GAIL: Concerns remain in core businesses

However, triggers such as rate revision by the regulator could support the stock

GAIL’s performance for the quarter ended September was again disappointing. Concerns over lower gas transmission volumes and a weak operating environment have led to the under-performance of the stock in the past one year. While expectations during the quarter were not high, GAIL still reported a net profit of Rs 440 crore much lower than Bloomberg consensus estimate of Rs 520 crore.

Ebitda (earnings before interest, tax, depreciation, amortisation) at Rs 844 crore, too, was lower than Rs 1,055 crore estimated by analysts. Sales at Rs 14,088 crore though were in line with the expectations. Profitability has also impacted by a number of one-offs and, hence, with the bottom-line declining 66 per cent year-on-year, the stock lost only 1.9 per cent on Wednesday, to close at Rs 301.55. The results came after market hours on Tuesday.

The gas marketing segment, for instance, had a one-off provision of Rs 150 crore, on account of a difference between earlier non-APM (administered pricing mechanism) and APM prices that GAIL has not yet recovered from customers. Adjusted for this, the marketing segment’s earnings growth would have been flat sequentially. Decline in petchem production also was mainly due to maintenance shutdown, integration of the Pata-2 unit in Uttar Pradesh and lastly, plant shutdown at Oil and Natural Gas Corporation (ONGC)’s Hazira unit, which supplies LPG to GAIL. Thus, while production declined, the increasing depreciation costs took a toll on the segment’s profitability.

While Q2 results saw one-offs as was the case with the first quarter, one may expect a better performance in the second half. Natural gas transmission volumes, for example, could see a positive impact of gas-pooling for the power segment leading to sequential improvement in volumes. Also, on year-on-year basis, the 1.1 per cent decline in gas transmission volumes was lower than expectations, even as the impact of lower production from Reliance KG-D6 and ONGC fields is still being felt. What’s more, with ONGC production back to normal, GAIL’s LPG production is likely to revive in the December quarter.

Analysts at Nomura say as GAIL gets 100 per cent domestic gas, it will be a key beneficiary of a nearly 18 per cent price reduction from October 1. The concerns on natural gas transmission volumes and high cost petchem feed stock from R-LNG, however, will remain and keep the stock prices range bound in the interim.

For the longer-term, there are triggers that investors need to be watch for. Expected upward revision in transmission tariff calculation by the regulator is one of them. Analysts at Kotak Institutional Equities also expect increase in LNG import volumes, supported by the government’s recent policies to promote offtake from the power and fertiliser sectors. While this should help transmission volumes, analysts also expect raw material cost for LPG production to decline due to expected fall in domestic gas price in the next 3-4 quarter.