Subdued outlook for GAIL

Weak petchem margins, high feed-stock prices, lower utilisation of gas pipeline infrastructure are likely to keep stock under pressure

GAIL reported a dismal set of numbers for the quarter ending March 2015. Immense losses suffered by the petrochemical segment and the lower trading/marketing margins had a sharp bearing on its performance, which came in below Street expectations. The stock, which fell 4.5 per cent intra-day, closed with a loss of 1.85 per cent at Rs 381.15 after-results on Wednesday.

While the loss in the petchem segment might have been due to high utilisation of feed stocks looking at trial runs of the new Pata facility in Uttar Pradesh, moving forward also, the outlook is not very encouraging. The company will be using high-cost imported LNG (which it has contracted on long-term basis from suppliers) leading to high costs of feed stock at a time when spot prices of LNG are much lower. Beside, petchem margins also remain soft. However, output from the Pata facility is expected to start from July’15, which though will add to the company’s volumes.

GAIL’s extensive network of pipeline, too, remains under-utilised due to shortage of natural gas and low demand for high-priced imported LNG cargoes (long-term contracts) looking at low spot prices of LNG. Due to these two factors, analysts remain worried, and expect the stock to stay under pressure.

Sachin Mehta at Centrum Broking who has ‘hold’ rating on GAIL in his preview note had said the impact of fall in crude price and resultant impact on petchem prices would be pronounced in Q4’FY15 and FY16, as new capacity gets commissioned. However, the loss came much more than his estimates. This, coupled with sourcing of regassified LNG on long-term basis (which is expensive by $5-6/mBtu, or million British thermal unit, as compared to spot contracts) will dampen earnings, believes Mehta.

Such was the impact of the two factors that it nullified the benefit of nil subsidy burden in the March 2015 quarter compared to Rs 500 crore in the year-ago and previous quarters.

For the March’15 quarter, the company’s sales at Rs 14,235 crore, down about two per cent year-on-year, were about four per cent lower than the Bloomberg consensus estimate of Rs 14,778 crore. However, the earnings before interest, tax (Ebit) loss of Rs 154 crore reported by GAIL in the petrochemical segment compared to a profit of Rs 196 crore in the year-ago quarter impacted its profitability. The other dent was provided by the trading/marketing margins as natural gas marketing Ebit at Rs 93 crore, though higher than Rs 51 crore in the previous (December’14) quarter was much lower than Rs 196 crore in the year-ago quarter. Thus, it’s not surprising that company’s earnings before interest, tax, depreciation and amortisation (Ebitda) at Rs 608.19 crore came in much lower than the  Bloomberg consensus estimate of Rs 1,113 crore. Net profit at Rs 511 crore, thus, also was much lower than Rs 703 crore estimated by the street.

Harshad Borawake at Motilal Oswal Securities says, “We remain Neutral (on GAIL) due to medium-term earnings concern led by under-utilisation of its new gas pipeline network and profitability concerns on the new petchem facility.” The consensus target price as per analysts polled on Bloomberg during the month of May at Rs 419 also indicates limited upside.