GAIL INDIA: Subsidy Uncertainty, Low Volumes a Worry

The rise in Gail India’s June quarter net profit beat market expectations, though it was mainly on account of a relatively lower subsidy burden. The dwindling gas volumes remain a worrying factor given the unpredictability of future subsidies and the interest cost on aggressive capital expenditure. Gail’s net profit grew 15% to . 1,133.8 crore in the June quarter while its subsidy share stood at . 700 crore. The upstream share of subsidy (contributed by ONGC, Oil India and Gail) is down to 31.5% of the total under-recoveries of the industry in the June quarter from 40% in March. The other positive was higher marketing margins on spot LNG sales.
Its natural gas trading business reported a 28.3% jump yo-y in revenues and a 58.3% spurt in EBIT in the June quarter. The segment’s margins gained 110 basis points to 5.4%. However, Gail’s natural gas sales dropped 6.1% to 109.8 mmscmd from the yearago quarter, while traded volumes were 1.6% down at 83 mmscmd. Similarly, it reported a 25% drop in production of polymers at 66,000 tonnes, while the production of LPG & other hydrocarbons was down 7.7% at 322,000 tonnes.
While these statistics show a weakness in Gail’s core business, aggressive capex plans are adding to costs. The interest burden has jumped 183% to . 58.8 crore y-o-y.
The advent of natural gas regulator PNGRB also adds to the operational uncertainties faced by Gail. Earlier this July, PNGRB slashed transmission tariff for Dadri-Bawana-Nangal pipeline by 57% to . 11.85 per mmBtu. Such moves can reduce its return on capital employed in its upcoming pipelines as well.
Dwindling domestic natural gas production is expected to keep the growth in natural gas transmission low. For FY13, it has kept its target at 120 mmscmd, unchanged from last year. The scrip now trades at a P/E of 11.9, which may be seen as inexpensive considering its historical valuations.
However, there are concerns regarding the uncertainty over the subsidy burden and stagnating core business, which will continue to weigh on its valuations.