Stock Review: GAIL

Gail's steady growth resumed in the June '11 quarter, after the blip of March '11 quarter, which was affected by a jump in subsidy burden. The company's volume growth stagnated during the quarter while the profit growth came mainly from lower subsidy burden and higher margins in the gas transmission business. The company completed major work on the Dahej-Vijaypur II pipeline during the quarter. However, sourcing additional gas will be its key challenge, going ahead, as its additional infrastructure comes into play.

Natural gas trading was the only business segment for Gail that pulled its numbers up for the Junuary '11 quarter — a trend that is visible for the past few quarters. The segment, which represents nearly 80% of Gail's revenues, posted a strong 32.2% revenue growth even as volumes slipped 2.6% to 82.63 mmscmd, or million standard cubic meters per day. A strong 140-basis-point expansion in margins to 4.3% nearly doubled segment's profit to . 313.1 crore. A basis point is one-hundredth of a percentage point.

The LPG and liquid hydrocarbons business, which suffers the most due to the subsidy it had to bear, turned in decent profit of . 228.5 crore. This was 2% below the year-ago period. But it is substantially better than . 73-crore loss posted in the March '11 quarter.

Gail had to contribute . 682 crore toward oil retailers' under-recoveries during the June '11 quarter, which were 53% higher against the year-ago period. Still, they were nearly 25% lower to the March '11 quarter, though under-recoveries had increased in the June '11 quarter. This proved vital in its profit growth to its highest level in almost three years.

In terms of physical performance, the company had little to talk about. Gail's overall transported gas volumes inched up around 0.8% to 117.16 mmscmd while LPG transportation volumes grew 3.7% to 788,000 tonne. However, its own production and LPG sales and other liquid hydrocarbons were lower than the year-ago period. Similarly, in case of polymers, although production was 10% up, sales volumes were stagnant.

Considering current results, the scrip is now trading around 15.9 times its earnings for trailing 12 months. For the largest domestic natural gas transporter, these valuations are at a substantial discount to smaller players such as Indraprastha Gas and Gujarat Gas. However, the company faces challenges in continuing with its volume growth, particularly when domestic availability of natural gas is not improving.