GAIL (India) Ltd (Q4 FY14)

• Net sales rise 16.8% yoy driven by strong growth across all segments except petrochemicals, mainly on higher realizations

• Gas transmission volumes fall 4.5% yoy as gas production volumes declined from KG-D6 and PMT blocks. Petrochemical segment sales volumes were lower by 18.9% yoy

• OPM at 9.9% was higher by 27bps yoy but nosedived 439bps qoq

• While EBIT margins for natural gas transmission jumped, EBIT margins of LPG transmission, petrochemicals  segment and LPG and LHC segment saw a sharp falls

• Gas price hike will impact petrochemical margins from FY15, Maintain Market Performer with a revised 9-month target price of Rs386

Weak operational performance

Volumes in all segments except LPG transmission reported a yoy decline. LPG transmission saw a 15.8% yoy jump in volumes. Natural gas transmission was below our estimates and commensurate decline was seen in natural gas trading volumes. Petrochemical volumes witnessed a steep fall of 18.9% and were below our estimates. Key reason for the decline in natural gas transmission volumes was owing to shut down at few fertilizer plants. Surprisingly natural gas transmission volumes were lower on a sequential basis in spite of increase in gas production at RIL’ KG-D6 block and increased import at Petronet LNG’s Dahej terminal.

Realizations for most segments rise yoy

Realizations in natural gas transmission segment were higher by 94.1% yoy but were lower by 27.8% qoq. Yoy increase was on account of one time impact of retrospective cut in tariffs in Q4 FY13 while sequential fall was due to provisioning of Rs2bn for ship-or-pay receivables. Natural gas trading segment saw 21.9% yoy jump in realizations owing to higher LNG prices and steep rupee depreciation. Petrochemical segment realizations were higher on the back of strong realizations in the ethylene chain. LPG and LHC segment saw a 11.7% qoq decline owing to Rs5bn provision of under recoveries for LPG as compared to nil share in Q3 FY14.

EBIT margins fall sharply across all segments sequentially

While EBIT margins for natural gas segment were up by 22 percentage points yoy, EBIT margins for LPG transmission was lower by 9.5 percentage points. Rise in LPG transmission EBIT margins can be partly explained by higher volumes. Jump in natural gas transmission EBIT margins was owing to the one time impact of retrospective tariff revision in Q4 FY13. Petrochemical segment EBIT margins fell by 22 percentage points owing to higher quantity of dearer LNG processed vis-à-vis APM gas last year and steep depreciation in rupee which added to the costs. LPG & LHC segment reported a 592bps sequential decrease in EBIT margins owing to Rs5bn subsidy burden in this quarter compared to nil in Q3 FY14.

PAT lower than expectations

During Q4 FY14, GAIL reported an operating profit of Rs14.4bn, an increase of 20.1% yoy. This was significantly lower than our and street expectations. Depreciation was higher by 12.2% yoy owing to capitalization of assets with respect to new pipelines. Interest costs jumped 92% yoy due to the debt raised to fund the aggressive capex plans. These factors cumulatively resulted in a PAT of Rs9.7bn lower than our expectations of Rs14.2bn.

Maintain Market Performer

The transmission volumes have been declining on a sustained basis (since Q3 FY11) and in the near term only a gradual recovery is expected. Additionally with GAIL as a user of the gas, the proposed gas price hike is expected to hurt petrochemical segment margins. With GAIL coming back into the subsidy burden net, uncertainty regarding future subsidy share has loomed again. We retain our Market Performer rating with a revised 9-month price target of Rs386.