GAIL: No Relief in Sight

India’s biggest natural gas company- Gail has been hit over the past two years marked by an ad hoc subsidy burden and operational issues. Dwindling natural gas volumes are makings its operations less profitable even though it is continuing its expansion projects.
During the past two fiscal years, Gail expanded its natural gas transmission capacity nearly 25% to 214 MMSCMD by spending nearly 6,000 crore to a pipeline length of 10,700 km. Still the natural gas flowing through its network was 18% down in the June quarter to 99 MMSCMDfrom 120 MMSCMD in the quarter to March ’11. This has impacted the return Gail earns on its employed capital (RoCE) which has dropped steadily in the past two years. This has prompted Gail to scale down its capital expenditure plans. Two years ago, it had projected 9,622 crore of capital expenditure for FY14, which was cut to 5,398 crore recently. This strain is reflected in the 33% drop in the company’s value in the past two years. However, there does not appear to be any near-term prospect of improvement.

Rains Can’t Wash Away Fert Cos’ Woes

India may be gearing up for a record agricultural output this year, but domestic fertiliser makers are unhappy. That is reflected in the industry’s gross under-performance on the bourses over the past one year, with most companies having shed between 10% and 60% in value. There may be some improvement in sight, but hardly adequate to make any significant impact on the industry's fortunes.
Sales volumes of the fertiliser industry have been under pressure of late. Provisional data released by the fertiliser ministry shows that total fertiliser sales in the April–June 2013 quarter were down 10.2% compared to year ago. Volumes fell for de-controlled fertilisers, while urea volumes grew 6% to 5.9 million tonne.
“Failure of monsoon last year led to lower sales, which has led to carry forward of higher inventory of finished fertilisers in the current fiscal. This, in turn, would again impact production levels in the current year,” says G Chokkalingam, chief investment officer at Centrum Wealth Management.
Volumes are still down, but a better monsoon is helping companies liquidate their inventory, with urea sales jumping 27% y-o-y in the single month of June 2013. Even non-urea volumes showed a marked improvement in June on a sequential basis. A note from Edelweiss Securities says that non-urea production volumes grew 3.7% y-o-y in June 2013 after 15 straight months of decline, with the only exception of December 2012. 
A recent report from brokerage house Prabhudas Lilladhar also says that their channel checks revealed an improved traction for fertilisers in past one month. The area sown has increased to 518 lakh hectares as compared to 342 lakh hectares at this time last year, the report says. The industry is also battling worsening working capital cycle. “Over . 30,000 crore of subsidy for FY13 was not cleared to the fertiliser companies impacting their balance sheets,” says Centrum’s Chokkalingam. A fall in the rupee over the past two years will also bloat the working capital needs of the industry, according to him. In other words, although the uptick in volumes is a good indication, the sector won’t benefit in the near term.
“We believe short-term challenges persist for the industry due to excessive channel inventory,” says an Edelweiss report. It expects manufactured volumes to pick up, but traded volumes to take a hit. “The underperformance by the sector is likely to continue till the government comes up with strong measures towards mounting subsidy burden on the fertiliser companies,” says Ajit Mishra, assistant vice-president, equity retail research, Religare Securities. Centrum’s Chokkalingam advises investors to stay away from the sector at least in the near term. “Investors can actually wait for June 2013 quarter results, which are expected to turn out poor for many companies,” he says. 

