Falling Volumes a Big Worry for Natural Gas Cos

Natural gas producers in India have reported healthy results for the December quarter. However, their volumes are under pressure owing to falling domestic production. Although imports are brisk, high prices in the global markets are a deterrent to faster growth, making it unattractive for investors. India’s biggest gas transporter, Gail India, reported a record high profit of . 1,285 crore in the December quarter, but it was boosted by a reduction in subsidy burden, an unpredictable factor. Its daily gas transmission volumes slid to 105 million units from 110 million units in the June 2012 quarter and 106 million units in the September 2012 quarter.
The second biggest gas transporter in India, Gujarat State Petronet, reported a 16.8% year-on-year drop in volumes at 27.2 million units a day in the December quarter — which was also lower sequentially — due to falling production from RIL’s KG-D6 field. The RIL field alone contributed 40-45% to the company’s total volumes. Its December 2012 quarter profits dipped 6% to . 119 crore.
Gujarat Gas posted a 179% growth in profit year-on year for the December 2012 quarter. However, at . 69.3 crore, the profit was still 30% lower sequentially. The dip in earnings could be primarily attributed to lower volumes — down 14% Y-o-Y and 8% Q-o-Q — on the back of higher cost, according to a report by Karvy Stock Broking.
India’s gas production has been steadily declining after peaking in the March 2010 quarter, mainly due to the fall in production at RIL’s KG-D6 block. Petronet LNG, the country’s biggest importer, did contribute by improving its import volumes.
The falling natural gas volume is a major worry for investors as new transporting capacities may remain under-utilised.
Still, there are a few positives. The government is mulling over a possible increase in domestic gas prices, which will incentivise production. Similarly, the petroleum ministry is trying to find a workable solution to RIL’s KG-D6 problems, while Gail has announced the commissioning of the Dabhol LNG terminal. Petronet LNG’s Kochi unit will commence business this April.
Howsoever, all these developments are too small and scattered to assuage investor sentiments.

Falling Volumes a Big Worry for Natural Gas Cos

Natural gas producers in India have reported healthy results for the December quarter. However, their volumes are under pressure owing to falling domestic production. Although imports are brisk, high prices in the global markets are a deterrent to faster growth, making it unattractive for investors. India’s biggest gas transporter, Gail India, reported a record high profit of . 1,285 crore in the December quarter, but it was boosted by a reduction in subsidy burden, an unpredictable factor. Its daily gas transmission volumes slid to 105 million units from 110 million units in the June 2012 quarter and 106 million units in the September 2012 quarter.
The second biggest gas transporter in India, Gujarat State Petronet, reported a 16.8% year-on-year drop in volumes at 27.2 million units a day in the December quarter — which was also lower sequentially — due to falling production from RIL’s KG-D6 field. The RIL field alone contributed 40-45% to the company’s total volumes. Its December 2012 quarter profits dipped 6% to . 119 crore.
Gujarat Gas posted a 179% growth in profit year-on year for the December 2012 quarter. However, at . 69.3 crore, the profit was still 30% lower sequentially. The dip in earnings could be primarily attributed to lower volumes — down 14% Y-o-Y and 8% Q-o-Q — on the back of higher cost, according to a report by Karvy Stock Broking.
India’s gas production has been steadily declining after peaking in the March 2010 quarter, mainly due to the fall in production at RIL’s KG-D6 block. Petronet LNG, the country’s biggest importer, did contribute by improving its import volumes.
The falling natural gas volume is a major worry for investors as new transporting capacities may remain under-utilised.
Still, there are a few positives. The government is mulling over a possible increase in domestic gas prices, which will incentivise production. Similarly, the petroleum ministry is trying to find a workable solution to RIL’s KG-D6 problems, while Gail has announced the commissioning of the Dabhol LNG terminal. Petronet LNG’s Kochi unit will commence business this April.
Howsoever, all these developments are too small and scattered to assuage investor sentiments.

