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1QFY12 results
Gail’s 1QFY12 net profit rose 26%QoQ to Rs9.9bn and came 5% ahead of estimate
primarily due to non- core items. Lower gas transmission and petchem volumes
were key negatives but management expects these to improve from 2Q. With
Reliance’s gas production growth struggling, Gail’s transmission volumes will
remain ranged over FY12-13 weakening its medium term investment case but the
likelihood of potential positive policy related newsflow on cap in subsidised LPG
cylinder volumes and clarity on upstream sharing formula ahead of ONGC’s $2.5bn
FPO may provide some near term succour. Maintain O-PF (Target: Rs500, +9%).
Inline core profit in 1Q; higher reported profit
Gail’s 1QFY12 PAT came 5% ahead of our estimate at Rs9.85bn (+11%YoY/26%QoQ).
However, core Ebit was just 1% higher. Lower than expected gas transmission
throughput (117 cf. 121mmscmd) and petchem sales (88 cf. 120kt) were offset by
higher blended transmission tariffs, LPG realisation and gas trading margin (Rs416 cf.
325/mscm, four spot LNG cargoes). Higher other income, lower interest costs and tax
rates drove the beat on PAT. Lower domestic demand led to a rise in polymer
inventories (32kt) to near nine quarter high; Gail appears to have resisted abovenormal
price discounting, though. Management expects inventories to normalise in 2Q;
indeed Gail’s PE prices appear to have risen consistently in July to 15 month highs.
Ranged gas transmission volumes in FY11-13 as KG-D6 struggles
Gas transmission volumes fell 3%QoQ to 117mmscmd; management suggests that five
fertiliser plants were shutdown during 1Q but indicated that volumes have reverted
back to ~120mmscmd. Nonetheless, with PLNG unlikely to run above its 1Q rates and
with the Dabhol terminal likely to be help only from FY13, higher imports may not
compensate for further drops in KG-D6 output. We model stagnant transmission
volumes over FY11-13, therefore, weakening Gail’s key investment case. Investments
in non core areas (Rs7bn on 115MW wind-power cleared for FY12) do not help either.
Policy changes could provide potential upsides
Media reports suggest that the government may be evaluating the recommendation
made by a task force on direct transfer of subsidies to cap the availability of subsidized
LPG cylinders to 4-7 per connection; current averages are at ~7.3. We estimate that a
cap at six cylinders will cut u-r by US$1.2bn; at four will cut this by US$2bn and imply
a 4-7% upgrade to GAIL’s EPS. Newsflow around likelihood of formalisation of the
upstream subsidy sharing formula ahead of ONGC’s US$2.5bn FPO may also help GAIL.
Maintain O-PF
While our muted outlook on gas transmission is a fundamental headwind, we maintain
our O-PF rec (+9%) due to the likelihood of potential positive policy related newsflow
for Gail. At 13xPE, 2.3x PB and 2% dividend yield, Gail’s valuations are reasonable.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
1QFY12 results
Gail’s 1QFY12 net profit rose 26%QoQ to Rs9.9bn and came 5% ahead of estimate
primarily due to non- core items. Lower gas transmission and petchem volumes
were key negatives but management expects these to improve from 2Q. With
Reliance’s gas production growth struggling, Gail’s transmission volumes will
remain ranged over FY12-13 weakening its medium term investment case but the
likelihood of potential positive policy related newsflow on cap in subsidised LPG
cylinder volumes and clarity on upstream sharing formula ahead of ONGC’s $2.5bn
FPO may provide some near term succour. Maintain O-PF (Target: Rs500, +9%).
Inline core profit in 1Q; higher reported profit
Gail’s 1QFY12 PAT came 5% ahead of our estimate at Rs9.85bn (+11%YoY/26%QoQ).
However, core Ebit was just 1% higher. Lower than expected gas transmission
throughput (117 cf. 121mmscmd) and petchem sales (88 cf. 120kt) were offset by
higher blended transmission tariffs, LPG realisation and gas trading margin (Rs416 cf.
325/mscm, four spot LNG cargoes). Higher other income, lower interest costs and tax
rates drove the beat on PAT. Lower domestic demand led to a rise in polymer
inventories (32kt) to near nine quarter high; Gail appears to have resisted abovenormal
price discounting, though. Management expects inventories to normalise in 2Q;
indeed Gail’s PE prices appear to have risen consistently in July to 15 month highs.
Ranged gas transmission volumes in FY11-13 as KG-D6 struggles
Gas transmission volumes fell 3%QoQ to 117mmscmd; management suggests that five
fertiliser plants were shutdown during 1Q but indicated that volumes have reverted
back to ~120mmscmd. Nonetheless, with PLNG unlikely to run above its 1Q rates and
with the Dabhol terminal likely to be help only from FY13, higher imports may not
compensate for further drops in KG-D6 output. We model stagnant transmission
volumes over FY11-13, therefore, weakening Gail’s key investment case. Investments
in non core areas (Rs7bn on 115MW wind-power cleared for FY12) do not help either.
Policy changes could provide potential upsides
Media reports suggest that the government may be evaluating the recommendation
made by a task force on direct transfer of subsidies to cap the availability of subsidized
LPG cylinders to 4-7 per connection; current averages are at ~7.3. We estimate that a
cap at six cylinders will cut u-r by US$1.2bn; at four will cut this by US$2bn and imply
a 4-7% upgrade to GAIL’s EPS. Newsflow around likelihood of formalisation of the
upstream subsidy sharing formula ahead of ONGC’s US$2.5bn FPO may also help GAIL.
Maintain O-PF
While our muted outlook on gas transmission is a fundamental headwind, we maintain
our O-PF rec (+9%) due to the likelihood of potential positive policy related newsflow
for Gail. At 13xPE, 2.3x PB and 2% dividend yield, Gail’s valuations are reasonable.
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