Stock Review: GAIL

THE September 2010 quarter results of natural gas major Gail India were in line with the street estimates as it benefited from marketing margin on APM gas and yo-y reduction in the subsidy burden. However, there was a noticeable fall in volumes as a couple of its plants underwent maintenance shutdowns and a shutdown at Panna Mukta Tapti fields reduced availability of gas. Gail's subsidy burden for the quarter came down 24% y-o-y to . 346 crore, which boosted performance of its LPG business. The PBIT from the LPG and liquid hydrocarbons business stood at . 175 crore, as against a loss of . 73 crore in the year-ago period. However, production was 10.6% lower at 337,000 tonnes as its Vijaypur plant was shut down for maintenance.

The company's natural gas sales volumes were 2.5% lower at 79.04 million metric standard cubic meter per day (mmscmd) during the September 2010 quarter as supply from the Panna Mukta and Tapti fields was down for most of the quarter due to technical problems. For the quarter, the company reported a 30% growth in net sales to . 8,128 crore. Although its operating margin improved y-o-y by 130 bps to 17.9%, it was the weakest in the last four quarters. Between the December 2009 and June 2010 quarters, the company had maintained its operating profit margin above 20%. The company's y-o-y growth rate at the PBDIT level was 35%, which increased to 40% at the pre-tax level thanks to a fall in the interest cost and slower growth in depreciation. However, the company's deferred tax provisions soared disproportionately, bringing down the growth at the net profit level to 29%. The jump in deferred tax provision was mainly on account of the tax exemption enjoyed on the cross-country new pipelines, which became available to the company during the quarter for the first time. A high level of deferred tax is likely to become a characteristic for the company as more and more pipelines commence operations.

In the petrochemicals business, the company had to shut down its Pata plant for scheduled maintenance as well as debottlenecking. This brought down volumes by 9% to 93,000 tonnes and was partially responsible for the pressure on the margin, bringing down profits when compared with the year-ago period.

The company has embarked upon an ambitious expansion project, which will triple its gross block in the next four years. Being the largest player in its field, it is also a natural beneficiary of the increasing gas volumes in the country. With the government planning to introduce some formula to apportion oil industry's under-recoveries, Gail stands to benefit from a better visibility on its earnings.