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GAIL India – 3QFY2011 Result Update
Angel Broking maintains an Accumulate on GAIL India with a Target Price of Rs. 530.
For 3QFY2011, GAIL India (GAIL) reported good performance, registering robust
12.5% yoy growth in bottom-line to `968cr (`860cr), which was marginally above
our estimate of `930cr due to higher other income and lower effective tax rate.
On the operational front, the natural gas (NG) transmission and trading segments
delivered good performance on higher volumes, tariffs and marketing margin on
Growth registered across segments, but petchem disappoints: GAIL reported
top-line growth of 34.7% yoy during the quarter, primarily on the back of good
yoy performance by the NG transmission, NG trading and LPG transmission
segments. The NG transmission segment registered top-line growth of 17.4%,
while operating profit of the segment grew by 14.2% yoy. Similarly, the NG
trading segment also reported robust top-line growth of 49.6% yoy and operating
profit growth of 75.4% yoy due to marketing margin charged on APM gas.
Subsidy burden during the quarter stood at `418cr, in line with our estimates.
However, the disappointment in performance came from the lower-than-expected
LPG and liquid hydrocarbon realisation and petrochemical volumes. This coupled
with higher other operating expenses resulted in GAIL’s operating profit growing
by a mere 3.5% yoy to `1,314cr (`1,270cr), below our expectation of `1,606cr.
Outlook and valuation: The substantial capex to be incurred on transmission
pipelines could see maximum capitalisation on the back of incremental gas
production domestically. Average marketing margin earned on trading of NG is
expected to stabilise. We believe that the city gas distribution (CGD) and upstream
businesses could be value-accretive in the long run. We maintain an Accumulate
on GAIL, with a SOTP-based Target Price of `530.
Revenues in line, up 34.7%: For 3QFY2011, GAIL reported 34.7% yoy growth in
revenue to `8,365cr (`6,212cr), which was in line with our expectation of
`8,276cr. Revenue growth was aided by good performance registered by the
natural gas transmission, natural gas trading and LPG transmission segments. The
natural gas transmission and trading segments reported revenue growth of 17.4%
yoy and 49.6% yoy respectively, during the quarter. Similarly, the LPG transmission
segment grew by 11.4% yoy. Revenue of the natural gas transmission segment was
driven by higher volumes (up 10.3% yoy) and realisations, up 6.3% yoy to
`925/tscm (`870/tscm). Growth in the natural gas trading segment was mainly on
account of higher realisations due to increased APM gas price and allowance to
charge marketing margin on APM gas, aided by marginal growth in volumes.
Similarly, growth in the LPG transmission segment was driven by higher
transmission volumes, aided by marginally higher realisations.
OPM contracts by 473bp yoy to 15.7% on poor performance by petchem segment:
A substantial 33.1yoy drop in petrochemical volumes (on account of shutdown due
to commissioning of the sixth furnace at the recently expanded Pata plant and
inventory building) and lower margins yoy led to a whopping 37.8% dip in
operating profit of the segment, partially offsetting the robust operating profit
growth in the natural gas transmission, natural gas trading and LPG transmission
segments. NG transmission also saw a dip in margins on account of higher
operating cost. This led to overall contraction in OPM by a substantial 473bp yoy
to 15.7% (20.4%). Staff costs during the quarter fell by 36.8% yoy to `160.4cr
(`253.9cr). Other operating expenses increased by 45% yoy to `621.2cr
(`428.4cr), which included `32.1cr (`20.2cr) as survey expenses and write-off of
dry well expenditure in the E&P business. Thus, despite robust top-line growth, due
to the contraction in OPM, operating profit grew by a mere 3.5% yoy to `1,314cr
(`1,270cr), which was below our expectation of `1,606cr on account of
lower-than-expected LPG and liquid hydrocarbon realisation and petrochemical
volumes.
Depreciation, interest cost increases; other income up 45.5%: Depreciation during
the quarter increased by 13.9% yoy to `160.5cr (`140.9cr), while interest cost rose
15.7% yoy to `16.5cr (`14.2cr). Other income surged 45.5% yoy to `209.2cr
(`143.8cr).
PAT up 12.5%, marginally above expectation: The effective tax rate during the
quarter fell to 28.1% (31.7%) and was lower than our estimates. PAT grew by
12.5% yoy to `968cr (`860cr), which was 4% higher than our expectation of
`930cr due to higher other income and lower effective tax rate.
Segment-wise performance
Natural gas transmission segment: The segment registered 17.4% yoy growth in
top-line to `1,001cr (`853cr), driven by higher volumes and realisations.
Transmission volumes grew 10.3% yoy to 120mmscmd (109mmscmd), above our
estimates to 110mmscmd, as production from the PMT resumed and spot LNG
imports increased. Natural gas transmission tariffs rose 6.3% yoy to `925/tscm
(`870/tscm), higher than our expectation of `900/tscm as incremental flow was
through the new gas pipelines, which have higher tariffs. It is pertinent to note that
the new PNGRB tariffs on DVPL/GREP upgradation are more than double of those
on the existing HVJ network.
