GAIL: Operating performance still short of expectations

The better numbers in Q4 have been led by lower taxes and not a substantial improvement in operating performance

GAIL's performance for the quarter ending March 2016 has been a mixed bag. The company, which had been under pressure due to declining demand for its higher priced imported gas, has seen sentiments improve post renewed contracts with Qatar-based RasGas leading to a downward revision in imported gas prices. Thereafter, GAIL's performance has also improved in most business segments, but the quantum of improvement is what has left the street pondering about.

Company has seen its net profit improve from Rs 511 crore in year ago quarter to Rs 664 crore in December'15 quarter and to Rs 770 crore in March'16 quarter. The reported profit beat the Bloomberg consensus estimates of Rs 704 crore by a good margin. However, the numbers have been primarily led by lower taxes and not a substantial improvement in operating performance. Analysts say tax rate came at 19 per cent compared to the expected 30 per cent partly aided by a tax reversal of Rs 52 crore.

Operationally, Ebitda at Rs 1,119 crore was lower than estimate of Rs 1,269 crore and so were revenues at Rs 11,732 crore (estimate of Rs 13,419 crore).

Amongst segments, petchem continues to remain in losses even as feedstock prices are down. One reason for the loss in March quarter is that volumes at 110,000 metric tonnes (MT) were also lower than expectation of around 140,000 MT. But, as GAIL uses imported natural gas as feedstock, the prices for which have been negotiated downwards, losses reduced from Rs 161 crore in December'15 quarter to Rs 109 crore in March'16 quarter.

Sachin Mehta at Centrum Broking says, "Core earnings were weak. Earnings from petchem segment was a disappointment." Mehta infers that while plant operations have stabilised, the additional sequential jump in petchem volumes is been sold at discount and commercial sales have not really commenced, thus leading to lower than expected earnings.

Transmission services, gas marketing, etc are seeing positive traction in profitability but LPG and liquid hydrocarbons' segment continues to disappoint on the profitability front. EBIT for the latter two at Rs 164 crore was lower than Rs 233 crore in the previous quarter and Rs 283 crore in the year ago period. Others segment (exploration and production, city gas, power generation) have seen some uptick.

Overall, while there is improvement in performance, it is below street expectations. Analysts as those at Nomura said that after a good Q3, they expected GAIL's earnings revival to continue in Q4, but offset somewhat by lower domestic gas availability. In their view, Q1FY17 will be the quarter to watch out for, as GAIL should see the benefit from a petchem volume ramp-up/price recovery, a domestic gas price cut and likely increases in tariffs.

Thus, the stock priced at Rs 381 substantially up from lows of Rs 260 may remain range-bound in the near term till these expectations materialise.