No respite GAIL ::HDFC Sec, report

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No respite GAIL reported weak results led by : (1) lower profits in petchem/LPG segments due to falling realisations and usage of LT RLNG as RM (2) Inventory losses in gas trading and (3) Rs 5bn oil UR sharing for 2QFY15 (vs Rs 0.01bn YoY). EBITDA came in at Rs 9.9bn (-57%) and consequently PAT stood at Rs 5.4bn (-61%). No UR sharing is a positive for GAIL; however, there are multiple negative triggers going ahead : (1) Petchem/LPG realisations will fall with crude prices. However, RM cost will not change due to the usage of LT RLNG (2) Gas transmission vol are unlikely to rise in the near future (3) Off-take risk to LT RLNG vol (~15mmscmd) as LT prices are ~60% higher than spot prices, and at current prices, FO is cheaper than LT LNG (4) Capitalisation of petchem Pata-II (~Rs 81bn, 4QFY15) will increase depreciation/interest cost, however returns will be muted due to higher gas cost. We have cut FY16/17E EPS by ~16% factoring lower profits in petchem, LPG and gas trading biz. Our SOTP target for GAIL is Rs 390/sh (~6.7x FY17E EV/EBITDA & Rs 93/sh from investments). Maintain SELL. 3QFY15 highlights  Natural gas transmission : Volumes stood at 94 mmscmd (-2% YoY). Transmission tariff was Rs 1.07/scm (-16%) due to revised tariff (similar tariff will continue).  Gas Trading : Volumes at 74 mmscmd were down 7% YoY. Reported margins were Rs 0.08/scm (-89% YoY). Sharp fall in spot RLNG prices led to Rs 950mn inventory losses.  Petrochemicals : Volumes came in at 112kt (+3% YoY). EBITDA margin stood at Rs 2.5/kg (-93% YoY, ~85% of LT RLNG in gas mix), with PBIT at Rs 0.1bn (-99% YoY).  LPG and LHC : Oil under-recovery sharing was Rs 5bn for 2QFY15 (vs Rs 0.01/0bn YoY/QoQ). Volumes came at 330 kT (-1% YoY). Subsidy adjusted margins fell to Rs 23/kg (-19% QoQ) due to usage on LT RLNG.  Petchem Pata II status : Management has guided for commissioning in 4QFY15 and ~60% utilisation in FY16.

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http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3011228