GAIL INDIA: Co may have to Settle for a Higher Subsidy Share

Interpreting Numbers & Trends For gas behemoth Gail

Gail India’s earnings for the quarter to December look good, but only because of a benign subsidy burden booked on a provisional basis. 
This just adds to the growing list of uncertainties that the company has to face, including lack of visibility in gas volume growth and the government’s recent move to regulate marketing margins. It is hardly surprising to see the Gail stock drifting lower after the results were unveiled.
Gail’s 13% profit growth at . 1,091 crore was not a big surprise and is in line with its September quarter numbers. The 35% growth in net sales to . 11,294 crore proved to be the main driver. Other income dropped 89% to . 21.4 crore, while interest and depreciation grew in double-digits, while its effective tax rate rose to 31.7% from 28.1% last December.
What buoyed its performance was the subsidy of . 536.12 crore, which was accounted for on a provisional basis with the government yet to announce its share. When the government finally announces it, the amount could be substantially higher considering the government is cash-strapped. “For FY12, we model upstream subsidy share at 40% and, hence, major impact of subsidy will be in the March ’12 quarter as the actual subsidy in the first three quarters was based on a 33% upstream sharing assumption,” brokerage Motilal Oswal said in a report.
Gail is expected to complete a capex of nearly . 4,000 crore in FY12 and another . 9,000 crore in FY13. However, its natural gas volumes are unlikely to see much improvement. Increase in domestic production and imports are likely to be barely able to replace the dwindling KG-D6 volumes. This raises concern of under-utilisation of new pipelines in the medium term. Timely completion of its Dabhol terminal will be crucial for its volume growth. Most brokerages expect its FY13 volumes to average in the 119-123 mmscmd range from around 118 mmscmd for FY12. The government recently told the regulator, PNGRB, to determine marketing margins on natural gas sold by Indian players. If implemented, this will have a negative impact on Gail. The marketing margin of $0.24 per mmBtu contributed around 20% to Gail’s net income in the December quarter, according to a report from HSBC Global Research. 

KEY POINTS The subsidy booked on provisional basis is 536 cr Capex of 4,000 crore (FY12) and 9,000 crore in (FY13) unlikely to lift production much Regulator PNGRB determining the marketing margins to hit margins