Gas Authority of India (GAIL) posted lower-than-expected results for the March quarter thanks to a higher subsidy burden as well as several one-off items. Analysts have pruned their earnings estimates for FY12 and FY13 by 11-19 per cent and 21 per cent, respectively, to account for a higher upstream subsidy share of 38 per cent (versus 33 per cent earlier) and lower-than-anticipated gas volumes coming in from KG Basin.
Analysts are factoring in a 39 per cent share of upstream companies in the total under-recoveries in FY12 and 33.33 per cent share in each of the next two financial years. Assuming no retail price rises, GAIL is expected to share 5.5 per cent (Rs 2,800 crore) of the upstream subsidy burden in FY12, which could rise to 6.5/7 per cent in FY13/14. This increase will be driven by falling share of diesel in total under-recoveries due to diesel price rises and lower crude oil prices.
Amongst its business segments, the petrochemicals business could witness significant re-rating over 4-5 years post completion of the Pata gas cracker, Madhya Pradesh to 0.8 million tonnes per annum (mtpa). Analysts believe this segment’s operating margins should be above 50 per cent in the next 2-3 years and value it at Rs 131 a share. While higher subsidy burden will be a drag in its LPG business, lower volume ramp up in KG Basin will impact the gas transmission volumes.
GAIL’s current valuations of 13.2 times FY12 earnings appear to be attractive. However, concerns such as uncertainty on subsidy sharing, lower ramp up in KG gas will continue to be a drag on the stock. Further, any delays in its pipeline expansion projects as well as further downward tariff revisions will hit near-term profitability. Most analysts are bullish on the stock and see upsides of 25-30 per cent from current levels.
HIT BY ONE-OFFS
GAIL’s March quarter net profit at Rs 783 crore, down 14 per cent year-on-year (y-o-y), was marred by one-off items. First, the company made a provision of Rs 120 crore towards downward revision in transmission tariffs from Dahej-Uran and Dahej-Vijaipur pipelines. Further, employee costs shot up 154 per cent over last year to Rs 270 crore due to revision in salary of non-executive employees and provision of retirement benefits. Higher subsidy burden at Rs 902 crore (up 167 per cent y-o-y and 116 per cent q-o-q) added to the pressure. GAIL’s FY11 subsidy burden was Rs 2,111 crore (up 59 per cent y-o-y). However, GAIL shared just 7 per cent of FY11 subsidy burden of upstream companies as against 9.2 per cent in FY10.
Robust performance by the petrochemical segment helped offset the impact of these one-time items. Strong volume growth of 78 per cent q-o-q to 1,44,000 tonnes, due to higher demand coupled with a 1.6 per cent sequential uptick in realisations boosted this segment’s EBIT to Rs 440 crore, up 124 per cent q-o-q.
While gas transmission volumes at 120.4 million metric standard cubic meters per day were flat sequentially, a y-o-y growth of 5 per cent indicate higher LNG imports and commencement of C-series gas production by ONGC. While sequential EBIT was down 19.5 per cent q-o-q to Rs 534 crore (hit by tariff revision in the two Dahej pipelines), it grew 5.6 per cent over last year due to higher volumes. LPG and other liquid sales segment posted volume growth of 2.4 per cent q-o-q at 339,000 tonnes but saw a dip of 4.8 per cent on y-o-y basis. The segment’s EBIT was at Rs 73 crore due to higher subsidy burden. Its Ebitda margin contracted by 588 basis points y-o-y to 14.3 per cent owing to higher employee costs.
