 "Petrochemical turnaround boosts GAIL show")
GAIL reported stellar June quarter performance, helped by turnaround in petrochemical segment. Natural gas transmission and marketing segments, too, boosted overall numbers. The 244 per cent increase in net profit at Rs 1,335 crore, included gains from stake sale in Mahanagar Gas. Adjusted for this, net profit still increased 118 per cent to Rs 846 crore, ahead of Bloomberg consensus estimate of Rs 795 crore.
The turnaround in petrochemicals, which had been reporting losses for some time now, is a big positive and the benefits will continue to flow from here on. The Street had been expecting a turnaround in March quarter, after re-negotiation of prices for imported gas, used as raw material for petrochemicals. But that did not happen as expanded capacities did not stabilise. The June quarter saw benefits come through; these will continue as utilisation levels increase.
During the June quarter, petrochemical production stood at 127 kilo tonnes (56 per cent utilisation), and the segment's profit before interest and tax (PBIT) came at Rs 8.5 per kilogram or kg. This is significant improvement compared to negative Rs 24 per kg in FY16.
Sachin Mehta at Centrum Broking says capacity utilisation in August had already reached 70 per cent. Since the company is close to finalising the option to convert its plant at Pata Phase-II in Uttar Pradesh. This conversion will be without any capital expenditure and will lead to profit growth from second half of FY17. Analysts at Motilal Oswal Securities say the petrochemical turnaround will continue, helping the company achieve 35 per cent annual profit growth in FY16-18.
Meanwhile, the company's results were also led by gas-trading operating profit, which came in at Rs 422 crore (up 23 per cent over year ) while gas transmission supported overall gains, with operating profit of Rs 533 crore, growing 41 per cent over year. There are gains of Rs 80 crore due to one-time rate revision in gas transmission segment. Jefferies pointed out that six rate orders so far mean Rs 340 crore increase in FY17 PBIT or Rs 1.8 increase in earnings per share for GAIL. Rate revision in larger transmitting lines can lead to more benefits.The turnaround in petrochemicals, which had been reporting losses for some time now, is a big positive and the benefits will continue to flow from here on. The Street had been expecting a turnaround in March quarter, after re-negotiation of prices for imported gas, used as raw material for petrochemicals. But that did not happen as expanded capacities did not stabilise. The June quarter saw benefits come through; these will continue as utilisation levels increase.
During the June quarter, petrochemical production stood at 127 kilo tonnes (56 per cent utilisation), and the segment's profit before interest and tax (PBIT) came at Rs 8.5 per kilogram or kg. This is significant improvement compared to negative Rs 24 per kg in FY16.
Sachin Mehta at Centrum Broking says capacity utilisation in August had already reached 70 per cent. Since the company is close to finalising the option to convert its plant at Pata Phase-II in Uttar Pradesh. This conversion will be without any capital expenditure and will lead to profit growth from second half of FY17. Analysts at Motilal Oswal Securities say the petrochemical turnaround will continue, helping the company achieve 35 per cent annual profit growth in FY16-18.
Following the June quarter show, most analysts remain positive and are upgrading their target prices. Analysts at Emkay Global say that given the business performance, valuation multiple for its core business earnings (profit) could re-rate to 14-15 times. Emkay has a target price of Rs 443, Centrum has pegged it at Rs 450. Consensus target price, according to Bloomberg, is at Rs 423. The stock is currently trading at Rs 389.