India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
GAIL (INDIA)
Petrochemicals and LPG segments dent result
Result below expectations; PAT at INR 9.7 bn lower than estimate
Gail India’s (GAIL) Q3FY11 PAT, at INR 9.7 bn (up 4.8% Q-o-Q, 12.5% Y-o-Y),
was lower than our estimate (INR 11.53 bn) on the back of lower production
volumes in LPG/petrochemicals segment and higher inventory build up in the
petrochemicals segment. Operational EBIT, at INR 11.5 bn, fell 9.2% Q-o-Q,
primarily due to dip in EBIT in petrochemicals (-28.1% Q-o-Q) and LPG/liquid
hydrocarbons segments (-14.3% Q-o-Q), partially offset by higher EBIT from the
natural gas trading segment (+28.5% Q-o-Q). Subsidy provision for the quarter
stood at INR 4.18 bn (INR 3.46 bn in Q2FY11, INR 4.12 bn expected) with
upstream companies expected to share one-third of the gross under-recoveries
during Q3FY11.
Petrochemical and LPG segments’ production volumes disappoint
Natural gas volumes transmitted by GAIL were 4.6% higher Q-o-Q, at 120.2
mmscmd, after production resumed from the PMT field. However, natural gas
transmission EBIT, at INR 6.6 bn, was down 7.6% Q-o-Q due to higher–thanexpected
operating costs (INR 0.31/scm against our estimate of INR 0.25/scm).
Natural gas trading EBIT margins improved 21.9% Q-o-Q to INR 0.27/scm,
leading to a EBIT of INR 2.1 bn. LPG transmission volumes, at 893 KT, up
11.8% Q-o-Q, were in line with estimates. Petrochemicals segment’s
production volumes, at 102 TMT, were lower than expected (113 TMT) due to
shutdowns on account of commissioning of the sixth furnace at the recently
expanded Pata plant. Also, lower sales/production ratio (79.4%) in Q3FY11
further contributed to a lower EBIT of INR 1.95 bn (-42.76% Y-o-Y, -28.1% Q-o-
Q) for the petrochemicals segment, which we expect to be reported in Q4FY11
numbers. LPG segment’s production volumes were also lower at 265 TMT (-
28.57% Y-o-Y, -21.36% Q-o-Q) due to shutdown of compressors at Vijaipur and
Gandhar.
Outlook and valuations: Positive; maintain ‘BUY’
We remain positive on GAIL due to the growth in earnings from the pipelines
transmission business. We broadly maintain our March 2012 SOTP value at INR
571/share. At CMP of INR 478, the stock is trading at 14.9x and 14.7x our FY12E
and FY13E EPS, 2.6x our FY12E book and 10.3x FY12E EV/EBITDA. The stock
provides upsides of 19% from CMP and hence we maintain our ‘BUY/Sector
Outperformer’ recommendation/rating.
EBIT lower due to LPG and petrochemicals segment
Q3FY11 operational EBIT, at INR 11.5 bn, fell 9.2% Q-o-Q, primarily due to fall in EBIT
of the petrochemicals (-28.1% Q-o-Q) and LPG/liquid hydrocarbons segments (-14.3%
Q-o-Q), which was partially offset by higher EBIT from the natural gas trading segment
(+28.5% Q-o-Q).
Natural gas transmission EBIT, at INR 6.6 bn, was lower than our estimate (INR 7.3
bn) primarily due to higher–than-expected operating costs (INR 0.31/scm against our
estimate of INR 0.25/scm). Despite realizations increasing 6.4% Y-o-Y, higher than
expected operating costs led to a decline in EBIT margins to INR 0.62/scm. Operating
costs increased due to higher gas prices which jumped from USD 4.75/mmbtu to USD
5.25/mmbtu with effect from July 2010. During the quarter, GAIL booked natural gas
costs for Q2FY11 and Q3FY11.
Petrochemicals EBIT, at INR 1.95 bn, was lower 42.8% Y-o-Y and 28.1% Q-o-Q due to
lower–than-expected production volumes of 102 TMT (113 TMT). Production volumes
were negatively impacted during the quarter due to delay in commissioning of the sixth
furnace at the recently expanded Pata plant. The sales/production ratio was also lower
for Q3FY11 at 79.4% (estimated 100%) leading to sales volume of 81 TMT (-37.7% Y-o-
Y, -24.3% Q-o-Q). The inventory carry forward, due to lower sales/production ratio, will
have a positive impact on Q4FY11 results.
