As expected, higher subsidy contributions wrecked GAIL (India) Ltd’s fourth quarter numbers. With the government asking upstream oil and gas companies to shell out more towards the so-called under-recoveries—the difference between the market price and fuel retail rates—GAIL’s subsidy burden increased more than two-and-a-half times in the three months ended March over the year-ago period.
Earnings before interest and tax margins for the gas transmission business fell by 10 percentage points from a year ago. The margin erosion in the petrochemicals segment was even steeper. Consequently, operating profit fell 5.6%. A halving of other income and an increase in interest expenses further ate into earnings; net profit fell by 14% from a year ago.
Also, there is no clarity on whether the increase in subsidy contribution last fiscal (as a percentage of total under-recoveries) is a one-off, or will continue, not to forget the impact of inflated crude rates. But that is only one part of the problems facing GAIL.
Sure, natural gas transmission revenue grew by 19% and volumes increased by 5% from a year ago. But volume growth was flat sequentially and it is here that GAIL faces the threat of a further depression in earnings.
Gas production at Reliance Industries Ltd’s KG D6 basin is declining and the Panna-Mukta and Tapti fields are aging. While Oil and Natural Gas Corp. Ltd is expected to ramp up production, it may not amount to much.
Hence, GAIL may have to depend more on imported liquefied natural gas (LNG). However, Petronet LNG Ltd was already operating its Dahej terminal at full capacity as of the March quarter. Its second terminal at Kochi will be commissioned only by the end of this year.
Yes, the gas importer can operate at even 120% of its capacity, but with Japanese demand pushing up prices, there is also the question of whether there will be takers for higher priced gas.
Moreover, interest and depreciation charges are forecast to rise in the coming quarters, as new pipelines are commissioned and others get completed, as Religare Securities Ltd pointed out in a recent report. In sum, these concerns could pressure GAIL’s profitability over the next couple of quarters.
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