5%
Depreciation 2,491 2,888 16.0% 4,660 5,697 22.2%
Profit before tax 13,736 12,883 -6.2% 30,582 25,123 -17.9%
Pretax margin (%) 12.0% 9.2%   13.6% 9.3%  
Tax 3,882 3,726 -4.0% 9,391 7,885 -16.0%
Profit after tax/(loss) 9,854 9,157 -7.1% 21,192 17,238 -18.7%
Net profit margin 8.6% 6.5%   9.4% 6.4%  
No. of shares (m)         1,268  
Diluted earnings per share (Rs)*         28.6  
Price to earnings ratio (x)**         12.0  
* On a trailing 12 months basis
What has driven performance in 2QFY14 ?
  • In the gas transmission segment, the volumes declined both on a sequential and year on year basis. However, the company reported 8.4% YoY growth in the revenues on the back of higher transmission tariffs. The operating profits in the transmission segment declined by 4.7% YoY. However, the operating profits were up 4% QoQ due to increase in transmission tariffs. The increase in tariffs is likely to be on account of take or pay nature of contracts.

    Segmental breakup
    Rs m 2QFY13 2QFY14 YoY ch. (%) 1HFY13 1HFY14 YoY ch. (%)
    Natural Gas transmission
    Sales 9,845 10,668 8.4% 18,998 20,662 8.8%
    PBIT 6,049 5,762 -4.7% 11,722 11,300 -3.6%
    PBIT margins 61.4% 54.0%   61.7% 54.7%  
    LPG Transmission
    Sales -40 955 nm 1,097 1,894 72.7%
    PBIT -489.2 426.1 nm 220 976 343.4%
    PBIT margins nm 44.6%   20.1% 51.5%  
    Gas Trading
    Sales 96,970 123,785 27.7% 189,391 234,370 23.7%
    PBIT 2,447 4,870 99.0% 7,404 7,895 6.6%
    PBIT  margins 2.5% 3.9%   3.9% 3.4%  
    Petrochemicals
    Sales 8,798 11,336 28.8% 14,540 22,370 53.9%
    PBIT 4,182 3,909 -6.5% 6,140 8,291 35.0%
    PBIT margins 47.5% 34.5%   42.2% 37.1%  
    LPG & Other Liquid Hydro Carbons
    Sales 7,695 10,388 35.0% 18,418 20,425 10.9%
    PBIT 665 -2,279 nm 5,037 -2,389 nm
    PBIT margins 8.6% -21.9%   27.4% -11.7%  
    Other segment
    Sales 758 755 -0.4% 1,318 1,331 0.9%
    PBIT -126 17 nm -135 -238 nm
    PBIT  margins -16.6% 2.24%   -10.2% -17.9%  

  • The volumes in the LPG transmission segment also witnessed a 10.3% YoY decline. However, on a QoQ basis, the volumes were up 4.3%. The sales and operating profits for the segment are not comparable on a YoY basis since company had to derecognize the revenues in 2QFY13.On a sequential basis, the operating profits (EBIT) for the segment declined by 23% due to higher share of costlier imported gas.

  • The revenues in the gas trading segment grew by 27.7% YoY (up 15% QoQ). While the volumes in the segment declined both on an annual and quarterly basis, higher realizations led to the growth in the revenues. As such, the operating margins for the segment improved to 3.9% from 2.5% in 2QFY13.

  • The Petrochemicals segment witnessed a revenue growth of 28.8% YoY (up 2.7% QoQ). The volumes in the Petrochemicals segment grew by 7% YoY. However, on a sequential basis, the volumes witnessed a decline of around 11%. The operating margins for the segment witnessed a decline of 13% YoY (5.2% QoQ) on account of increase in the gas costs and subdued volumes.

  • The revenues in LPG and liquid Hydrocarbon segment grew by 11.7% YoY (up 2.0% YoY). The volumes for the segment declined by around 7% YoY (down 4% QoQ). The operating expenses for the segment increased substantially during the quarter as the share of costlier imported gas increased substantially while supplies from KG-D6 gas dried up. The subsidy burden in the LPG segment declined by 11% YoY (almost flat on a sequential basis). The company reported operating loss margin of around 21.9% during the quarter, versus profit margins of 8.6% in 2QFY13.

    Cost breakup
    (Rs m) 2QFY13 2QFY14 YoY ch. (%) 1HFY13 1HFY14 YoY ch. (%)
    Raw materials 90,022 112,946 25.5% 173,220 216,135 24.8%
    % of sales 78.9% 80.7%   76.9% 80.3%  
    Staff costs 1,888 2,031 7.6% 3,628 4,035 11.2%
    % of sales 1.7% 1.5%   1.6% 1.5%  
    Other expenses 8,246 10,414 26.3% 15,397 19,136 24.3%
    % of sales 7.2% 7.4%   6.8% 7.1%  
    Total expenses 100,156 125,391 25.2% 192,244 239,305 24.5%
    % of sales 87.8% 89.5%   85.3% 89.0%  

  • The net profit for the quarter declined by 7.1% YoY despite lower subsidy burden. The bottomline declined due to weak operating performance in natural gas transmission, petrochemicals and LPG and other liquid hydrocarbon segments.

What to expect?

Thefalling domestic gas supplies and increase in the input costs due to costlier imported gas remain a key concern for GAIL. In the gas trading segment, GAIL has proposed the Government to increase trading margins. In the transmission segment, the ship or pay contracts will end by March 2014. This may have an adverse impact on the transmission volumes.

Regarding PATA plant, the management has indicated that the company will be using high priced gas as there has been no allocation from APM gas for production from the expanded capacity. Hence, the margins for the segment are likely to get adversely impacted. Further, there is a risk of oversupply in the petchem segment from higher imports.

In the LPG segment, even if the Government caps the subsidy outgo at Rs 14 bn, the benefit to GAIL will be partly offset by increase in the share of high cost LNG.

Going forward, we expect the margins will remain under pressure due to under utilization of the pipeline network and increase in the input gas costs. The management has suggested that there might be some positive developments as far as subsidy burden is concerned.

At the current price, the stock is trading at a trailing 12 months price to earnings ratio of 12.2. We maintain a ‘Hold’ recommendation on the stock.

We would like to reiterate to our subscribers that for the purpose of diversifying risk no stock should form more than 5% of one's portfolio. Please visit our asset allocation page for more details.

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