GAIL: Transmission volumes to give a boost

Q3 was boosted by increasing revenues and profitability in the natural gas trading and LPG businesses

Through two trading sessions, Gas Authority of India Ltd (GAIL) has gained about two per cent, owing to good results for the quarter ended December 2013, even as the benchmark Sensex lost 140 points. Analysts believe GAIL’s gains will be sustained. While the December quarter saw a rise in revenue and profitability in the natural gas trading and liquefied petroleum gas (LPG) businesses, analysts say gas transmission volumes are bottoming out and the petrochemical segment will get a boost from capacity additions.

Many analysts, therefore, have upgraded their target prices. Analysts at Nomura say, “Our conviction on GAIL has been high; the numbers for the December quarter are reassuring.” They have increased their target price to Rs 450 from Rs 400. Nitin Tiwari at Religare Capital Markets has revised his target price to Rs 475 from Rs 450. Of the 25 analysts polled by Bloomberg since GAIL’s results on Wednesday, 19 have ‘buy’ ratings, four ‘neutral’ and two ‘sell’, with a consensus target price of Rs 385, an upside of 10 per cent from the current Rs 350.

Natural gas trading, LPG upbeat
At Rs 15,981 crore, GAIL’s net sales rose 28.1 per cent year-on-year and 14.8 per cent sequentially; the Bloomberg consensus estimate for net sales stood at Rs 15,019 crore. The major boost to revenues and profits was provided by natural gas trading, which saw a 31 per cent rise in revenue at Rs 13,287 crore (75 per cent of overall revenues), besides a 69 jump in profit before interest and tax (PBIT) at Rs 336 crore, on a year-on-year basis.

Revenue in the LPG and liquid hydrocarbon segment, contributing about 11 per cent to revenue, rose 51 per cent year-on-year to Rs 1,934 crore, while profitability improved due to lower subsidy burden. As such, it turned into the most profitable segment for GAIL, contributing about 36 per cent at the PBIT level. This segment’s PBIT jumped 28.8 per cent year-on-year to Rs 762 crore.

Transmission, petrochemical to gain
Transmission services (revenues up 20 per cent year-on-year to Rs 1,189 crore) saw PBIT fall 33.6 per cent year-on-year and 28.6 per cent sequentially to Rs 4,112 crore. Gas transmission volumes remained flat at 95-99 million standard cubic metres a day (mscmd) for the last four quarters.

Religare’s Tiwari is optimistic on the outlook. He feels transmission volumes have likely bottomed out. “While Reliance has indicated maintaining its gas production levels, further ramp-up should be positive for the increase in gas availability. The one-mscmd addition from Deen Dayal fields in the KG basin will be positive for gas availability; ONGC is also increasing production.”

Analysts at Nomura say transmission profitability was affected by one-offs, adding rates have potential upsides (not factored in numbers yet).

Only the petrochemical business was weaker than expected, due to lower sales and higher gas costs. However, analysts feel this segment may surprise in the fourth quarter. Further, capacity additions in this space are set to be completed by the end of FY14 and could lead to volumes doubling.

At Rs 2,232 crore, GAIL’s earnings before interest, tax, depreciation and amortisation rose 11.5 per cent year-on-year, beating estimates of Rs 2,070 crore. Net profit was up 33.6 per cent at Rs 1,679 crore, boosted by an exceptional income of Rs 345 crore. Excluding this, adjusted net profit rose 3.9 per cent year-on-year to Rs 1,334 crore, higher than estimates of Rs 1,247 crore. A lower fuel subsidy burden of Rs 1.34 crore, which analysts had anticipated, also helped.