Higher base takes steam out of Gail’s spectacular show

GAIL’S otherwise excellent operating performance for the September 2009 quarter appeared dismal compared to the year-ago period, mainly on account of a higher base effect. The quarterly profits at Rs 713 crore were 30% lower only due to the abnormally high profits in the September 2008 quarter. Gail had enjoyed the benefit of higher LPG realisations, alongside a benign subsidy burden, which had boosted its quarterly profits beyond Rs 1,000 crore for the first time in its history.
The company, however, wrote off an additional Rs 258.5 crore in the subsequent quarter towards underprovisioning of subsidy in September 2008 quarter. The main highlight of Gail’s September 2009 quarter results was the spurt in volumes of natural gas transported. The transmission volumes jumped 30.5% to 106.58 million standard cubic metres a day (mscmd) for the first time crossing a three-digit level.
The revenues from this segment jumped 39% with profits growing 58% to Rs 616 crore, which was two-thirds of its gross profit. With the volumes of gas transported growing within the country, the importance of this segment will continue to grow. Till FY09, the natural gas transportation business, which has traditionally been its single-largest profit earning segment, had contributed around 40% of profits, which jumped to 50% in the quarter ended June 2009.
The company also indicated a significant fall in its expenditure written off on its exploration efforts. The spending on dry wells stood at Rs 17.7 crore, nearly one-third of the year-ago period. The company had written off around Rs 87 crore on an average in the preceding three quarters. This reduction does not indicate any reduction in E&P activity, but only that the results are not out. Hence, there is a possibility that the coming quarters could see a jump in this expenditure.
Going forward, Gail will continue to benefit from rising volumes of natural gas in India. The company’s proposal on revised pipeline tariff is pending with the Petroleum and Natural Gas Regulatory Board. However, no significant change is expected in its tariff structure.
The scrip, which lost over 11% in preceding five trading sessions, currently values the company at 19 times Gail’s profit for trailing 12 months. Considering the steady growth prospects ahead, the valuation appears reasonable.