GAIL: Capex galore, earnings aren’t (ARA)

GAIL has been spending precipitously on capacity expansion over the past few years.

January 01, 1970 5:30 IST | India Infoline News Service
CMP Rs326, Target Rs340, Upside 4.3%

Over the past three years, GAIL has invested Rs121bn towards capacity expansion, majority of which was spent towards widening natural gas transmission network. The network now stands at 10,700kms with a carrying capacity of 210mmscmd. Over the next three years, the company has plans to spend Rs109bn. 39% and 35% of the budgeted amount will spent towards expanding petrochemical capacities and natural gas transmission network respectively.

During FY13, GAIL reported an operating cash flow of Rs53.3bn, which was highest ever. However, with a net capex of Rs58.6bn, the company reported a negative free cash flow of Rs5.3bn. This is the third consecutive year of a negative free cash flow. RoE and RoCE for GAIL fell by 40bps and 70bps respectively in FY13. This was primarily on the back of lower utilization of transmission assets. The company currently has a natural gas transmission capacity of 210mmscmd against which it transmitted only 105mmscmd in FY13. The current run rate is even lower at 99mmscmd.

Debt on the books increased from Rs51.7bn in FY12 to Rs90.5bn in FY13. Consequently, D/E ratio increased from 0.2x in FY12 to 0.4x in FY13. However, with net debt to operating profit at 1x and interest coverage of 32x, the leverage position remains comfortable. In terms of revenue and EBIT mix, gas transmission segment’s contribution has been on a steady decline while that of natural gas trading has been rising. LPG & LHC segment has also contributed to improved profitability in FY13.

Going ahead, transmission volumes might remain muted in the near term. However, over medium to longer term, as new conventional fields commence production, LNG terminals increase capacities and CBM production enters the market, the volumes should revive. Gas price hike is expected to dent profitability of the petrochemical segment. We see limited upsides from current levels given fair valuations of FY15E P/E of 9.6x. Retain our Market Performer rating.

Financial summary
Y/e 31 Mar (Rs m) FY12 FY13 FY14E FY15E
Revenues 404,408 475,227 561,507 639,697
yoy growth (%) 24.3 17.5 18.2 13.9
Operating profit 55,988 64,692 68,492 74,749
OPM (%) 13.8 13.6 12.2 11.7
Reported PAT 36,538 40,222 40,972 42,999
yoy growth (%) 2.6 10.1 1.9 4.9
EPS (Rs) 28.8 31.7 32.3 33.9
P/E (x) 11.3 10.3 10.1 9.6
Price/Book (x) 1.9 1.7 1.5 1.3
EV/EBITDA (x) 8.1 7.4 7.5 7.1
Debt/Equity (x) 0.2 0.4 0.4 0.4
RoE (%) 17.9 17.5 15.8 14.7
RoCE (%) 21.2 19.5 16.6 15.3
Source: Company, India Infoline Research

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