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UBS Investment Research
GAIL (India) Ltd.
3Q11 disappoints on lower Petchem. vols
Q3FY11: Operating profit of Rs13.3 bn and PAT of Rs9.7bn
GAIL reported Q3FY11 PAT of Rs9.7bn, up 12.5% YoY and 4.8% QoQ, in line
with our estimates. EBITDA at Rs13.3bn increased 3.5% YoY but was below
UBSe due to lower contribution from petchem segment. EBITDA margin at 15.9%
declined 200 bps as compared to Q2FY11. Interest charges at Rs165m were up
16% YoY and 40% QoQ. Gail’s subsidy contribution in the quarter was Rs4.2bn.
Petrochemicals segment affects operating margin on lower sales
The high margin petrochemicals business posted an EBIT of Rs2.0bn in Q3FY11,
down 43% YoY and 28% QoQ. EBIT margin of the segment was 34% vs 38% in
Q2FY11 and 43% in Q3FY10. Petchem contribution to overall EBITDA was
affected due to shutdown of the company’s Pata plant on maintenance. However,
the plant is up now and we expect operating margins to stabilise going forward.
The production in Q3 was higher than sales on account of inventory rebuilding.
Earnings were in our expectations as they were partially boosted by other income
of Rs1.9bn (+51% YoY) mainly on account of ONGC dividend payout. The
dividend also led to a below average tax rate in the quarter.
Valuation: Maintain Buy rating with DCF based PT of Rs580/share
At 13.9x FY 12E EPS, the stock is trading at the upper end of its trading band, but
we believe rising gas supply should continue to drive a stock re-rating. The stock is
down 10% in the last 10 days and we see current valuations as a buying opportunity
as we think the disappointment on 3Q numbers is due to one off factors.
GAIL (India) Ltd.
GAIL is India’s principal gas transmission company and owns cross-country gas
pipelines. It is 57% owned by the Government of India (GoI). Gas tranmission is
a fixed returns business in India, which is regulated by the GoI. Its FY10
turnover was US$5.4bn.
Statement of Risk
We believe the risks to our estimates include the regulatory uncertainty in gas
supply and delay in the pipeline capex. A higher upstream subsidy payout poses
additional risk to GAIL.
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