LPG transmission segment: The segment registered top-line growth of 11.4% yoy
during 3QFY2011, largely on account of the 8.9% yoy increase in volumes to
893TMT (820TMT). Higher volumes can be attributed to increased volumes from
the Jamnagar-Loni pipeline due to higher availability of LPG from RIL for the
domestic markets. Transmission tariffs during the quarter rose marginally to
`1,456/MT (`1,427/MT) yoy.
Petrochemical segment: The petrochemical segment’s performance was much
below our expectation. Sales during the quarter fell by 29.9% yoy to `571cr
(`815cr) on account of the whopping 33.1% yoy drop in volumes to 81TMT
(121TMT) due to delay in commissioning of the sixth furnace at the recently
expanded Pata plant and the inventory build up at the company end. Thus, we
expect better volumes in 4QFY2011 as the accumulated stock will be disposed off.
Average realisations however, increased 7.3% yoy to `70,123/MT (`65,372/MT),
driven by higher international petrochemical prices. The segment’s EBITDA margin
fell by 644bp yoy to 41.7% (48.2%) on account of higher gas cost due to increase
in APM gas and LNG price resulting in a fall in EBITDA/tonne to `29,259/MT
(`31,488/MT). Lower volumes and margin contraction resulted in a substantial
37.8% fall in operating profit to `237cr (`381cr).
LPG & liquid hydrocarbon segment: During the quarter, the subsidy burden stood
lower at `418cr as against `455cr in 3QFY2010 and `346cr in 2QFY2011, in
line with our expectation of `420cr. The segment reported operating profit of
`173cr as against `147cr in 3QFY2010, despite lower yoy sales volume of LPG
and other liquid hydrocarbons. LPG volumes during the quarter fell by 7.7% yoy to
263TMTs (285TMTs) and other liquid hydrocarbons volumes fell by 23.6% yoy to
68TMTs (89TMTs). However, blended realisations increased to `22,024/MT
(`18,984/MT). The segment’s EBITDA margin registered an increase of 303bp yoy
to 23.7% (20.7%). Higher realisation and margin expansion resulted in
EBITDA/tonne increasing to `5,227/MT as against `3,930/MT in 3QFY2010.
Investment arguments
Volume story yet to unfold: GAIL expects to incur substantial capex in the
transmission segment in view of the incremental gas volumes expected from the
KG basin, GSPC, marginal fields and new LNG terminals. However, stagnant
production at the KG basin and higher LNG prices are a cause of concern on the
volume front. Nonetheless, we believe that GAIL could still be a volume story if
KG-D6 resumes its potential production. Thus, we expect volumes to register CAGR
10% over FY2010-12.
Petchem margins may shrink: The petchem margins are expected to shrink on
account of higher blended cost of natural gas. Stagnant domestic production of
natural gas is resulting in higher dependence on spot LNG. Thus, incremental
polymer volumes would result from costlier gas as compared to PMT.
Subsidy burden to persist: In recent times, we have witnessed government
hesitance to pass through higher crude oil prices due to inflationary concerns. This
implies that GAIL would continue to bear the subsidy burden going forward. We
have assumed GAIL to bear subsidy burden of `1,700cr in FY2012.
Upstream segment could see triggers: GAIL’s asset portfolio includes huge
prospective basins like Myanmar fields and the CBM blocks. We view these blocks
as a potential upside for the stock. Out of the 27 exploratory blocks the company
owns, 9 blocks seem to have potential hydrocarbon discoveries. Any material
success in the form of major discovery could be a huge trigger for the stock.
Outlook and valuation
Substantial capex slated ahead for transmission pipelines could see maximum
capitalisation on incremental gas production domestically. Delays in the ramp up
of natural gas production at the various fields could however, prove to be a
dampener for the stock. We expect blended tariffs to increase. However, we
believe it would be difficult for GAIL to earn higher than the PNGRB determined
reasonable rate of 12% post-tax RoCE, since any increase in capacity utilisation
beyond what is assumed by PNGRB will be followed by a decline in tariffs. Petchem
margins are expected to be pressurised on account of higher feedstock cost. We
expect the subsidy-free scenario as a potential upside. If the extant subsidy sharing
mechanism continues, valuations would suffer. Also, we are concerned over the
higher crude oil prices impacting GAIL’s numbers as the retail LPG and kerosene
prices are not revised very often.
The average marketing margins will stabilise at current levels in the coming
quarters since GAIL is allowed to charge trading margins on APM gas. GAIL also
has significant plans in the CGD space. The company plans to bid aggressively
for CGD projects across the country through its wholly-owned subsidiary, GAIL
Gas. We believe the CGD business could be a value-accretive proposition in the
long run.
Some upside triggers for the stock:
Deregulation of diesel or any favourable step towards subsidy-sharing
mechanism;
Earlier-than-expected ramp up in KG basin;
Softening of LNG prices (leading to higher demand for spot LNG); and
Significant discovery in any of the prospective exploratory blocks.
At the CMP of `468, the stock is available at 14x FY2012E EPS of `33.4 and 2.6x
FY2012E P/BV. We maintain an Accumulate on GAIL, with a SOTP-based Target
Price of `530.
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