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GAIL (India)
F3Q11 below Expectations
Quick Comment: GAIL reported F3Q11 results,
registering EBITDA of Rs13.3bn, up 3.5% YoY, down
8% sequentially, and 7% below our expectation.
However, PAT came at ~Rs9.7bn, which was up 12.5%
YoY and 4.8% QoQ and 5% ahead of our expectation
mainly due to higher-than-expected other income
through dividends and a lower effective tax rate.
Gas transmission volumes remain strong; however,
margins lower due to increased costs: Volume was
~120mmscmd, up ~5% QoQ and 10% on a YoY basis.
Despite this, the division EBITDA was down 15% QoQ
as the gas price from PMT fields increased to
US$5.25mmbtu from US$4.75mmbtu effective July 20.
This has led to higher costs for the company’s internal
consumption in both gas transmission and the
petrochemical division. The cumulative effect of the gas
price increase is about Rs720mn, of which Rs360mn
pertains to the last quarter.
LPG division negatively affected by subsidy: GAIL’s
LPG division reported EBITDA of ~Rs1.7bn, down ~13%
QoQ as the company increased the provision for
subsidy burden by 20% QoQ to Rs4.2bn. LPG sales
volume was down 4% during the quarter.
Petrochemical plant shutdown leading to lower
sales volumes: Petrochemical EBITDA came at
~Rs2.4bn, which was down 24% QoQ and 34% on a
YoY basis. The division was negatively affected by a
20-day shutdown during September-October (10 of the
days were in October), leading to lower production in the
first month and consequently lower sale volumes, as
inventory cover was not sufficient. However, production
has recovered in the last two months, which has led to
the current inventory build-up. The company expects
this to taper down in the coming months.
What does this mean to our estimates? Based on
F3Q11 results, we see 2-3% downside to our numbers.
However, we are maintaining our estimates and our
Overweight rating on the stock. We will revisit our model
after further information from company management.
LPG transmission: This division reported robust operating
performance with volume up ~12% sequentially and ~9% YoY.
EBITDA for the division was Rs.970mn, up ~18% YoY and
~4% on a QoQ basis.
Gas Trading Division: Natural gas trading activity was strong
with a 5.5% sequential increase in sale volumes. GAIL
reported EBITDA of Rs2.1bn for this division, up 75% YoY and
28.6% QoQ. The strong results were driven in part by strong
LNG volumes and in part by marketing margin of Rs.200/tscm
on regulated APM gas allowed to GAIL by MoPNG.
Valuation Methodology and Risks
Under our base-case scenario, we take the EV/EBITDA
multiples of comparable European and US gas pipeline
companies (75% weighting) and Asian petrochemical
companies (25% weighting). This yields our target multiple of
8.6x, which we apply to our F2012 EBITDA estimate. To this
core business value, we add cash and cash equivalents, plus
equity investments taken at current market prices to derive our
price target.
Key risks: Sharing of LPG and kerosene subsidy losses,
execution risk in building new pipelines; lower transportation
tariffs.
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