GAIL: Transmitting profits

Better petrochemical and LPG prices boost the top line.

The Rs 18,008 crore GAIL‘s net profit for the June 2008 quarter at Rs 890 crore, up 31 per cent y-o-y, has surprised the Street. Analysts had already pencilled in a lower share of subsidy that the company provides to oil marketing companies, who are retailing finished products such as petrol at prices below costs to consumers.

The burden in the last quarter was Rs 480 crore. But where the Street was expecting a fall in GAIL’s operating profit margin, the company scored by maintaining it at 24.5 per cent. Two factors contributed to the sharp 43 per cent rise in the operating profit of Rs 1,400 crore. First, higher crude prices helped the LPG and petrochemical segments and second input costs for gas were lower.

The company, which primarily buys and distributes gas, was able to post a 35 per cent y-o-y rise in the top line to Rs 5,731 crore because transmission volumes for natural gas were higher by about 7.4 per cent. Besides, the firm also traded higher gas volumes of over 17 per cent during the quarter.

The company, distributed lower volumes of petrochemicals but that was made up with price increases. It was the same for LPG where realisations improved by about 40 per cent on account of higher prices but volumes fell marginally.

Going ahead, GAIL will benefit from its partnership with Reliance Industries; the company will transmit gas from the KG-D6 field. It is likely to enter into an arrangement with Petronet LNG to transmit gas from Dahej. Gas transmission volumes for GAIL, over the next two years, are estimated to increase by about 20-25 per cent.

The company has also identified 230 cities to distribute gas in a phased manner. It has already bid for licenses for 7 cities. GAIL’s revenues expected to grow at around 21-23 per cent to around Rs 22,000 crore this fiscal with net profits growing by approximately 16-18 per cent to about Rs 3,000 crore. However, should the government increase GAIL’s subsidy burden profits could be lower.

GAIL’s stock has corrected by 36 per cent since the start of the year. At the current price of Rs 407, the stock trades at 12 times its estimated FY09 earnings.