GAIL Q3 results: LPG, gas transmission segments witness strong traction

GAIL’s December 2017 quarter operating performance may have disappointed, but strong revenue growth and net profits being marginally lower than expectations, coupled with good prospects, offer some comfort.

Led by strong volume growth across segments, net sales grew 19 per cent year-on-year (y-o-y) to Rs 144.14 billion, and were ahead of Bloomberg’s consensus estimates of Rs 137.5 billion. 

Most segments, including gas transmission, marketing, LPG, and hydrocarbons, registered robust volume growth. The gas marketing segment, which contributes about 70 per cent to GAIL’s revenue, grew 18 per cent, and drove its overall performance.

Operating profit grew 15.8 per cent y-o-y to Rs 19.6 billion, but was lower than analysts’ estimates of Rs 21.43 billion. This was mainly due to softness in petrochemical margins led by lower realisations. Petchem sales volumes grew 21 per cent y-o-y, but realisations at $1,265 a tonne were down 11 per cent y-o-y.

Petchem realisations for GAIL have been soft, as global prices could not keep pace with the oil rally. Besides, there was pressure from new domestic capacities of Oil and Natural Gas Corporation and Reliance Industries, said analysts. Thus, the operating profit of the petchem business declined 33 per cent y-o-y to Rs 940 million; though a 5 per cent sequential increase is encouraging.

Most other businesses witnessed margin improvement, led by strong realisation. Growth in LPG and other hydrocarbon segments (where the operating profit surged 75 per cent y-o-y to Rs 6.8 billion) was well supported by gas marketing business (up 12 per cent y-o-y), among others.

This helped GAIL report a net profit of Rs 12.62 billion, an increase of 28.4 per cent y-o-y, but marginally lower than the Rs 12.93 billion estimated.

Despite the miss, analysts remain bullish, given GAIL’s firm prospects, led by the natural gas transmission segment, which is benefiting from robust gas domestic demand and realisation.

The LPG and other hydrocarbon segments’ operating performance is also expected to remain healthy, supported by firm oil prices. GAIL’s LPG prices have improved from Rs 28 per kg in the September quarter to around Rs 40 per kg now. Even after accounting for a modest increase in gas cost from October (from $2.5 per million British Thermal Units, or mmBtu, to $2.9 mmBtu), the segment’s profitability should remain robust.

The other trigger for GAIL is the unified tariff. The company has requested for a unified tariff of about Rs 57 per mmBtu to improve its lower capacity utilisation, enhance return on equity, and to ensure lower tariffs for new pipelines like the  Jagdishpur-Haldia-Bokaro-Dhamra pipeline. 

Analysts estimate that such a move could increase GAIL’s operating profit by Rs 21.5 billion, or an upside of 25 per cent to its FY19 earnings per share.

The earlier concerns on commencement of higher-priced US contracts are also being addressed. GAIL has contracted a significant part of its volume for 2018 and that provides comfort, according to analysts. But, since supplies are for a longer period, the Street is awaiting renegotiation of the US contract or long-term supply contracts with customers.