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GAIL: Natural gas transmission remains strong - Views on News from Equitymaster

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GAIL: Natural gas transmission remains strong

Oct 30, 2009

Performance summary
  • Topline grows by a measly 0.8% YoY during 2QFY10 despite a 43% growth in the natural gas transmission business. Sales from the petrochemicals and LPG & liquid hydrocarbon segments decline.
  • EBITDA margin shrinks 7.2% to 16.7% in 2QFY10 on the back of higher raw material costs.
  • Petrochemicals gross margins decline from 59% in 2QFY09 to 52% this quarter. However, transmission margins increase 5%.
  • Other income records a decline of 21% YoY.
  • Bottomline declines 30% YoY during 2QFY10 due to weaker operating margins and lower other income.

Standalone financial snapshot
(Rs m) 2QFY09 2QFY10 Change 1HFY09 1HFY10 Change
Net sales 61,726 62,243 0.8% 119,108 122,657 3.0%
Expenditure 46,979 51,849 10.4% 90,291 101,408 12.3%
Operating profit (EBDITA) 14,748 10,395 -29.5% 28,817 21,249 -26.3%
EBDITA margin (%) 23.9% 16.7%   24.2% 17.3%  
Other income 1,856 1,468 -20.9% 2,929 2,067 -29.4%
Interest 189 179 -5.6% 379 358 -5.7%
Depreciation 1,386 1,416 2.2% 2,815 2,820 0.2%
Profit before tax 15,029 10,268 -31.7% 28,551 20,138 -29.5%
Tax 4,794 3,135 -34.6% 9,348 6,447 -31.0%
Profit after tax/(loss) 10,235 7,132 -30.3% 19,203 13,691 -28.7%
Net profit margin (%) 16.6% 11.5%   16.1% 11.2%  
No. of shares (m)         1,269  
Diluted earnings per share (Rs)*         18  
Price to earnings ratio (x)*       19  
* On trailing twelve months basis

What has driven performance in 2QFY10?
  • GAIL has recorded a standalone topline growth of 0.8% YoY during 2QFY10 despite a 43% growth in the natural gas transmission business. Sales from the petrochemicals and LPG & liquid hydrocarbon segments decline.
    Revenue break-up
    (Rs m) 2QFY09 % share 2QFY10 % share Change
    Natural Gas Trading 37,890 61.8% 41,810 67.4% 10.3%
    Natural Gas Transmission 5,390 8.8% 7,730 12.5% 43.4%
    Petrochemicals 6,210 10.1% 6,140 9.9% -1.1%
    LPG and Liquid Hydrocarbons 10,650 17.4% 5,150 8.3% -51.6%
    LPG Transmission 900 1.5% 1,030 1.7% 14.4%
    GAILTEL 60 0.1% 30 0.0% -50.0%
    Unallocated 190 0.3% 140 0.2% -26.3%

  • The natural gas transmission volumes grew by 30% YoY in 2QFY10 while the petrochemicals segment witnessed a 17% growth in volumes. While transmission margins increased by 5% during the quarter, petrochemicals margins declined by 7%.

  • During 2QFY10, GAIL shared the under recoveries of the oil marketing companies to the tune of Rs 4.6 bn (Rs 4 bn in 2QFY09).

  • As per the regulations of the Petroleum and Natural Gas Regulatory Board, the natural gas pipeline tariff being charged by the company for its pipeline networks is subject to revision with retrospective effect. Impact on profits, if any, will be recognized when the pipeline tariff is revised in accordance with the regulations. It may be noted that in the last analyst meet, GAILís management was of the view that tariff was unlikely to be revised downwards.

  • During the quarter, GAILís raw material cost increased 7.7% (as % of sales). Other expenditure declined by 0.6% (as a % of sales).

What to expect?
The stock currently trades at Rs 344, implying a multiple of 19 times its trailing 12 months standalone earnings and 11 times our FY11 estimated consolidated earnings.

The subsidy burden is a legacy of the political meddling in the Indian oil and gas sector. Even if transmission tariff is not revised downwards, it is likely to remain sluggish due to the governmentís proposed allocation to non-remunerative users like the fertilisers industry. Additionally, the petrochemical segment is suffering from the effects of a cyclical downturn.

However, 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. Considering the factors for and against the company, we would advise against taking fresh positions in the stock at the current juncture.

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