GAIL : Co’s earnings multiple looks reasonable

GAIL India surprised the market with substantially higher profit numbers, much beyond the analyst estimates. Gail’s net profit for the March 2010 quarter jumped 45% to Rs 911 crore against the analyst expectations of 12-27%. This proved to be the second-highest quarterly profits recorded by the company in its history of over 25 years.

For Gail, it was an all-round performance, as most of its major segments increased revenues as well as margins, thereby boosting profits. The impressive performance came despite a Rs 338-crore subsidy burden and a 10% increase in drywell expenditure against the year-ago period.

Natural gas trading, which accounts for the majority of the company’s revenues, proved to be the only major segment showing some stagnation. Revenues as well as profits from this segment were lower than the year-ago period, while its margins eroded, despite an 8% growth in volumes to 83.6 MMSCMD. LPG and hydrocarbons business — the segment directly affected by the subsidy sharing — reported a growth of 81.6% in profits to Rs 406.7 crore despite subsidy burden, which stood at nil in the March 2009 quarter.

The petrochemicals segment reported its historically highest profit of Rs 447 crore, as the segment’s revenues grew 17% to Rs 822 crore. This was despite a 4% Y-o-Y fall in polymer sales to 109,000 tonne during the quarter.

Gail’s last quarter numbers were also helped by an improvement in other income and a fall in interest and depreciation costs. The company also reported a substantially lower effective tax rate of 30.3% for the March 2010 quarter against 37.2% in the year-ago period.

The company has lined up aggressive investment plans worth $10 billions for the next four years, of which 70% will go in laying pipelines. For this, the company will be raising debt worth $4.5 billion in the next three years — through issue of bonds (35%), term loans (33%), external commercial borrowings (24%) and others (8%).
Surprisingly, Gail’s better results boosted its scrip, which gained nearly 3% in the past two trading sessions to Rs 440.50 on BSE, when the Sensex lost 0.7% at 16876 points. Considering the per-share earnings of Rs 26.2 for FY10, the price-to-earnings multiple (P/E) now works out to 16.8, which appears reasonable for the gas behemoth.