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GAIL: 3Q FY11 earnings review
3Q profit up 13% YoY
Driven by 51% YoY jump in other income & 4% EBITDA rise
GAIL’s 3Q FY11 net profit at Rs9.7bn is 13% YoY higher. The rise in 3Q profit is
driven by
„ 51% (Rs647m) YoY rise in other income
„ 4% (Rs456m) YoY rise in EBITDA
3Q other income up 51% YoY
Special dividend from ONGC is 86% of 3Q other income
GAIL’s 3Q FY11 other income is 51% YoY higher at Rs1.9bn vis-à-vis Rs1.3bn in
3Q FY10. The main driver of jump in other income is special dividend of
Rs32/share on 51m shares GAIL holds in ONGC. Dividend from ONGC
constitutes 86% of total other income in 3Q FY11.
LPG & transmission EBITDA up; petchem down
3Q gas transmission EBITDA up 23% YoY
Higher volumes & tariff drive gas transmission EBITDA up
GAIL’s 3Q FY11 gas transmission EBITDA is up 23% YoY driven by
„ 10% YoY jump in gas transmission volumes to 120mmscmd from
109mmscmd in 3Q FY10
„ Gas pipeline EBITDA at Rs865/mscm being 12% YoY higher. The rise in gas
transmission EBITDA is mainly driven by GAIL being allowed to charge
marketing margin on APM gas from June 2010
3Q LPG EBITDA 18% YoY higher
LPG price realization 16% YoY higher; subsidy 8% YoY lower
GAIL’s 3Q FY11 gross LPG EBITDA is 2% YoY lower at Rs5.9bn due to 11%
YoY decline in LPG sales volumes.
However, LPG EBITDA net of subsidy is 18% YoY higher at Rs1.7bn driven by
„ 16% YoY higher LPG price realization
„ 8% YoY lower subsidy. Decline in subsidy in 3Q FY11 is despite oil price
being 16% YoY higher. This is due to LPG-kerosene price hikes in June
2010, which cut subsidy.
GAIL’s 3Q petrochemical EBITDA 38% YoY lower
Volumes down 33% YoY but realization 7% YoY higher
GAIL’s 3Q petrochemical EBITDA is 38% YoY lower at Rs2.4bn hit by 33% YoY
lower sales volumes. GAIL’s 3Q petrochemical price realization is up 7% YoY but
it was hit by slump in sales volumes.
FY11-FY12E EPS raised by 2%
FY11 EPS raised 2%; 20% YoY jump in EPS expected now
We have raised GAIL’s FY11E EPS 2%, to Rs29.8. The upgrade is mainly due to
upgrade in GAIL’s FY11E gas transmission EBITDA by 10% (Rs3bn). We have
raised GAIL’s FY11E gas transmission volume estimate due to higher-thanexpected volumes in 3Q and 9M.
Revised FY11E EPS implies 20% YoY earnings rise
Our revised FY11E EPS implies 20% YoY earnings growth. GAIL’s 9M profit is
25% YoY higher, which means we expect its 4Q profit to rise by just 10% YoY.
FY12E EPS raised 2%
Earnings upgrade mainly due to gas transmission EBITDA raised by 4%
We have raised GAIL’s FY12E EPS 2%, to Rs33.1. The upgrade in FY12E EPS
is mainly due to upgrade in gas transmission EBITDA by 4% (Rs1.6bn).
Net impact of higher oil price assumed not significant
We raised FY12E Brent price estimate to US$89/.bbl from US$85/bbl earlier.
However, cyclical business EBITDA net of subsidy remained largely unchanged
as upgrade in LPG and petrochemical EBITDA was neutralized by higher subsidy
estimate.
Raise PO 3%, to Rs441/share
PO raised to Rs441/share from Rs430/share
We have raised GAIL’s PO 3%, to Rs441/share from Rs430/share earlier. The
PO upgrade is due to the upgrade in the value of its core business to
Rs373/share from Rs355/share earlier. The upgrade is mainly due to upgrade in
value of transmission business by Rs24/share. However, value of GAIL’s
investment has been cut to Rs68/share from Rs75/share earlier.
Retain Underperfrom
Revised PO implies 8% potential downside
Even the revised PO implies 8% potential downside. We therefore retain
Underperform rating on GAIL
Price objective basis & risk
Gail India (XGLAF / GAILF)
Our SOTP-based PO of Rs441 (US$61.52 for GDR) comprises (1) Core
businesses (Rs373/sh), and (2) market value of investments in ONGC, Petronet
LNG, IGL and China Gas (Rs68/sh). The value of natural gas and LPG
transmission businesses of GAIL is based on DCF valuation using WACC of
10.3%. We have valued LPG production and petrochemical business of GAIL on
EV/EBITDA of 7x on FY12E EBITDA. Downside risks: (1) Gas transmission
volumes are lower than expected, (2) Gas tariff on pipelines is below
expectations, (3) Decline in LPG and petrochemical prices (4) Subsidy burden is
far above expectations, (5) Plunge in market prices of ONGC, Petronet LNG, IGL
and China Gas. Upside risks: (1) Gas transmission volumes beat estimates, (2)
Gas tariff on pipelines is above expectations, (3) Increase in LPG and
petrochemical prices, (4) Subsidy burden is much lower than expected, (5) Surge
in market prices of ONGC, Petronet LNG, IGL and China Gas.
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