GAIL - Pleasant surprise - Centrum

Surprisingly, GAIL reported strong numbers with profitability surging by 30.4% QoQ and 11.8% YoY at Rs12.8bn. It was an all round performance with strong petchem volumes backed by healthy realisations, robust liquid hydrocarbons realisations and dividend income which led to significant jump in bottom-line. Subsidy burden too was lower by 10.9% QoQ and 19.7% YoY at Rs7.0bn. Natural gas transmission volumes remained flattish QoQ at 105.0mmscmd. During the quarter the company commissioned its Dabhol LNG terminal and is currently processing second commercial cargo. We believe this will benefit transmission volumes going forward. The stock has fallen over the past couple of weeks and at this price point valuations look attractive. Hence, we upgrade the stock from 'Neutral' to 'Buy'.

Higher petchem volumes, liquid hydrocarbon realisations lead to higher revenues: GAIL witnessed over 9.8% QoQ and 10.7% YoY jump in revenues at Rs125.0bn backed by higher petchem volumes and higher liquid hydrocarbons realisations.

Gas transmission volumes flat: GAIL's gas transmission volumes remained flat QoQ at 105.0mmscmd owing to non-availability of additional gas from domestic or through LNG route. Average tariffs also remained flattish at Rs948/'000scm. However, petchem volumes jumped by 26.7% QoQ at 128,000mt which benefitted the performance. Additionally, LPG and liquid hydrocarbons segment's realisations jumped by over 30% QoQ which led to over 7-fold QoQ jump in the segment's EBIT at Rs5.9bn. Operating profit thus expanded by 41.8% QoQ and 8.1% YoY at Rs20.0bn.

ONGC dividend income and lower QoQ subsidy burden offer support: Other income jumped 6-fold YoY at Rs1.5bn due to Rs1.0bn dividend received from ONGC. Subsidy burden climbed down by 10.9% QoQ and 19.7% YoY at Rs7.0bn thus further supporting the bottom-line. Higher petchem volumes backed by healthy realisations, robust liquid hydrocarbons realisations, dividend income and lower subsidies led to 30.4% QoQ and 11.8% YoY jump in bottom-line at Rs12.8bn.

Volume growth in near term expected from Dabhol, Petronet's Kochi LNG terminal: GAIL commissioned its Dabhol terminal in December and is already processing its second LNG cargo. Hence some volumes are likely to be added from Dabhol. Additionally, Petronet's Kochi terminal is expected to be commissioned by Q1FY14E which will lend further support to transmission volumes. Any policy action on the oil and gas sector will benefit GAIL also to some extent. The stock has recently fallen and is looking attractive from valuations perspective at current levels. It is available at 10.8x and 10.4x FY13E and FY14E EPS of Rs30.9 and Rs32.2 respectively. We have upgraded the stock from Neutral to 'Buy' due to its attractive valuations with SOTP-based target price of Rs373 (earlier Rs365).

Source : Equity Bulls

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