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Key highlights
Revenues came in at Rs81bn, up 31% yoy and above our estimate of Rs79bn.
Subsidy share was Rs3.5bn, higher than our estimate of Rs3.2bn. Additionally, the share of GAIL of the upstream
portion of Rs36bn at 9.5% was also higher than our estimate of 9%.
As a result, EBITDA of Rs14.6bn was lower than our estimate of Rs15bn. But this still represents a healthy 40% growth
yoy, reflecting higher volumes, resilient tariffs and the effect of allowing GAIL to charge marketing margins on APM
gas.
Transmission volumes for the quarter were at 115.5 mmscmd, higher by 21% yoy and marginally higher than our
estimate of 115 mmscmd. Trading volumes were flat though at 79 mmscmd against 80 mmscmd in Q2FY10.
The Petchem business remains under pressure on volumes, with total production at 93 tmt against Q2FY10 output of
102 tmt. Total Polymer sales, however, rose a healthy 22% to reach 107 tmt against 88 tmt in Q2FY10.
The LPG transmission business also showed strong growth, with 799 tmt transported for the quarter against 728 tmt
in Q2FY10.
Overall, PAT of Rs9.24bn represents a 30% growth yoy, against our estimates of Rs9.15bn. The increase is largely led
by higher transmission volumes and higher polymer sales.
Transmission volume growth on track
We have been bullish on the company’s growth prospects in its core business of transmission and trading, primarily
based on the significant addition to domestic gas availability via KG D6 volumes. We are seeing that story play out
gradually, reflecting in the 21% yoy growth in transmission volumes for the quarter. We believe there is sufficient steam
left in the segment to warrant further upside over the longer term, underpinning our estimates of transmission volumes
of 135 mmscmd by the end of FY12E.
Similar trends seen in trading volumes
With the significant spurt seen in transmission volumes, trading volumes have grown in tandem as well and we do not
see this trend changing over the near term with consistent yoy growth. However, sequentially, we see limited potential
for growth as domestic volumes remain flat.
Other businesses strong as well
The LPG transmission business showed good growth, while Petchem volumes were flat for the year with GAIL operating
at close to 100% capacity utilization. The LPG and Hydrocarbons business, however, showed an 11% yoy decline,
reflecting the trend in the past three quarters.
Significant Capex plans on the anvil
To fund its ambitious expansion plans, GAIL invested close to Rs57bn in FY10 and is expected to spend a further Rs120bn
over the next two years. The expansion is not just restricted to gas pipelines, as GAIL is also looking to complete the
expansion of its Petchem capacity to 460 tmt from the current 420 tmt. This is expected to further provide support to the
company’s Petchem business.
Subsidy overhang remains
Total subsidy burden of Rs3.5bn was higher than our estimate of Rs3.2bn, highlighting the underlying uncertainty of
under recovery that continues to affect PSU oil stocks despite the deregulation and price increases. We estimate the
burden at the current formula to rise to Rs15.5bn in FY11, having a material impact on operational and financial metrics.
The company remains hopeful of being excluded from the subsidy-sharing scheme, in line with the Kirit Parikh
Committee recommendations. We continue to build in a share for GAIL to the extent of 9% in auto fuel subsidy, in line
with H1FY11 trends.
Valuations & View
GAIL has faced some delays in commissioning of the extensions to its pipeline network, with an additional 20 mmscmd
of transmission capacity slated to come online by April now targeted for Dec’10. However, meaningful increases in
volumes will take time as KG D6 volumes seem unlikely to ramp up to 80 mmscmd in FY11. The LPG business continues
dated 21 Apil on provisional tariff norms for GAIL) has alleviated fears on tariffs being downgraded by regulators, with
our estimates indicating steady tariffs at Rs0.85/scm for FY11-12E. However, in line with the slower-than-expected rampup
in capex, we reduce our capex assumptions for FY11 and FY12, which increases our EPS estimates for FY11 and FY12
by 4% and 3% respectively (via lower depreciation and interest costs). We reiterate Outperformer on the stock with a
price target of Rs531 per share, implying 9% upside to CMP.
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