Silver lining for GAIL

While June quarter was marred by one-offs, Street is positive due to expanded petchem capacities

GAIL saw a decline in June quarter’s profits but this was largely due to one-offs, a part of which is reversible in the current quarter. Beyond that, analysts remain positive on the company’s prospects, as they believe transmission volumes have bottomed out. The expanded petrochemicals capacities are also likely to drive earnings in a few quarters, as also the expected rate recalculations. The company has also bid for piped gas supplies to 13 cities, which will expand its current reach. Not surprisingly, the stock, after sliding to closing lows of Rs 390.15 post results, has recovered to Rs 432.

The company had to provide Rs 242 crore in the quarter due to downward revision of rates by Petroleum and Natural Gas Regulatory Board (PNGRB) on four pipeline routes. But, the June quarter’s share was only Rs 15 crore, estimate analysts at Elara Capital.

  In the gas transmission business, which accounts for about a third of profits, volumes were steady at 97 mmscmd compared to 99 mmscmd in the year-ago quarter and 95 mscmd in the March 2014 quarter. While transmission volumes declined from 118 mscmd in FY11 to 96 mscmd in FY14, analysts expect it to have bottomed out and increase gradually from FY15 onwards to 120 mscmd by FY17.

The underrecoveries on selling imported liquefied natural gas (LNG) at administered prices dented the company’s gas trading segment. A Rs 190-crore hit was taken by GAIL in the June quarter but will be recovered in the current quarter. The trading volumes at 77 mscmd, however, were in line with analysts’ estimates.

The planned shutdown of seven days in April and around two-week outage in May-June also led to lower production and sales in the petchem division. While realisations in the segment increased to Rs 114 a kg from Rs 110 a kg in previous quarters, gas costs rose sharply, hurting petchem’s profitability. Nitin Tiwari at Religare Institutional Equities expects petchem sales to revive from the second quarter onwards. Further, the benefits of doubling of capacities to 0.8 mtpa at its Pata facility in Uttar Pradesh will boost earnings from the second half of FY15. At the net level, a change in accounting method led to depreciation charges falling nearly Rs 70 crore, providing cushion to the bottom line.

Uncertainty on price rise for gas sold under administered prices, declined gas production in the country and slow ramp-up of LNG volumes exist, analysts feel the government will address these issues looking at the country’s rising energy requirements. With overall subsidy on oil and gas majors reducing, GAIL will also benefit—it provided Rs 500 crore towards LPG subsidy in the June quarter versus Rs 700 crore last year.  Some analysts expect GAIL to be fully exempted from subsidy sharing.

Analysts at Ambit Capital feel GAIL’s valuation ignores an improvement in the fundamentals of its transmission business and the likely end of the subsidy overhang.