GAIL India

Valuations in step with sterling performance

GAIL India's scrip gained 3.1% to close at Rs 438.70 as it reported a better-than-expected result for the December 2009 quarter. The company more than tripled its profits for the quarter to Rs 860 crore while it transported an additional 29% natural gas at 109 million cubic meters a day. 

   Although Gail couldn't post a major growth in volume terms or at the net sales level, the reduction in its subsidy burden to Rs 455 crore from Rs 905 crore boosted the margins. 

   This enabled its liquid hydrocarbons business to post a robust profit of Rs 125 crore as against a loss of Rs 250 crore in the December 2008 quarter. 

   The other important contributor to Gail's higher profitability was reduced E&P expenditure. The company wrote off Rs 20.2 crore in December 2009 quarter towards dry well expenditure, much lower against Rs 109.4 in the year ago period. 

   Staff costs also reduced against the year ago period as Gail reversed some earlier staff cost provisions. At the same time its cost of traded goods came down 11% mainly due to the reduction in imported LNG rates. LNG cargoes were being imported at a rate above $10 per million British thermal units (mBTU) in the year ago period, which averaged around $7 per mBTU during December 2009 quarter.
   Being cash-rich, Gail earns a sizeable other income every quarter. The December 2009 quarter saw its other income fall 45% y-o-y as interest rates dipped and it used a part of the funds in project execution. 

   At the current market price, Gail is now valued at 19.5 times its profits for the trailing 12 months. 

   It is investing heavily to lay the national gas grid and is planning to add over 6,600 km of pipelines in the next three years. Considering the long gestation period for its pipelines, the current valuations appear fair for the company.