HISTORIC HIGH: Other income rose 33% from a year ago to . 2,535 cr

Other income rose 33% from a year ago to . 2,535 cr 

Other Income Fuels RIL, Capex may Boost Stock 

    It has been close to two years since Reliance Industries, or RIL, reported extra gains from treasury operations to spring a surprise or two while unveiling its quarterly numbers. The company’s results for the quarter to June stood out for the fact that treasury gains were at an all time high, beating analysts forecasts.
RIL’s other income for the quarter soared 33% compared with the yearago period to . 2,535 crore, a historic high. The company said this was mainly on account of profit on sale of investments in fixed income instruments and higher average liquid investments.
Two factors have contributed to this. First, the company was generating more cash than it was investing, resulting in a bulging cash balance, which was . 93,066 crore at the end of June this year. Second, the company was using low-cost foreign currency debt — $12 billion, according to Barclays’ estimates — to fund its capital expenditure plans. This helps it to book interest income on idle funds as income every quarter, when interest expenditure — as well as foreign exchange losses — on borrowed funds get capitalised or added to the cost of assets being constructed.
Reliance, India’s second biggest by market capitalization, had outstanding debt of . 80,307 crore at the end of June this year, up from . 72,427 crore at the end of FY13.
For main business segments such as refining and petrochemicals, the numbers RIL posted for the June quarter were more or less in line with forecast. Gross refining margins, or GRM's, — a measure of the differential between the cost of raw material and revenues from selling finished products — rose to $8.4 per barrel from $7.6 a year ago. For the oil and gas segment, the output drop and its impact on profitability were also in line with analyst forecasts. However, investors need not feel disappointed. The company’s liquidity position will boost capacity expansion. RIL’s capital expenditure programme appears to be gaining pace. During April - June 2013 the company added . 10,523 crore to its fixed assets, which was more than half its net addition in entire FY13. This could gain pace as the stated capacities start getting commissioned, possibly from the second half of FY14. For those with a long-term perspective, these may be good news. 

RIL Profit may Grow 13-15% in Q1

Natural gas production at Reliance Industries’ KG basin field may be consistently declining, but the company is likely to emerge as one of the outperformers in the June quarter. While aggregate earnings of Sensex stocks are forecast to grow less than 5%, RIL is expected to record a net profit growth of 13-15% during the quarter.
RIL is expected to benefit from marginally higher gross-refining margins — or GRMs in petroleum parlance, representing the differential between the cost of raw material and revenues from selling finished products — compared with the yearago period. Similarly, a 3.2% YoY depreciation in the rupee will mean more rupee profits per dollar of GRM.
GRMs contracted substantially in April-May 2013. But they improved in June 2013, taking the average for the quarter above the year-ago period. The expected GRM at $8.5 per barrel will be higher by nearly 12% YoY,
    but down 16% from the preceding quarter.
Singapore complex margins, considered as a proxy in estimating RIL’s GRMs, declined 24% in April-June 2013 from the preceding January-March 2013 quarter. However, a fall in Brent-Dubai differential and lower LNG prices are likely to boost RIL’s premium over Singapore complex margins, according to a Nomura report.
The petrochemicals division is also expected to post robust numbers, thanks to higher global margins as well as an increase in customs duty on polymers. Oil and gas will be the only segment to prove a drag on the results as natural gas production has dipped to 15 mmscmd, 54% down from 32.5 mmscmd in the year-ago quarter.
RIL carries a chunk of foreign currency debt, but it is unlikely to book any mark-tomarket losses after the slide in the rupee. According to a Barclays report, RIL faces around . 6,000 crore in translation losses on its $12-billion forex debt, but the bulk of it will be capitalised.
Analysts will be looking out for some updates on new polyester capacity and other downstream expansion projects. They will also watch out for comments on how the proposed higher natural gas price would influence the company’s exploration programme, and on production improvement. 

