GAIL’s stock has been under pressure for some time on concerns of subdued growth in transmission volumes, consequent to the falling gas output at the KG-D6 basin of Reliance Industries Ltd (RIL). The uncertainty on upstream subsidy sharing has added to its woes. What’s new is that many analysts believe the outlook for FY13 is also muted.
For one, RIL has already indicated further reduction of about 15 per cent gas output to 27-28 mscmd (million standard cubic metres a day) in FY13, which will impact GAIL’s transmission volumes. While some boost may come from the commissioning of LNG terminals, the overall transmission volumes target of 121.55 mscmd and gas marketing volume target of 87.57 mscmd for FY13, as announced by GAIL on March 27, are unimpressive, indicating near flat volume growth in 2012-13. Positively, margins in the petrochemicals business (about 20 per cent of overall revenues) are expected to be better in FY13, and provide cushion to overall profitability with volume gains coming in FY14.
Meanwhile, the GAIL stock, which hit a 52-week low of Rs 346.1 in the first week of March 2012, is expected to underperform over the next one to two quarters, with any meaningful gains likely only towards the end of 2012.
| LOWER PROFIT GROWTH | |||
| in Rs crore | FY2011 | FY2012E | FY2013E |
| Net sales | 35,106.7 | 39,906.3 | 44,402.8 |
| % chg y-o-y | 29.9 | 13.7 | 11.2 |
| Ebitda | 6,507.4 | 6,926.2 | 7,671.3 |
| Ebitda(%) | 18.5 | 17.4 | 17.3 |
| Net profit | 4,021.0 | 4,088.0 | 4,330.2 |
| % chg y-o-y | 20.8 | 1.7 | 5.9 |
| EPS (Rs) | 31.7 | 32.3 | 34.1 |
| PE (x) | 11.6 | 11.4 | 10.8 |
| E:Estimates, Source- Capitaline, Bloomberg, Analyst Reports | |||
Transmission volumes
During the first nine months of FY12, GAIL has reported almost flat transmission volumes (118.4 mscmd compared to 117.3 mscmd in 9M FY11). While FY12 is likely to end with marginally higher volumes, compared to FY11 levels, most analysts feel transmission volumes in FY13 will remain flat or marginally lower. GAIL’s transmission target of 121.55 mscmd also indicate the same.
GAIL’s transmission volumes received a setback as gas production at the KG-D6 basin has declined from the 53 mscmd levels of FY11. Even as one expected production to stabilise at about 35 mscmd in January 2012, estimates indicate production is likely to decline further to 28 mscmd in FY13 and to 22 mscmd in FY14.
For GAIL, some respite may come from the increase in LNG transmission volumes with the Dabhol LNG terminal getting commissioned in April 2012. However, the terminal is likely to run at 30-40 per cent levels in FY13 before moving to full capacity in FY14, say analysts. In a report dated March 22, Vidyadhar Ginde and Akash Gupta, analysts at Bank of America Merrill Lynch, said LNG imports would not be able to make up for the fall in KG-D6 output, and so, GAIL’s gas volumes may remain flat even in FY13. Analysts at IIFL, too, estimate GAIL’s gas transmission volumes for FY13 (119.9 mscmd) to be lower than in FY12 (122.5 mmscmd)
| TWIN WORRIES- GAS SUPPLY AND SUBSIDY | |||
| in Rs crore | 9M FY12 | 9M FY11 | YoY chg (%) |
| Reported net profit | 31.7 | 27.8 | 14 |
| Under provision of subsidy | 3.4 |
- | |
| Net profit factoring in actual subsidy | 29.4 | 27.8 | 6 |
| Assumptions | |||
| Gas transmission volumes (mscmd) | 118.4 | 117.3 | 1 |
| Subsidy accounted by GAIL (Rs bn) | 17.8 | 12.1 | 48 |
| GAIL's actual subsidy (Rs bn) | 21.2 | 12.1 | 75 |
| Source: GAIL, BofA Merrill Lynch Global Research | |||
While the transmission business accounts for a little over half of total gas volumes, the marketing business accounts for about 40 per cent. Arindam Pal, analyst at Asian Market Securities, adds that GAIL’s gas marketing targets of 87.57 mscmd for FY13 does not indicate any improvement. Some benefit on profitability can be seen due to the new LNG contract being signed by GAIL with Cheniere Energy, which is likely to be at a discount to the current contracts, observe analysts at Enam.
Infrastructure utilisation
The concerns over gas volumes come at a time when GAIL has undertaken massive pipeline infrastructure ramp-ups. Analysts at IIFL expect over 3,000 km and 63 mscmd of pipeline capacity to be commissioned in the next 12 months. They add that Bawana-Nangal pipeline (31 mscmd) is close to completion and is scheduled for commissioning in March 2012. Work on the Dabhol-Bangalore (16 mscmd) and Kochi-Mangalore (16 mscmd) pipelines is progressing on schedule and the two projects will be commissioned in two phases (in August 2012 and March 2013, respectively).
While addition in transmission capacity is positive from the long-term perspective, looking at the requirement of natural gas in the country the drop in Reliance’s gas output and delay in additional gas production by other producers like ONGC do not augur well. Thus, analysts believe GAIL’s transmission capacities may remain underutilised during FY13.
Petrochemicals hold promise
The petrochemicals business is where some analysts still remain positive on profitability. This is in the backdrop of gas crack margins getting a boost as the polyethylene (end-product) prices are likely to remain firm. Analysts at Enam feel high margins along with doubling of petchem capacity would provide long-term earnings growth. However, the capacity expansions are likely to go onstream only in FY14.
Outlook
For Q4' FY12, with volumes subdued and GAIL having to provide for subsidies (it had under-provided subsidies by Rs 330 crore say analysts), its performance is expected to be impacted. Going ahead, too, analysts estimate GAIL to report muted growth in FY13. In fact, with uncertainties on subsidy sharing likely to continue, it will act as an overhang for the stock.
However, the boost in transmission volumes will come in FY14, as Dabhol and Kochi LNG terminals reach optimum utilisation levels pushing volumes for GAIL. The petrochemical volumes will also increase with capacity expansions bearing fruits in FY14.
Though most of the negatives seem priced in, the stock, which has fallen by nearly 32 per cent from its high of Rs 535.85 in January 2011 as against 15.5 per cent by the Sensex, is likely to underperform in the near-term in the absence of any positive triggers. At best, it could track broader markets. However, from the perspective of one to two years, given FY14 would be a better year for GAIL, investors could accumulate on declines.
