Gail: Losing steam

Lower petrochemical sales affects the firm's performance in the December 2007 quarter.

Gail's performance in the December 2007 quarter was lacklustre due to lower petrochemical sales following a plant shutdown.

However, improved y-o-y profit in the LPG and liquid hydrocarbon division and a tight check on operating costs, helped the company offset the high subsidy burden.

Going by the subsidy sharing formula, the subsidy burden was Rs 367.5 crore in the last quarter compared with Rs 315 crore a year earlier.

Nevertheless, the company's operating profit grew 0.9 per cent y-o-y to Rs 872.3 crore in the last quarter, while net sales fell 1.8 per cent to Rs 4298.3 crore. Its operating profit margin improved 60 basis points y-o-y to 20.3 per cent in Q3 FY08.

In the September 2007 quarter too, the company's operating profit margin had improved by 350 basis points y-o-y to 19.4 per cent.

Meanwhile, the company's volumes in the natural gas transmission division were 85.33 mmscmd (million standard cubic feet per day of gas) in the December 2007 quarter, a y-o-y rise of 6.2 per cent.

However, volume-related tariff adjustments resulted in the segment profit of this division declining 8.8 per cent y-o-y to Rs 414.1 crore.

Production in the petrochemicals division stood at 77,000 tonne in Q3 FY08 compared with 94,000 tonne in the previous year. Lower product margins in this division resulted in the segment profit declining 17.7 per cent y-o-y to Rs 228.8 crore in the last quarter.

However, the production in the LPG and liquid hydrocarbon division was 3,70,000 tonne in the December 2007 quarter compared with 3,49,000 tonne a year earlier.

The segment profit of this division went up 38.4 per cent y-o-y to Rs 125.2 crore in the last quarter. Going forward, there is uncertainty with regard to Gail's subsidy sharing burden. At Rs 425.1, the stock trades at 13 times estimated FY09 earnings.

Arvind Mills: Weak strands

Arvind Mills reported disappointing results for the December 2007 quarter, with the operating profit margin declining by 430 basis points to 11.5 per cent.

The revenue front was an exception as it jumped 20 per cent y-o-y to Rs 537 crore, led by the strong growth in branded garments and retailing businesses.

The denim business continued to face pressure as US and European orders declined, coupled with the rupee appreciation.

Denim volumes declined by more than 20 per cent y-o-y to 16.22 million metres and prices went up just 2 per cent at Rs 95 a metre. On the other hand, branded garments and retail revenues jumped more than 40 per cent to Rs 137 crore.

The operating profit declined by about 13 per cent to Rs 62 crore due to a 26 per cent rise in costs-total raw material prices went up from 23.2 per cent of sales in Q3 FY07 to 28 per cent in December 2007.

With the cotton prices growing by 20 per cent, other expenses were up 29 per cent and power costs increased 8 per cent. Net profit before extraordinary items grew 54 per cent due to a substantial decline in provision for taxes, stable depreciation costs and 20.5 per cent decline in interest cost.

The company's financial performance in FY08 is unlikely to be encouraging. However, things are likely to improve due to expectations of softer cotton prices, improved denim and power scenario, and doubling of revenues from the branded garments and branded retail business.

Moreover, the company's retail expansion plans are on course with 288 outlets, including the small format Megamart (77).

At Rs 54, the stock trades at 13.5 times and 11 times estimated FY09 and FY10 earnings and may not be expensive despite the weak results, given the company's strong brands and focus on the fast growing branded garments and retailing business.

With contributions from Amriteshwar Mathur and Priya Kansara