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India Equity Research Reports, IPO and Stock News
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1QFY12 net profit at Rs9.85bn (up 11% yoy) was 12% above our subsidy adjusted expectations
due to higher profits from gas trading. The big hit to reported profits will come once new pipelines
are fully capitalised, as they would face severe under-utilisation given the drop in domestic gas
supply.
Profits above expectations
1QFY12 net profit at Rs9.85bn (up 11% yoy) was 11% above expectations after considering
the upstream subsidy numbers which came out end of last week. The actual subsidy at
Rs6.8bn was higher than our estimate of Rs5.9bn. Adjusting for the higher subsidy, most of
the positive surprise was on account of gas trading profits which nearly doubled yoy. On a
qoq basis, the increase in gas trading EBIT has been slightly higher than the drop in gas
transmission EBIT. GAIL has capitalised Rs16.7bn for new pipelines probably close to end of
quarter, whereas the total capitalisation for FY12 on account of HVJ/DVPL expansion is likely
to be Rs78bn .
Gas transmission segment
Segment EBIT at Rs6.5bn (up 2% yoy) was 6% below expectations mainly due to lower
volumes. Gas transmission volumes were 117.2mmscmd, lower than numbers reported in 3Q
and 4QFY11, which were just over 120mmscmd. Thus the qoq increase in spot LNG volumes
has not been adequate to counter the lower domestic supply from the KG-D6 block. Note that
4QFY11 transmission EBIT was after provision of Rs1.16bn for cut in DUPL/DPPL tariffs. The
transmission volumes during the quarter compare poorly with GAIL's volume guidance of
135mmscmd for the year (implying higher exit rate at year end).
Profits of this segment are likely to be under pressure in subsequent quarters as new
pipelines with substantially higher capex get commissioned. These new pipelines will prove to
be a big drag on the bottomline as visibility on incremental gas supply is low due to downturn
in gas production from the KG-D6 block. The delay in expansion of HVJ/DVPL pipeline (from
June to December 2011) has postponed the asset capitalisation and hence the hit on the
bottomline. There could be further delays, but given our negative views on domestic gas
supply over next three years, the negative impact on profitability would have to be recognised
at some stage.
Reliance Industries (RIL) has guided that any major increase in KG-D6 gas production would
be after three years and we are now forecasting production at 48mmscmd in FY12 and
50mmscmd in FY13/14. GAIL will try and compensate for the lower domestic supply by
maximising LNG imports, but the latter would be inadequate given the scale of new pipeline
capacity which is coming on stream. Over next 12-18 months, 3 new pipelines will be
commissioned with a capacity of 86mmscmd (HVJ/DVPL with new downstream pipelines
54mmscmd, Dabhol-Bangalore 16mmscmd, Kochi-Bangalore 16mmscmd). We believe each
of these pipelines will be loss-making initially once they are commissioned.
Petrochemical segment
Segment EBIT at Rs2.4bn (down 14% yoy) was 15% below expectations on lower volumes
and realisations. RIL had disclosed that Indian PE demand was down 1% yoy. With Indian
Oil's new cracker operating this year for first time, product offtake appears to have been a
problem impacting volumes as well as realisations. GAIL's production of PE was 109kt (still
below capacity of 120kt) whereas the sales volume was much lower at 88kt, indicating build
up of inventory. Among petrochemical products, PE margins have dropped the most as
ethylene supplies have increased based on low-cost natural gas supply.
LPG and allied hydrocarbons segment
Segment EBIT at Rs2.3bn (flat yoy) was 20% above expectations after adjusting for actual
upstream subsidy payments due to better than expected realisations. Segment volumes were
349kt (down 3% yoy) and in line with expectations. Upstream subsidy remains a concern
given the experience in FY11 which shows that the final figure on subsidy for the full year is
decided only at end of the year. Hence the trend in first three quarters cannot provide any
guidance on the subsidy hit for the year.
