Gail India - Q2FY14 Result Update - LKP Research

GAIL's Q2FY14 net profit of Rs9.16bn was significantly higher than our estimate of Rs8.2bn primarily due to higher other income during the quarter. GAIL's subsidy burden for the quarter was constant on a sequential basis at Rs7bn, which was lower than our estimate of Rs7.5bn. Net revenues at Rs139.4bn registered a jump of 22.7% yoy mainly on account 27.7% increase in gas trading revenue while petchem and LPG and OLHC revenues increased by 28.8% and 35% respectively. GAIL's gas transmission volumes during the quarter declined by 10.4% yoy to 95mmscmd due to fall in volumes from RIL's KG D6 while gas transmission tariff increased by 23.1% yoy to Rs1,152/tcm. Petchem sales volume increased by 6.9% yoy (qoq -10.7%) while realizations increased by 20.5%/15.1% yoy/qoq. Petchem margin during the quarter declined by 524bps sequentially to 34.5% (yoy -1,305bps). Gas trading segment's EBIT during the quarter increased by 2x to Rs4.87bn doubled as trading margin increased by 81.2% yoy to $0.31/mmbtu.

In the near term, we believe that concerns relating to lack of growth in GAIL's key gas transmission segment could be an overhang on the stock. Further, the proposed increase in APM gas price would affect GAIL's petchem business while lack of gas supply from RIL's KG D6 would continue to affect its LPG extraction business. However the likely exemption of GAIL from subsidy sharing mechanism would help abate the impact of higher APM gas price.

We maintain our NEUTRAL rating on GAIL with SOTP based price target of Rs362. At the CMP, the stock is trading at 10.2x and 7.0x FY15e earnings and EV/EBITDA respectively.

Source : Equity Bulls

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