POWER GRID CORP: Higher Cash Flows to Power Up Co, Stock

State-run power transmission company Power Grid Corporation’s profit for the quarter to 31 December 2012 was its highest ever. Yet the company’s stock has been falling and trades now at historical lows. However, retail investors need not fret because the weakness has more to do with the overall market trend.
Power Grid Corporation’s profit growth has been robust for the past five quarters, after the slowdown in mid- 2011. In the past two quarters, its profit touched new highs — . 1,126 crore in the September quarter and . 1,129 crore in December. Power Grid also ensured that its debt-to-equity ratio settles at an acceptable 70:30.
The street, however, appears to have ignored all these positives, for the stock has been a laggard. It has fallen almost 3% over the past year, at a time Sensex gained over 4.8%. In the few days after the December quarter results, the stock declined over 5%, when the Sensex shed just 1.2%. With analysts too recommending the stock, it is all the more puzzling as to why the Power Grid is plunging. One of the market’s concerns could be the company’s investment target of . 1 lakh crore for the 12th Five-Year Plan period, for which, it is feared, the company may have to dilute equity.
The envisaged annual capital expenditure target is . 20,000 crore, to be funded by . 14,000 crore of debt and . 6,000 crore of equity, if it sticks to a 70:30 debt-to-equity ratio. The company’s operational cash flows are adequate to meet this target, which implies that it will not have to dilute equity.
An important positive for the company is that its financial returns are improving, with more projects becoming operational. A report by Citi Research says that Power Grid’s return on equity, or RoE, will be over 17% over the next three years. Besides, it is able to generate incremental earnings through telecom, consultancy and other businesses.
A flattish trend in its stock price and an improvement in earnings have led to a steady fall in the company’s valuations. Power Grid is now trading at a historical low price-to-earnings ratio of 11.9. Retail investors may be frustrated with the languishing stock, but they would be better off if they are patient enough.

Gas Availability, Subsidies a Key Worry for Gail

Gail India posted a record high net profit in the quarter to December 2012, thanks to a low subsidy burden and with the petrochemicals division posting a robust growth after a recent expansion. The stock hasn’t performed well in the past one year, as investors continue to be worried over the steadily declining volumes of natural gas as well as the ad hoc nature of subsidies.
In the quarter to December 2012, Gail’s 18% jump in net profit took it to a record level of . 1,285 crore. LPG and liquid hydrocarbons was the biggest contributor to the profit jump as LPG subsidy was restricted to . 700 crore, of which it took credit for . 85.7 crore excess provisions for the previous quarter. The segment’s profit jumped 94% to . 592 crore. 
The petrochemical segment also performed well with revenues growing 26% to . 1,107 crore and profits rising 13.4% to . 439.5 crore. The company’s main business of natural gas transmission is hurting because of steadily declining volumes. The negative impact was partially mitigated by higher tariffs from new pipelines. Another problem is the ad hoc nature of subsidies, which means inspite of relatively lower subsidies till date, the March 2013 quarter subsidies could be substantially higher.
At just 11% above its 52-week low, the stock is trading at a price-to-earnings ratio of 10.9, which is reasonable considering the company’s scale of operations and historical valuations. However, the dwindling gas availability and subsidies will continue to dominate investor sentiments, going ahead. 
KEY POINTS In the quarter to December 2012, Gail’s 18% jump in net profit took it to a record level of . 1,285 crore
Co’s main business of natural gas transmission is hurting because of steadily declining volumes
Gail stock is now trading at a PE ratio of 10.9, which is reasonable considering co’s scale of operations and historical valuations

Govt Compensation Helps, but only if Reforms Stay

Cos’ reduced dependence on govt following gradual hike in diesel prices will keep them in better fit

    Three state-owned oil marketing companies (OMCs) have been able to post profits for the December ’12 quarter thanks to the government agreeing to make good most of their losses. But the companies remain in losses in the 9 months to the December quarter as the government’s portion of compensation is yet to be received. Nevertheless, they seem to have been fully compensated for the Oct-Dec ’12 quarter.
The three OMCs — IndianOil, BPCL and HPCL — received adequate compensation from the government and upstream companies to cover their losses, unlike the inadequate compensation of the earlier two quarters. Industry leader IndianOil, which had lost a net . 13,635 crore in the April-September 2012 period, reported a drop in net under-recovery at . 13,227 crore for the 9-month period (April-December 2012). Similarly, the second biggest player BPCL reported a drop in net under-recovery to . 5,917 crore for April-December 2012 from . 6,133 crore of the initial six months. In spite of this improvement in the 3-month period ending December ’12, the companies remain in the red for the financial year so far, as losses from earlier period are yet to be compensated. Over the past few years, the government has adopted the approach of compensating the OMCs in the March ending quarter of the fiscal to ensure they don’t post losses on an annual basis. As a result, the March ’13 quarter will be an important one for the industry.
IndianOil was the only company to post a jump in profits for the December ’12 quarter with BPCL and HPCL witnessing sharp reduction on a y-o-y basis. However, this was mainly due to IOC writing off . 6,168 crore towards entry-tax arrears under litigation in Uttar Pradesh.
On the other hand, what the companies have received for the October-December 2012 quarter is just an assurance letter from the government towards the compensation and not the actual cash. The cash would be paid only after Parliament approves supplementary budget expenditure. This means the ground reality for these companies doesn’t change much as the problems related to working capital crunch, high debt and interest burden would continue. Nevertheless, things have started improving for the industry with the government allowing a gradual hike in the prices of diesel, which was the main source of under-recoveries. A few more quarters will be needed to underline the government’s commitment to reforms. The companies’ reduced dependence on the government to determine their profitability, as and when that happens, would be the biggest trigger for their re-rating. 