Gas trading segment
Segment EBIT at Rs3.1bn (up 95% yoy) was 49% above expectations as spot LNG cargoes
appears to have collected higher marketing margins. This is clearly apparent since segment
EBIT has increased 16% qoq whereas marketing volumes at 82.63mmscmd are down 3.6%
qoq.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
1QFY12 net profit at Rs9.85bn (up 11% yoy) was 12% above our subsidy adjusted expectations
due to higher profits from gas trading. The big hit to reported profits will come once new pipelines
are fully capitalised, as they would face severe under-utilisation given the drop in domestic gas
supply.
Profits above expectations
1QFY12 net profit at Rs9.85bn (up 11% yoy) was 11% above expectations after considering
the upstream subsidy numbers which came out end of last week. The actual subsidy at
Rs6.8bn was higher than our estimate of Rs5.9bn. Adjusting for the higher subsidy, most of
the positive surprise was on account of gas trading profits which nearly doubled yoy. On a
qoq basis, the increase in gas trading EBIT has been slightly higher than the drop in gas
transmission EBIT. GAIL has capitalised Rs16.7bn for new pipelines probably close to end of
quarter, whereas the total capitalisation for FY12 on account of HVJ/DVPL expansion is likely
to be Rs78bn .
Gas transmission segment
Segment EBIT at Rs6.5bn (up 2% yoy) was 6% below expectations mainly due to lower
volumes. Gas transmission volumes were 117.2mmscmd, lower than numbers reported in 3Q
and 4QFY11, which were just over 120mmscmd. Thus the qoq increase in spot LNG volumes
has not been adequate to counter the lower domestic supply from the KG-D6 block. Note that
4QFY11 transmission EBIT was after provision of Rs1.16bn for cut in DUPL/DPPL tariffs. The
transmission volumes during the quarter compare poorly with GAIL's volume guidance of
135mmscmd for the year (implying higher exit rate at year end).
Profits of this segment are likely to be under pressure in subsequent quarters as new
pipelines with substantially higher capex get commissioned. These new pipelines will prove to
be a big drag on the bottomline as visibility on incremental gas supply is low due to downturn
in gas production from the KG-D6 block. The delay in expansion of HVJ/DVPL pipeline (from
June to December 2011) has postponed the asset capitalisation and hence the hit on the
bottomline. There could be further delays, but given our negative views on domestic gas
supply over next three years, the negative impact on profitability would have to be recognised
at some stage.
Reliance Industries (RIL) has guided that any major increase in KG-D6 gas production would
be after three years and we are now forecasting production at 48mmscmd in FY12 and
50mmscmd in FY13/14. GAIL will try and compensate for the lower domestic supply by
maximising LNG imports, but the latter would be inadequate given the scale of new pipeline
capacity which is coming on stream. Over next 12-18 months, 3 new pipelines will be
commissioned with a capacity of 86mmscmd (HVJ/DVPL with new downstream pipelines
54mmscmd, Dabhol-Bangalore 16mmscmd, Kochi-Bangalore 16mmscmd). We believe each
of these pipelines will be loss-making initially once they are commissioned.
Petrochemical segment
Segment EBIT at Rs2.4bn (down 14% yoy) was 15% below expectations on lower volumes
and realisations. RIL had disclosed that Indian PE demand was down 1% yoy. With Indian
Oil's new cracker operating this year for first time, product offtake appears to have been a
problem impacting volumes as well as realisations. GAIL's production of PE was 109kt (still
below capacity of 120kt) whereas the sales volume was much lower at 88kt, indicating build
up of inventory. Among petrochemical products, PE margins have dropped the most as
ethylene supplies have increased based on low-cost natural gas supply.
LPG and allied hydrocarbons segment
Segment EBIT at Rs2.3bn (flat yoy) was 20% above expectations after adjusting for actual
upstream subsidy payments due to better than expected realisations. Segment volumes were
349kt (down 3% yoy) and in line with expectations. Upstream subsidy remains a concern
given the experience in FY11 which shows that the final figure on subsidy for the full year is
decided only at end of the year. Hence the trend in first three quarters cannot provide any
guidance on the subsidy hit for the year.
Gas trading segment
Segment EBIT at Rs3.1bn (up 95% yoy) was 49% above expectations as spot LNG cargoes
appears to have collected higher marketing margins. This is clearly apparent since segment
EBIT has increased 16% qoq whereas marketing volumes at 82.63mmscmd are down 3.6%
qoq.
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