GAIL - Core profitability disappoints, maintain Neutral - PhillipCapital

Other income helps meet PAT; core profitability disappoints: GAIL IN Q2FY13 adj PAT at Rs 10.72 bn (degrew 6/8% qoq/yoy) just about met our estimates helped largely by higher than expected other income. Lower APM and KG D6 gas availability led to 3/11% fall in gas transmission on qoq/yoy basis respt. Volumes across divisions fell except petrochemicals and LPG; leading to revenues of Rs 113.6 bn up 2% qoq. Gail derecognized income of Rs 1.23 bn on account of reduction in Jamnagar Loni LPG pipeline tariff by PNGRB; adjusted for this Ebitda declined a significant 29% qoq to Rs 13.8 bn. Interest out go fell due to FX related adjustments; while other income rose to Rs 2.7 bn; curtailing degrowth in adj PAT to Rs 10.72 bn down 6% qoq.

Key result highlights: 1/ Q2FY13 LPG subsidy outgo is Rs 7.86 bn (Rs 7 bn in Q1FY13) 2/ Gas transmission vol's fell 3% qoq to 106 mcm/d and transmission tariffs rose 11% qoq on a higher base to Rs 1021/tcm 3/ Gas trading vol's fell 3% qoq to 81 mcm/d; however trading Ebit halved qoq to Rs 332/scm 4/ on a lower base Petrochemical volumes increased 53% qoq to 101 kmt, realisations although were flat. On a higher base EBIT/mt improved majorly qoq to Rs 41,402/mt perhaps led by lower gas/feed costs.

Key conference call takeaways: 1/ Gas trading volumes declined qoq, due to lower gas availability from PMT fields; also heavy monsoons in September led to closure of some power plants, hurting the gas offtake. However things have normalized now 2/ Other income qoq has gone up due to additional dividend income from JVs of Rs 1 bn 3/ Dhabol LNG terminal to commission in Jan'13 however capacity scaled down to 1.2 mmt (from 2.2 mmt earlier) due to no breakwater facility 4/ Dhabol-Bangalore pipeline phase I to be completed by Dec'12 guided for 4 mcm/d supplies to customers in Goa/Mumbai route; on completion of ph-II, Gail could transmit 16 mcm/d 4/ Indicated gas supplies from A1 Block in Myanmar (Gail 10A%) would flow from Feb'13; with pipelines getting installed by May '13 it could reach peak output of 16 mcm/d 5/Pata expansion to be completed by Feb'14 6/ Incurred capex of Rs 28 bn in H1FY13 (Rs 11 bn on pipelines, Rs 9 bn on petchem, Rs 1.6 on E&P/wind power plant each and Rs 3 bn equity contribution in Opal

Maintain Neutral: Lower petrochem margins and poor visibility on gas availability with this huge capacity commissioning this year (Dabhol-Bangalore, DVL/GREP upgradation and Chainsa-Jhajjar-Hissar) is likely to lower earnings and thus returns going forward. Clarity is yet to emerge on the proposed cap on marketing margins (particularly GAIL's marketing margins on spot gas about 20% of the overall vol's), and to that extent its earnings remain vulnerable to any regulatory interventions. However on the positive side 1/ Additional LNG availability (GDF Suez – 0.8 mmt; Fenosa – 2 mmt over next 3 yrs starting Jan'13 and Gazprom 2.5 mmt over next 20 yrs commencing in FY18-19 secures medium-long term supplies with this the Oil Ministry's support to hear into it KG D6 operator's appeal for raising production and likely gas price hikes before FY14E suggests production ramp up could be sooner. Structural measures like direct transfer of subsidy to retail and cap on LPG cylinders may likely lower GAIL's subsidy burden in the longer term. We marginally raise our estimates for FY13&14E, to account for higher other income. Maintain Neutral with a PT of Rs 400.

Source : Equity Bulls

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