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Gail’s 3QFY11 net profits rose 13%YoY to Rs9.68bn. Core Ebit was 5%
below our estimate due to lower than anticipated petrochem sales
volumes but higher other income from ONGC’s special dividend and lower
than effective tax rate pulled reported numbers 7% above estimates.
While delay in KGD6 ramp up may lead to 13-16% downgrade in FY12-13
EPS, higher share of stable gas transmission in overall EPS and strong
leverage to crude may allow Gail to sustain premium valuations. O-PF.
3QFY11 profits rise 13%YoY; core Ebit 5% below our estimate
Gail’s 3QFY11 net profits rose 13%YoY/5%QoQ to Rs9.68bn (Rs7.6/share)
and came 7% above our estimate on the back of higher than expected other
income and lower effective tax rate. While core EBIT (Rs17.4bn,+2%YoY)
came 5% below our estimate, PBT was boosted by special dividend from
ONGC and rose 7%YoY. Gail shared Rs4.2bn in subsidies in the quarter.
Overall Gail has met 72% of our full year estimates in 9MFY11.
Gas transmission volume (120mmscmd) came 5% ahead of our estimate.
However, higher than anticipated opex as the impact of rise in price of gas
used for internal consumption was absorbed retrospectively from July’10
pulled down gas transmission EBIT by 8%QoQ. Planned shutdown and non
availability of PMT gas for a part of the quarter pulled down both LPG (332kt)
as well as petchem production (102kt). Ramp up of petchem production
towards the end of the quarter forced higher than expected inventory build up
and petchem sales volumes came 30% below our estimate at 81kt(-33%YoY).
Strong polymer price but transmission volume growth at risk
Higher crude prices should drive up polymer Ebit near term; further our
regional team expects polyethylene spreads to have bottomed in 2010 with
gradual rises from 2011 as demand growth exceeds capacity additions. Gail’s
low cost sixth furnace expansion project should also help from 4QFY11. We
assign Rs4-6/share (13-16%) of PAT to higher transmission volumes in FY12-
13CL from KGD6 and any delay in ramp up would put this contribution at risk.
Maintain O-PF with a target price of Rs525/share (+9%)
While delay in KGD6 production is a risk, higher share of stable gas
transmission in overall EPS as well as its strong leverage to crude price (0.8%
on EPS for every 1% change in crude) through its petchem business may
allow Gail to sustain its premium valuations. Maintain O-PF (+9%).
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