GAIL (India): All-round pressure on volumes:: Credit Suisse,

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GAIL (India) Ltd --------------------------------------------------------------- Maintain OUTPERFORM
New report: All-round pressure on volumes


● GAIL reported 1QFY12 EPS of Rs7.8, up 26% QoQ, but 5%
below our estimates as the petrochemical segment’s EBITDA
missed our numbers by 33%.
● GAIL shipped c.117 mmscmd of gas in 1Q, down 3 mmscmd QoQ
as five fertiliser plants had been shut for some time along the
HVJ. Average tariffs bounced back to Rs820 per 1000 SCM; a fall
in segment operating costs also helped EBITDA grow 23% QoQ.
Gas trading EBITDA grew 12% QoQ.
● GAIL’s subsidy payments fell 24% QoQ to Rs6.8 bn, as upstream
paid one-third of total losses. Increases in LPG/SKO prices mean
subsidies can fall more for 2Q/3Q12 if the one-third ratio is
maintained, though a final review (and increases) in 4Q is likely.
Subsidy led EPS strength in 2Q/3Q may not impact the stock.
● GAIL trades at 2.4 times one-year forward book, 20% above
multiples before 2007 (when no growth expectations were priced
in, we believe). While this may indicate some room for further
multiple correction, declines can become a good opportunity to
add, in our view. We maintain OUTPERFORM.
● Please click here for the full report.
GAIL reported 1QFY12 EPS of Rs7.8, up 26% QoQ, but 5% below
our estimates. Total EBITDA grew 23% QoQ but disappointed our
numbers by 5% – essentially on the back of poor performance of the
petrochemical (polymer) segment. DD&A charges went up 7% QoQ,
though interest costs fell 39% (we understand GAIL is capitalising
c.Rs1.3 bn in interest costs annually, on the pipelines being built).
Total PBT was 6% below estimates. Lower-than-expected tax rates
helped earnings.
Transmission volumes hurt by customer closures: GAIL shipped
c.117 mmscmd of gas in 1Q, down 3 mmscmd QoQ as five fertiliser
plants had been shut for some time along the HVJ. GAIL suggests it
has built up gas inventories in its pipelines, and that volumes would
have been flat at 120 mmscmd without these closures. Average
transmission tariffs bounced back to Rs820 per 1000 SCM; a fall in
segment operating costs also helped EBITDA grow 23% QoQ. Gas
trading EBITDA grew 12% QoQ, despite a fall in volumes – trading
income now represents 19% of total GAIL EBITDA.
GAIL paid a total subsidy of Rs6.8 bn (up 53% YoY, down 24% QoQ).
Its share of total upstream subsidy payments fell to 4.7% – as losses
on diesel (which GAIL does not share) were relatively high in 1Q.
These subsidy shares are based on 33% sharing for upstream
companies which given the ad hoc increase in 4Q11 is now viewed as
an interim, pro form arrangement, subject to revision in 4Q12.
Government of India increased LPG and SKO prices on 25 June 2011
which will reduce GAIL’s subsidy payouts. If upstream companies
continue to pay one third, 2Q/3Q EPS for GAIL can improve materially
QoQ


GAIL trades at 2.4 times one-year forward P/B, and 13.4 times P/E,
closing in to long-term averages (which were essentially during a
period of little growth expectations). With volume cuts at KG D6,
GAIL’s growth may have been pushed out – the capex on the new
pipelines may not return income for some time – but the longer-term
growth in Indian gas consumption remains intact, in our view. Relative
stability in GAIL’s earnings (ex subsidies) can also be an attraction in
a weak market. We recently cut estimates for RIL’s gas output and will
review our numbers when GAIL’s FY11 annual report becomes
available. We maintain OUTPERFORM.