Gail India: Slippery turf

Tax write-backs save the company the blushes.

It was yet another disappointing quarter for Gail (India) in the March 2007 quarter, as the company grappled with rising subsidy burden and lower revenues and profitability in gas transmission services.

If it weren't for a tax write-back of Rs 340 crore, its net profit growth would have been much lower than the reported 66 per cent y-o-y in Q4.

For the quarter, its top line grew 6.1 per cent y-o-y in Q4 FY07, but operating profit fell 14.5 per cent. The operating margin was down 370 basis points y-o-y to 15.5 per cent. The subsidy burden was Rs 502 crore during the quarter. In Q4 FY06, Gail had a subsidy burden of Rs 538 crore.

Though its gas transmission volumes were at about the same levels as in the previous year, revenues dipped nearly 16 per cent . Margins before interest and tax in transmission services declined 1,100 basis points y-o-y in Q4.

However, stronger polymer prices resulted in better profitability in the petrochemical segment. For the full year too, operating margin was down 550 basis points to 18.7 per cent, as a higher subsidy sharing burden and the floods in Gujarat impacted profitability.

Average daily gas transmission volumes increased by 2 per cent y-o-y in FY07, while LPG transmission volumes declined 10 per cent. Analysts expect transmission tariffs to improve in Q1 FY08 over Q4 FY07, which should help profitability to an extent.

Its Dahej-Panvel-Dabhol pipeline will be commissioned this quarter, which should improve transmission volumes somewhat.

The stock trades at 10-11 times estimated FY08 earnings, but with the uncertainty about the subsidy sharing burden and the lack of enough immediate triggers suggest that the stock is likely to move in a narrow range.

KEC: Power-packed

Higher demand for power infrastructure both in India and abroad has resulted in better performance for transmission tower player KEC International.

As a result, the company's operating profit grew 46.7 per cent y-o-y to Rs 70.65 crore in Q4 FY07, as compared to 34 per cent growth in net sales to Rs 640.9 crore. Its operating profit margin also improved 90 basis points y-o-y to 11 per cent. The stock has outperformed the broader market over the past three months.

Analysts point out that KEC's margin expansion in the last quarter has been helped by a significant proportion of its old (low margin) orders that have been executed and the company's focus on new higher margin orders.

KEC derives nearly 70 per cent of its turnover from overseas markets, with the African continent occupying a significant portion and that's thanks to the expansion in the electricity network there.

The company's order book at the end of Q4 FY07 was Rs 3,000 crore, a growth of 20 per cent y-o-y. In FY07 too, KEC's operating margin grew 260 basis points y-o-y to 12 per cent. Going forward, with no signs of weakness in the global power capex cycle, the KEC stock trades at a reasonable 12.5 times estimated FY08 earnings.

Asian Paints: Positive hues

Asian Paints reported an improved performance in the March 2007 quarter, thanks to the traditional strong demand for its products in the peak construction season.

As a result, the company's consolidated operating profit grew 28 per cent y-o-y to Rs 117 crore in the last quarter, as compared to 25 per cent growth in net sales to Rs 958.9 crore.

Its operating profit margin also improved 20 basis points y-o-y to 12.2 per cent in Q4 FY07. The stock rose 0.8 per cent to Rs 782.35 on Thursday, as the results were better than analysts' expectations.

The company's adjusted raw material costs as a percentage of net sales went up 180 basis points y-o-y to 60.8 per cent in the last quarter.

However, analysts highlight that prices hikes taken by the company during FY07, helped it offset higher input costs, mainly of titanium dioxide and crude-based materials in Q4 FY07.

Meanwhile, in its paints division, segment revenues grew 22.2 per cent y-o-y to Rs 3611 crore in FY07, which helped its operating margin rise 10 basis points y-o-y to 13 per cent in the previous year.

Going forward, the company's raw material costs are expected to come down, as prices of key inputs have shown signs of moderating. However, with the stock trading at 25 times estimated FY08 earnings, the company's growth appears to be factored in.