GAIL: Aggressive capex will ensure robust growth

NATURAL gas major Gail’s stock has fallen over 3.1% after it announced results that were below the market’s expectations. The maintenance shutdown of petrochemicals plant, mainly, dented profits. However, this is a non-recurring aspect and the company’s future growth prospects remain robust. Hence, a further slide in its share price appears unlikely.
Gail’s 13% net profit growth during the December 2010 quarter was much below analysts’ and investors’ expectations. After the subsidy burden fell 8% against the year-ago period, a robust profit growth only seemed natural. However, the petrochemicals division, the second-largest profit-making unit for the company, proved to be a spoilsport with profits falling 43% while sales came down 30% in comparison with the last December quarter. A three-week shutdown at its polymer plant to add another gas cracking furnace, combined with annual maintenance, was the primary reason behind lower production, sales, revenues and profits from this business during the quarter. But, the good thing is that the company’s polymer production capacity now stands 10% higher at 450,000 tonnes per annum. From the March quarter, the company can expect to benefit from higher polymer volumes.
Another important aspect of Gail’s numbers was the fall in its operating profit margins to the lowest level in eight quarters. Besides the petrochemicals division, the natural gas transmission business, which is the largest profit-making segment of the company, also witnessed margin erosion.
Higher interest and depreciation costs also impacted the company’s earnings as its capex projects kicked off.
All this while, the company continued to expand its transmission volumes, which crossed 120 million cubic metres per day during the quarter — 10% higher than the year-ago period. The sales volume of its gas was 3% higher at 83.4 million cubic metres per day.
Gail continues with its aggressive capacity expansion drive, which will see it invest over . 29,000 crore between FY11 and FY13, effectively doubling its gross block from the FY10 levels.
During 2011, the company expects to commission at least 1,500 km length of new pipelines, which will be a 20% addition to its existing network.
The addition to its transmission capacity will be much higher at 40% from around 150 million cubic metres per day today.
The recent correction has brought down the company’s valuation to 16.1 times its profits for the trailing 12 months from over 18.8 just two weeks ago. In view of the growth prospects over the next 2-3 years, the current valuation leaves scope for appreciation in the long run.