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GAIL: Strength in adversity - Views on News from Equitymaster
 
 
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  • Nov 2, 2001

    GAIL: Strength in adversity

    Reflecting the downturn in industry, Gas Authority of India Ltd. (GAIL) has reported a much subdued sales growth for 2QFY02. In the same quarter of the previous fiscal the company accrued benefits arising from commissioning of the polymer plant in FY00. In the current fiscal the company is operating on a like to like basis resulting in lower growth.

    (Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
    Net Sales 25,824 26,333 2.0% 49,816 52,082 4.6%
    Other Income 270 370 36.9% 580 680 17.3%
    Expenditure 20,287 20,535 1.2% 39,444 40,100 1.7%
    Operating Profit (EBDIT) 5,537 5,798 4.7% 10,372 11,983 15.5%
    Operating Profit Margin (%) 21.4% 22.0%   20.8% 23.0%  
    Interest 454 613 35.1% 896 1,186 32.3%
    Depreciation 1,448 1,502 3.7% 2,626 2,996 14.1%
    Profit before Tax 3,906 4,053 3.8% 7,430 8,481 14.1%
    Tax 2,078 1,795 -13.6% 2,808 3,045 8.4%
    Profit after Tax/(Loss) 1,828 2,259 23.5% 4,622 5,436 17.6%
    Net profit margin (%) 7.1% 8.6%   9.3% 10.4%  
    No. of Shares (eoy) 846 846   846 846  
    Diluted Earnings per share* 8.6 10.7   10.9 12.9  
    P/E Ratio   5.7     4.7  
    *(annualised)            

    With demand for gas far in excess of supply, the company does not face much of demand risk rather it faces supply risk. With a slowdown in business the demand for gas is likely to have declined but not to the extent of altering the demand supply balance. Consequently, gas transportation -- the core business of GAIL -- to that extent is relatively safe vis-a-vis fluctuations in the economy. That said, the company has moved into the polymer business, which reported a marked weakness in product prices.

    Speaking of supply risk, as per reports, the company is witnessing a drying up of its Gandhar gas fields. Supply to large consumers have reportedly been reduced. The company itself has a gas processing plant at Gandhar for extracting LPG. Although, GAIL will favour supply to its plant, in the medium term constraints in availability will arise. The company believes liquified natural gas (LNG) imports are likely to help mitigate the risk in the long term.

    During the first half of the current fiscal key polymer product prices have dropped by 6% - 16% YoY. This has put realisations from the business under pressure. Corrobrating this view are results from competing players. Demand, however, continues to be healthy having grown by an estimated 15% YoY over the concerned period. But new capacity (Haldia Petrochemicals Ltd.) has been commissioned, which has eaten into the pie. Despite economic weakness, the company has shown strength in operations with an improvement in operating margins. OPM for 1HFY02 increased by 120 basis points.

    The company has capitalised Rs 948.8 m on account of exchange rate variations arising due to the repayment of foreign exchange debt raised for the GREP project. The statutory auditor has opined that this amount should be passed through the income statement. The matter is being referred to the Expert Advisory Committee of ICAI. Adjusting for this amount in 1HFY02, pre-tax profits show a growth of only 1.4%. At the end of FY01, GAIL had capitalised similar expenses amounting to Rs 742.6 m.

    The company has provided for deferred tax and last year's tax provision has been restated to reflect deferred tax liability. Aggregate deferred tax upto March '01 will be provided at the end of the current fiscal. At Rs 61 the scrip is trading on a multiple of 4.7x 1HFY02 annualised earnings.

     

     

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