Street confident of GAIL sustaining its good show

Improving show of petrochemicals and other segments to drive profit growth, say analysts

GAIL's results for the quarter ending September 2016 (Q2) has instigated confidence on the turnaround in the company's performance. Not only has the company delivered better than expected profits, but most of its businesses are doing well now.

To start with, the anticipated rebound in petrochemicals (petchem) segment's profitability led to the jump in core earnings and was supported well by uptick in the transmission segment. From a loss of Rs 238 crore in year ago quarter, the petchem segment posted a profit of Rs 155 crore at the operating level. Higher raw material costs including of imported gas used as feedstock was a big drag on its profitability.

However, the fall and consequent renegotiation of imported gas prices at start of the year provided a relief. Nevertheless, the stabilisation of its new facilities at Pata in Uttar Pradesh which took time leading to high operating expenses, have also reversed. The March 2016 quarter did not see desired results, but while some benefits started flowing from June quarter the stabilisation of Pata-based capacities have led to lower operating expenses. This is boosted petchem's profitability. Hence, even as petchem prices were softer on a sequential basis, led by better capacity utilisation and lower input costs the segment's operating profit jumped a 67 per cent sequentially.

The benefits of lower natural gas prices, renegotiation of imported gas prices and improving demand have also benefitted GAIL's gas marketing and transmission services business. Operating profit of the gas transmission business improved 9 per cent year-on-year and 13 per cent sequentially.Transmission volumes at 101 mmscmd (million metric standard cubic meter per day) improved 12 per cent year-on-year and 5 per cent sequentially and tariff too improved. Gas trading business' operating profit was also up 72 per cent as volumes grew 9 per cent year-on-year and trading margins increased by more than half.

With all round benefits accruing, it was not surprising that GAIL's net profit surged 180 per cent year-on-year and at Rs 925 crore came higher than Bloomberg consensus estimates of Rs 905 crore. Profits would have grown more but for dry well write-offs and provision of VAT liability. Adjusted for one-offs, profits would have come at Rs 1,032 crore.

Notably, analysts say the performance is sustainable. Sachin Mehta at Centrum Broking says that the positive turnaround in petchem is sustainable. Rebound in volumes and realisations, stable trading margins and increase in tariffs and transmission volumes will remain key positives which will ensue, adds Mehta. Analysts at Edelweiss foresee robust earnings momentum as cyclical segments (petchem, LPG) benefit from gradual oil recovery, benign feedstock costs and ramp up of petchem units. Edelweiss has a target price of Rs 509 while Centrum's is at Rs 475.