‘Safety Net’ in Sai Silks IPO may be a Trendsetter

Sebi has been crying hoarse about the need for safety net for retail investors participating in initial public offerings. Now, companies seem to be listening to it. Sai Silks has come out with the first IPO to offer capital protection to retail investors. It has reserved 55% of its . 89-crore IPO, or . 49 crore, for retail investors. The promoters have committed to buy back shares up to a maximum of 1,000 from each retail individual investor if the stock price falls below the IPO price within the first six months of listing. The IPO document says the promoter group will buy up to a maximum of 1,000 originally allotted shares from retail individual allottees if the stock price falls below the issue price.
“This (capital protection) is an excellent initiative that will ensure better retail participation and is a step in the right direction,” Vikram Dhawan, director, Equentis Capital, a UK-based analytics firm, said. The timing of the safety net scheme appears to be right given that retail investor sentiment is weak, he said. 
The equity research head of a foreign brokerage house, who spoke on condition of anonymity since he is not authorised to speak to the media, also said the move could boost retail participation. “Maybe, it would take one or two more IPOs to work out all the modalities of such an arrangement. However, there is no doubt this will be a trendsetter. Gradually, more and more people will start using the scheme, which may become a permanent feature in time to come,” he said.
“Ultimately, the markets will have to operate on fundamentals, but such an initiative will ensure better discipline. Going ahead, this may lead to IPOs without safety net facing risk discounts. In other words, safety net may lead to premium pricing,” Dhawan said.
Sai Silks IPO received bids for 62.98 lakh shares against the 1.27-crore shares on offer on the first day, translating into 50% subscription till 1700 hrs, as per data available on the NSE. The company, primarily into women’s ethnic wear business, has set a price band of . 70-75 apiece for the issue, which would close on February 13. The share sale proceeds will be utilised for setting-up retail outlets, brand promotion activities, term loan repayment and meeting working capital requirements.
If successful, the capital protection scheme could be a significant reform measure in safeguarding the interests of retail shareholders. 

Deregulation will Fuel ONGC’s Future

Oil exploration firm ONGC posted its lowest profits in last five quarters in the quarter to December 31, 2012, on lower production, while the subsidy burden remained high. The profit, at . 5,563 crore, was 17% lower y-o-y, but in line with street expectations.
The market is unlikely to treat the results as a negative surprise as ONGC’s profits last year were boosted by extraordinary income. The company had booked . 3,142 crore income in the Dec 2011 quarter as Cairn India accepted the royalty payment as cost recoverable for the Rajasthan field.
ONGC shared . 12,433 crore as subsidy during the December 2012 quarter, which was only marginally lower to the year-ago quarter. The company’s subsidy burden has remained above . 12,000-crore level for seven of the past eight quarters, as it contributed over . 93,000 crore in the last two years. This resulted in the company securing a net realisation at $47.97 per barrel, 7.3% higher y-o-y. A depreciated rupee meant the realisation jumped 13.9% against the year ago period to . 2,597 per barrel.
ONGC has been facing dwindling production at its major producing field, Bombay High, through FY13. This has caused the company’s standalone production to fall 3% from 6.24 million tonnes in the December 2011 quarter to 6.05 million tonnes in the December 2012 quarter, according to the company’s press release. It has also lowered its production target to 23.64 million tonnes from 23.98 million tonnes for FY13. During the recently concluded quarter, the company’s natural gas production too fell 1% to 5.03 billion cubic metres.
ONGC’s future appears bright, mainly due to the government’s steps to gradually raise diesel prices that would substantially reduce petroleum subsidies in the coming months. The government is also considering raising prices of domestically produced natural gas. Moreover, the company’s oil production is expected to witness a jump of nearly 2 million tonnes in FY14.