GAIL: Good going

The firm has sold higher volumes and earned more for it, but may need to fork out more subsidies to oil companies.

 The Rs 18,837 crore GAIL's net profits rose 6 per cent to Rs 720 crore in the March 2008 quarter.That has surprised the street which had not expected very good volumes or margins for natural gas or the LPG transmission businesses.

However, better realisations for natural gas""up 17 per cent---and a turnaround in the LPG and liquid hydrocarbons division, driven partly by higher crude prices, helped the company post reasonably good numbers.

Besides, analysts had pencilled in a higher subsidy burden that GAIL shoulders for oil marketing companies, who are retailing finished products such as petrol at prices below costs to consumers.

The company, which buys and distributes gas, has provided a subsidy that is 23 per cent lower than the amount provided in the March 2007 quarter. For FY08, the provision for subsidy is lower by about 12 per cent compared with FY07. This amount could, however, change at a later date.

As a result, GAIL's operating profit margin expanded 800 basis points to 23.5 per cent for the March quarter, driving an impressive 93 per cent growth in the operating profit, while net sales rose 27 per cent.

In the first three quarters of FY 08, GAIL's performance had been largely lacklustre with net sales growth varying between a negative 1.8 per cent and 22.2 per cent, partly on account of plant shutdowns.

GAIL's partnership with Reliance Industries for transporting the latter's gas from its oilfields, will allow it to better utilise its networks over the next 18-24 months as will higher volumes from Petronet LNG's Dahej plant.

However, the stock fell 3.3 per cent on Wednesday because the exact amount of subsidy that it will need to provide is not known. At Rs 395, the stock trades at a reasonable 12.2 estimated FY09 earnings.

Titan: Still sparkling

 Titan's jewellery revenues in the March 2008 quarter may have grown 56 per cent but a part of this was due to the sharp rise in gold prices of about 30 per cent. Volumes for the high-end Tanishq brand are estimated to have increased by about 22-25 per cent which is reasonably good and reflects the strength of the brand.

The company has managed to sell more of the high-margin studded jewellery as also the designer jewellery. However, the earnings before interest and tax (ebit) margin for the jewellery segment fell 20 basis points to 5.1 per cent and since this accounts for about two-thirds of the company's revenues, the operating margin for the company as a whole was lower by 140 basis points at 10.2 per cent.

The Gold Plus brand ""which is sold in smaller towns--didn't fare too well with demand falling in the wake of higher gold prices.

The watches business posted strong margins during the quarter of 21.6 per cent and the company's new launches in the mid-premium price points appear to have been well received. The 12 per cent increase in revenues however could have been partly driven by dealers hoarding stocks because Titan had announced a price increase from April.

The Rs 3,041 crore Titan has fairly done well in a difficult environment though high and volatile gold prices threaten to slow down the growth momentum in the near term. Over the longer term, however, the company's strong brand, product range and retail ramp-up should help it post strong growth.

Besides, the diversification into eyewear and precision engineering too should fetch to better margins. Titan is expected to close FY09 with revenues of close to Rs 400 crore and a net profit of around Rs 190 crore.

At the current price of Rs 1296, the stock trades at 29 times FY09 estimated earnings and 21.5 times FY10 earnings and is expensive. However, the stock is a good play on rising disposable incomes and growing aspirations of a younger population.