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GAIL
Strong gas-transmission margin; re-iterate Buy
Profits in line with estimates. Despite the higher-than-expected
subsidy burden, GAIL reported profits along the lines of Street
estimates, owing to strong gas-transmission EBIT margin. The net
profit of `9.2bn was up 30% yoy on higher gas-transmission
volumes. Profit corresponded with our estimate despite GAIL
bearing a ~`3.5bn subsidy during 2Q, markedly higher than the
~`2.2bn we estimated. Gas transmission EBIT, at `697/tcm, though
flat yoy, was up 15% over the last three-quarter average. The gastrading
EBIT margin was higher, as expected, as the government
allowed GAIL to charge a marketing margin on APM gas.
Petrochemicals margin subdued: The petrochemicals margin
continues to be under pressure, down 29% yoy and 22% qoq, at
`25,382 a ton due to a global supply glut. During 2010, 12.7m tpa of
ethylene cracker capacity was added globally, squeezing margins.
Adhoc subsidy sharing continues. In 2Q, GAIL’s subsidy burden
(~`3.5bn) was ~9.2% of upstream share, up from 6-7% in the last
two quarters, re-iterating the adhoc nature of subsidy sharing.
and re-iterate our Buy rating on 14% EPS CAGR over FY10-13, due
to the doubling of the natural gas pipeline capacity. Key stock triggers
are commissioning of a gas-transmission pipeline and a ramp-up in
gas supply. Further, potential upside to our target price is likely from
a higher crude price, freedom from subsidy, E&P exploration
portfolio and CGD business. Risks: lower gas-transmission
tariffs/volumes; lower petchem margins/volumes; subsidy overhang.
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