GAIL (India) Ltd (Q4 FY12) – BUY

• Net sales rise 17.7% yoy on the back of higher realizations for petrochemicals and natural gas sales
  
• One time retrospective cut in tariffs for Mumbai and Agartala network impacts transmission business profitability
  
• OPM slumps 713bps yoy to 7.3% on back of the one time provisions for the tariff cuts which was reflected in sharp fall in EBIT margins for natural gas and LPG transmission segments
  
• Higher subsidy burden on account of under provisioning in Q3 FY12 impacted profitability for the LPG segment
  
• Maintain our BUY rating with revised 9-month target price of Rs366

Higher realizations for the natural gas trading segment results in strong topline growth

Gail (India) Ltd reported net sales of Rs105bn, an increase of 17.7% yoy. Sales were lower than our expectations. Growth in the topline was driven by 27.5% yoy jump in revenues of natural gas trading business. All other segments witnessed decline in revenues. For natural gas transmission, volumes were lower by 4% on the back of decline in KG-D6 production and realizations also fell owing to lowering of tariffs for Mumbai and Agartala networks (Rs2.5bn). For LPG transmission, although volumes were higher realizations declined for the same reason as for natural gas transmission. Higher LNG prices and rupee depreciation resulted in strong topline growth for the natural gas trading segment. While petrochemicals volumes were lower better realizations had an offsetting impact.

LPG segment impacted by higher subsidy burden

For Q4 FY12, GAIL accounted for a subsidy share of Rs13,980mn which included Rs3,355mn for under provisioning of Q3 FY12 and Rs10,625mn for Q4 FY12. This was in comparison to Rs9,017mn in Q4 FY11 and Rs5,361mn in Q3 FY12. This resulted in 40% yoy fall in revenues for the LPG and liquid hydrocarbon segment.

OPM flat on yoy basis but falls 133bps sequentially

During Q4 FY12, GAIL reported an operating profit of Rs7.7bn down 40.4% yoy, while OPM slumped 713bps yoy. This was way below ours and street expectations. In terms of segment-wise performance, EBIT margins for all segments were down sharply except petrochemicals. Fall in EBIT margins for natural gas transmission and LPG