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GAIL: Subsidy exemption boosts profits
Nov 6, 2014

GAIL (India) Ltd has announced results for the quarter ended September 2014. The company has reported flattish 0.9% year on year (YoY) growth in the sales and 42.3% YoY growth in the bottomline. Here is a brief summary of the results.

Performance summary
  • The company registered a flattish growth of 0.9% YoY growth in the topline during the quarter.
  • The operating profits for the quarter grew 38.2% YoY with operating profit margins at 14.3%, as compared to 10.5% in the corresponding quarter last year.
  • The net income for the quarter registered 42.3% YoY growth, with margins at 9.2%, as compared to 6.5% in 2QFY14.
  • The company has been exempted from providing LPG subsidy this quarter.
  • The company has recently announced signing of a Memorandum of Understanding (MoU) with State Oil Company of Republic of Azerbaijan (SOCAR) with a purpose to jointly pursue LNG opportunities.

(Rs m) 2QFY14 2QFY15 YoY ch.(%) 1HFY14 1HFY15 YoY ch.(%)
Sales 140,025 141,297 0.9% 269,023 275,020 2.2%
Expenditure 125,391 121,075 -3.4% 239,305 244,349 2.1%
Operating profit (EBDITA) 14,634 20,222 38.2% 29,717 30,671 3.2%
EBDITA margin (%) 10.5% 14.3%   11.0% 11.2%  
Other income 2,219 2,888 30.1% 2,796 4,612 65.0%
Interest (net) 1082 916 -15.3% 1694 1848 9.1%
Depreciation 2,888 2,368 -18.0% 5,697 4,704 -17.4%
Profit before tax 12,883 19,827 53.9% 25,123 28,731 14.4%
Pretax margin (%) 9.2% 14.0%   9.3% 10.4%  
Tax 3,726 6,798 82.4% 7,885 9,488 20.3%
Effective tax rate (%) 28.9% 34.3%   31.4% 33.0%  
Profit after tax/(loss) 9,157 13,029 42.3% 17,238 19,243 11.6%
Net profit margin 6.5% 9.2%   6.4% 7.0%  
No. of shares (m)         1,268  
Diluted earnings per share (Rs)*         36.1  
Price to earnings ratio (x)*         13.8  
*On a trailing twelve months basis

What has driven performance during the quarter?
  • The net sales for the quarter registered a flattish growth of 0.9% YoY.. The decline in the revenues from natural gas marketing (down 4.5%) and transmission (down 28.1% YoY) was compensated by increase in the revenues from Petchem (up 13%), LPG and OLHC (up 64% YoY) and LPG transmission segment (up 3 % YoY). One time write offs related to retrospective revisions of natural gas tariffs impacted the revenues for the transmission segment.

  • The natural gas sales volumes declined by 12.3% YoY while transmission volumes were down 4.3% YoY due to decline in gas production from domestic fields. The LPG transmission volumes also declined by 3.8% YoY during the quarter. The volume sales for LPG/OLHC segment declined by 4.4% YoY while Petrochemical segment sales volumes grew marginally during the quarter.

  • The operating margins for the quarter came at 14.3%, up from 10.5% in the corresponding period last year due to nil subsidy burden in the LPG and OLHC segment. Segmentwise, Petrochemicals segment margins suffered due to increase in the cost of gas with high share of costlier RLNG. One time write offs related to retrospective revisions of natural gas tariffs impacted the transmission segment performance.

    Segmental summary
    (Rs m) 2QFY14 2QFY15 YoY ch.(%) 1HFY14 1HFY15 YoY ch.(%)
    Natural gas transmission
    Revenues 10,668 7,669 -28.1% 20,662 14,272 -30.9%
    EBIT 5,762 2,620 -54.5% 11,300 4,854 -57.0%
    EBITmargins (%) 54.0% 34.2%   54.7% 34.0%  
    LPG transmission
    Revenues 955 978 2.4% 1,894 2,092 10.5%
    EBIT 426 477 11.9% 976 1,167 19.5%
    EBIT  margins (%) 44.6% 48.7%   51.5% 55.8%  
    Natural gas marketing
    Revenues 123,785 118,188 -4.5% 234,370   234,879 0.2%
    EBIT 4,870 4,518 -7.2% 7,895 4,163 -47.3%
    EBITmargins (%) 3.9% 3.8%   3.4% 1.8%  
    Petrochemicals
    Revenues 11,336 12,814 13.0% 22,370   22,741 1.7%
    EBIT 3,909 1,552 -60.3% 8,291 2,801 -66.2%
    EBITmargins (%) 34.5% 12.1%   37.1% 12.3%  
    LPG and other OLHC
    Revenues 10,388 17,037 64.0% 20,425   29,638 45.1%
    EBIT (2,279) 9,011 nm (2,389)   13,966 nm
    EBIT  margins (%) -21.9% 52.9%   -11.7% 47.1%  
    Other
    Revenues 755 2,000 164.9% 1,331 3,625 172.4%
    EBIT 17 989 5749.7% (238) 1,602 nm
    EBIT margins (%) 2.2% 49.4%   -17.9% 44.2%  

  • The net profit for the quarter grew 42% YoY with margins at 9.2% (versus 6.5% in 2QFY14). This was mainly on account of exemption from LPG subsidy during the quarter. Lower depreciation and interest expenses and higher other income also supported the growth in the bottomline.
What to expect?

The hike in the domestic gas prices is likely to adversely impact the performance of Petchem division (natural gas being one of the key inputs for the same) along with the decline in the crude prices. While the subsidy burden for GAIL was nil this quarter, subsidy issue needs more clarity. Falling transmission volumes are further a matter of concern for the company. While the gas price reform is positive for the company in the long term, in the near term the volume concerns remain. At the current price, the stock is trading at trailing 12 months price to earnings ratio of 13.8 times and is up 12% since our Buy recommendation in August 2014. We maintain a ‘Hold’ view on the stock.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also, within your overall exposure to equities, please ensure that you broadly follow our suggestions and that no single large cap stock comprises more than 5% of your portfolio

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