Subsidy to Hit Oil PSUs, Weak Re may Aid Pvt Cos

Under-recoveries have fallen 43% in Q1, but payment delays to affect PSU profits

This earnings season is unlikely to provide any excitement for the domestic petroleum industry. For PSU firms, the numbers will depend on the level of subsidy, while private companies should do well, thanks to aweak rupee. 
The industry is estimated to have been hit by under-recoveries, or sales below cost, of close to . 27,000 crore for the April-June 2013 quarter — a drop of nearly 43% against . 47,811 crore in the April-June 2012 quarter. Still, the PSUs will face the brunt of it because of delay in payments by the government. According to reports, the petroleum ministry has sought . 11,451 crore from the government, while upstream companies such as ONGC, Oil India and Gail will contribute . 14,906 crore. Downstream oil marketing companies such as Indian Oil, BPCL and HPCL are also expected to take a hit because of a weak local currency and the rising cost of crude oil. These three firms should post net losses, but lower compared to the past year. Upstream oil and gas producers ONGC, Oil India and Cairn should benefit because of the weak rupee. But the subsidy burden will limit gains for ONGC and Oil India. For Cairn India, Q1 profits may come under pressure, thanks to lower crude oil realisations and higher government share in the Rajasthan output. However, the key figure to watch out for will be output numbers, which is expected to improve. RIL is likely post better numbers compared to a year ago, thanks to higher gross refining margins and rise in margins in its petrochem business. Essar Oil may need to provide mark-to-market losses on its foreign currency loans, which will pull down its numbers.
The natural gas industry’s show will remain weak with availability of gas locally declining consistently. Gail’s volumes are expected to dip further, although that may not directly impact its bottom line due to take-or-pay arrangements. Lower LNG prices are expected to improve Petronet LNG’s volumes and in turn earnings. From the perspective of retail investors, there is nothing exciting to look forward to in the June 2013 quarter’s results season. 

ADVANTA: FDI Nod to Boost Growth

India’s biggest seed company Advanta was trading over 30% below its peak valuation in early March 2013. Yet the stock has generated over 50% returns for its shareholders in the past one year. The company will certainly be a favourite as the industry’s prospects appear bright, especially with the government set to open up the sector to atttact foreign investment.
For the quarter to June ’13, Advnata reported a spurt of over 120% in net profit to 31.7 crore at the consolidated level. For the first half, profits were up 35% year-on-year. This strong performance comes on the back of a very good year in 2012, when it posted a near five-fold spurt in net profit.
India’s seed industry is expected to grow at a CAGR of 17% over the next four years. The government’s decision to allow FDI in the sector makes the industry more attractive even for private equity funds. “In the long run, the prospects of the (seed) sector would be good. In fact, this sector would be one of the best sectors to play in the entire value chain,” says Sandeep Raina, AVP, Retail Capital Markets, Edelweiss Financial Services. Advanta could well be a beneficiary then.

SINTEX INDUSTRIES: Leveraged, Co’s Growth Plan May Spook Investors

Plastic goods maker Sintex Industries managed to maintain its year-ago profit level in the April to June quarter. However, its operational performance was weaker than expected. In the current market conditions, the aggressive growth plans of Sintex may not appeal to investors, who are actively shunning leveraged companies. For the April to June quarter, Sintex posted a 4.4% year-on-year growth in consolidated revenues at . 1,128.1 crore, but operating profits fell over 19% to . 104.6 crore. Its interest burden, too, was 22.8% higher at . 43.4 crore. Only the sharp drop in forex losses and lower tax provisions helped the company post a slightly better net profit than a year ago. The company has been facing working capital issues in its monolithic business, which has forced it to go slow. Hence, the 13% fall in revenues for that segment, on the back of a 7.8% drop in FY13, was not unexpected. However, Sintex also took a hit on its domestic custom moulding business, whose revenues fell 16.4% year on year during the quarter; the business was one of the star performers in FY13, posting a strong 29% growth. “Domestic business witnessed strong pressure from the automotive segment, where the number of large automotive manufacturers has seen a decline with the sluggish economic environment,” said the company’s press release. Sintex’s business of pre-fabricated structures remains as the main growth driver, with revenues during the quarter growing 18.8%, after a 35% spurt in FY13. Its textile segment also did well. The company is planning . 1,700-crore capex to set up a value-added yarn plant in Gujarat. At a time when the performance of its existing businesses is under pressure and the balance sheet is leveraged — consolidated debt-equity of 1 as on March 31 — this may not go down well with its investors. On the other hand, a potential 37% equity dilution, assuming all convertibles and warrants are converted into equity shares, will almost neutralise the gains to retail shareholders.