LPG/Liquid hydrocarbon EBIT, at INR 5.7 bn, was lower than estimates on back of lower
production volumes and higher conversion costs. Production volumes, at 265 TMT (-
28.57% Y-o-Y, -21.36% Q-o-Q), were lower than our estimate of 344 KT due to shutdown
of compressors at Vijaipur and Gandhar for 15 days. Also, conversion costs rose to INR
16/kg compared to INR 11.6/kg in Q2FY11 due to impact of higher natural gas prices.
Natural gas trading EBIT margins improved 21.9% Q-o-Q to INR 0.27/scm, leading to
EBIT of INR 2.1 bn. Trading EBIT increased due to impact of higher spot gas volumes
and margins.
LPG transmission volumes were in line with estimates at 893 KT (875 KT), up 11.8%
Q-o-Q. EBIT for the segment stood at INR 844 mn (+7.3% Q-o-Q, +32.2% Y-o-Y).
Subsidy burden at INR 4.18 bn for Q3FY11
GAIL has made a provision of INR 4.18 bn towards subsidy sharing for Q3FY11 (INR 3.46
bn in Q2FY11) with upstream companies expected to share one-third of the gross underrecoveries
during the quarter.
Subsidy burden at INR 4.18 bn for Q3FY11
GAIL has made a provision of INR 4.18 bn towards subsidy sharing for Q3FY11 (INR 3.46
bn in Q2FY11) with upstream companies expected to share one-third of the gross underrecoveries
during the quarter.
Revising up our earnings estimates
We are increasing our FY12 EPS estimate to incorporate higher natural gas volumes and
impact of higher natural gas trading margins. Also, margins were impacted as we have
assumed the USD/INR rate at 46 for both FY12 and FY13.
Outlook and valuations: Positive; maintain ‘BUY’
We remain positive on GAIL due to the growth in earnings from the pipelines
transmission business. We broadly maintain our March 2012 SOTP value at INR
571/share. At CMP of INR 478, the stock is trading at 14.9x and 14.7x our FY12E and
FY13E EPS, 2.6x our FY12E book and 10.3x FY12E EV/EBITDA. Stock provides upsides of
19% from CMP and hence we maintain our ‘BUY/Sector Outperformer’
recommendation/rating.
Company Description
GAIL (erstwhile Gas Authority of India) is a vertically-integrated public sector behemoth
dealing with the production, transportation, utilization, and distribution of natural gas in
India. Established in 1984 by the Government of India to exploit the country’s natural
gas resources and provide downstream industries with the same, GAIL is a Navratna
company, which has since then grown into a virtual monopoly player in this sector.
Currently, it commands usage of natural gas trunk pipelines of more than 7,000 km and
over 1,900 km of LPG pipelines as well. Further, its production plants for petrochemicals
and liquid hydrocarbons provide related diversification (and thus, stability and growth
opportunities to its earnings). It has also ventured into new businesses like telecom,
which leverage on its strengths of outreach; and, is slowly establishing a base of
sourcing gas through E&P blocks and LNG import facilities.
Investment Theme
Gas volumes transported by GAIL (4.7% CAGR for the past three years) are expected to
jump due to the inherent advantages of gas as a fuel over other fossil fuels and
infrastructural bottlenecks being eased due to large investments being made in the
sector. Energy-intensive sectors like fertilizers, power-generation, and refining have been
restricted /forced to use liquid fuels (fuel oil and naphtha) due to paucity of gas (due to
insufficient supplies and poor connectivity). But, with the setting up of the national gas
grid and finds like the KG basin, more industries will be able to use gas as fuel.
GAIL has 5 approved (by MoPNG before the PNGRB came into existence), un-built
pipelines; which have been assured 12% post-tax ROCEs with uncapped leverage, while
all future pipelines will have bidding based tariffs. This single-window opportunity to take
advantage of higher tariffs (due to the high, assured returns) during a strong volume
growth period, provide upsides to GAIL’s earnings.
With a presence in almost all facets of the natural gas business, GAIL has economies of
scale, integration benefits (both forward and backward), hedging of commodity price risk,
and options for growth in its kitty. Depending on how the macro-demand and regulatory
scenario shape up, the company has the flexibility, technological prowess, and financial
muscle to expand in any segment of the value chain.
Key Risks
Sourcing of natural gas is a concern, since RIL’s KG D-6 block is expected to provide
more than half of GAIL’s incremental volumes. The issue has remained mired in
controversy due to regulation (gas utilization policy, marketing rights, and pricing) and
adjudication (viz., court cases with NTPC and RNRL).
Tariff reduction in existing pipelines may be higher than estimated.
Rise in crude prices may increase the under-recovery sharing burden on GAIL.
No comments:
Post a Comment