UNLIKE its larger peer in the oil E&P industry, Gail was able to shrug off the heavy subsidy burden in the June ’10 quarter and post a handsome profit growth, mainly due to higher volumes and improved margins across all its segments. The results have been more or less better than the Street’s expectations and should strengthen investor confidence in the company’s growth, going forward. Although the company’s current valuations appear somewhat stretched, a majority of broking firms have this stock in their ‘top picks’ from the petroleum sector. Although Gail’s subsidy burden rose for the June ’10 quarter, it jumped only six times against the year-ago period, unlike the 12-fold jump in ONGC’s case. In view of the overall volumes and margins expansion, this spurt in subsidy burden proved benign. In fact, it’s the LPG & hydrocarbons business, which absorbs the subsidy burden, registered a strong 56% profit growth to Rs 233.3 crore due to higher volumes as well as higher prices. The segment’s 14% net sales growth was contributed equally by volume and price hikes.
The company owning the longest natural gas transmission capacity has found itself in a sweet spot, as the natural gas availability within the country grew steadily last year. Similarly, the government’s diktat to decontrol the natural gas pricing enabled it to charge marketing margins. Both these factors boosted the profitability of its natural gas trading segment by nearly 50%, as the margin improved 60 basis points to 2.9%. The transmission business also registered a double-digit profit growth.
In the polymers segment, the company registered a 4% volume drop, which was made up for by 4.4% higher prices. The company posted a 7.7% increase in the segment’s profits. After scaling to a high of Rs 516, Gail’s shares have retreated below Rs 450. Considering the current quarter’s earnings, the share is now trading at a price-to-earnings multiple (P/E) of 16.8. Going by its historical valuations, Gail’s current valuation appears somewhat stretched. However, its stable business and plans to lay new pipelines over the next 3-4 years appear to justify it.
The company has embarked upon a heavy capex programme that will triple its gross block within the next four years. At present, the growth in India’s natural gas consumption has slowed down due to lack of transmission infrastructure. As Gail’s new pipelines come up, the availability of gas in India — through production as well as imports — is set to grow rapidly. With a strong balance sheet and an array of supporting businesses to diversify earnings, Gail’s growth in the future will continue unabated. Natural gas being a cheaper alternative to liquid fuels also makes it a recession-proof business.
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